AM Best Report Stirs the Pot on Whether MGAs Lead to Insurer Insolvencies
In May of 2022, as Florida lawmakers debated solutions to the Florida property insurance crisis, a number of Democrats in the state Senate argued litigation and roof claims were not to blame for insurer insolvencies. It was insurers diverting premiums and profits to their managing general agencies.
Two years later AM Best financial rating and analytics firm – the largest rating firm in the country – echoed some of the Florida senators’ concerns, noting in a report posted this year that many of the insolvent property insurers had surrendered almost all of their premiums to MGAs in the year before receivership.
“The MGA’s interest may be more in line with generating more business and subsequently higher commission fees,” AM Best Associate Director Dawn Walker said in a article posted by the firm last week. “This scenario has the potential to undermine an insurer’s underwriting authority….Insurers may become too reliant on MGAs for premium generation without ensuring proper alignment of interests.”
As they did in 2022, some longtime Florida insurance industry representatives have taken issue with the assertions, arguing that many insurers had been overwhelmed with litigation costs and attorney fees in recent years. Florida insurers and their MGAs are now so scrutinized by regulators, reinsurers and rating firms, that there’s little room for diverting revenue unnecessarily, they said.
“There are so many checks and balances now,” said Paul Handerhan, the longtime president of the Federal Association for Insurance Reform, and an industry lobbyist and consultant.
To argue that MGAs’ fees, based on premium written, create an incentive to write risky business, “makes no sense,” he said. Carriers’ underwriting manuals, regardless of who administers the business, must be approved by the Florida Office of Insurance Regulation.
The OIR has been given new authority to require more information from insurers and has shown a new appetite for penalizing non-compliant companies in recent months. And insurers themselves, to a large degree, have pulled back considerably on writing properties in some areas of the state, particularly those with older roofs, reports have shown.
“MGAs can’t just open the floodgates and start writing as many policies as they want,” Handerhan said.
The AM Best assertions have sparked new criticism of national rating firms. The article came a month after the OIR announced it had subpoenaed emails and other records from the Weiss Ratings agency, which said in a June report that three Florida insurers had closed almost half of their claims last year without payments and were facing financial trouble.
That came two years after the Demotech rating agency triggered an outcry from Florida regulators and insurance agents when it warned that some 16 insurers were at risk of a major ratings downgrade – but offered no further explanation.
Still, the AM Best market segment report presents some compelling correlations: It looked at 13 property insurer insolvencies since 2017 and found that all but one of the carriers had given at least 96% of direct written premium to their MGAs. Also, from 2000 to 2022, the third-leading cause of financial impairment for the insurers was due to affiliated MGA programs, behind catastrophe losses and fraud, the analysis said.
Seven of those insolvent companies were domiciled in Florida, including St. Johns Insurance Co., FedNat and Southern Fidelity. Two more, both Lighthouse Property Insurance firms, were based in Louisiana but had a significant book of business in Florida. (See chart.)
The authors of the report warned that the tail is at risk of wagging the dog with some of the organizations.
“Some MGAs have abused their authority, writing unprofitable business to increase commissions,” the report said. “Insurers must structure their relationships with these DUAEs, whether unaffiliated or affiliated, with appropriate checks and balances.”
The warning bark comes at a time of major growth for MGAs nationwide, and increasing investment from private equity firms. Direct premiums written generated by MGAs has grown steadily in the U.S. over the past decade, topping $77 billion in 2023. That’s a 45% increase since 2021, AM Best reported.
The largest U.S. MGA, by premium, is Rain and Hail LLC, which writes crop insurance for affiliated insurers. Other top MGAs include Starr Specialty Agency; Evolution Risk Advisors; AGA Service Co.; Frontline Insurance Managers; and Tower Hill Insurance Group. The largest property insurers that generate the most premium through MGAs include ACE Property and Casualty; American Agri-Business Insurance; Scottsdale Insurance; Starr Surplus Lines Insurance; and Universal Property & Casualty, a Florida-based carrier that uses its MGA to recruit and manage its network of independent agents, the report noted.
The growth has been fueled in part by private equity firms, including some of the biggest names in the business: Warburg Pincus; Gallatin Point; Carlyle; and Howden Group. But that financial arrangement can lead to a dangerous focus on short-term gains, the report said.
“PE firms typically exit their investments within a few years to realize better returns, which may pressure MGAs to prioritize short-term growth over long-term sustainability or strategic initiatives,” AM Best said in the report. “Market conditions and other factors may delay or complicate the PE firm’s exit strategy, prolonging the investment holding period and creating uncertainty for MGA management teams and employees.”
Florida’s insurance commissioner, Michael Yaworsky, did not comment on the AM Best report. But a former deputy commissioner, Lisa Miller, argued that excessive claims litigation in Florida was proven to have had a major impact on carriers’ bottom lines, forcing several into liquidation, from 2020 through 2023. She cited one of the most-often quoted statistics, showing how Florida insurers endured more than their share of claims lawsuits.
“To insinuate that insolvencies occurred because an MGA is the cause ignores the one single fact, three years ago, when the insurance commissioner issued a letter to the House Commerce chair that showed that approximately 80% of lawsuits are in Florida, yet only 8% of claims” came from the Sunshine State, Miller said in an email.
A few Florida plaintiffs’ attorneys have disputed those statistics. But lawmakers seemed convinced and the Florida Legislature approved major changes in 2022 and 2023 that curtailed claims litigation, helping to trigger a rebound in the property insurance market, insurers agree.
Louisiana also has adopted new rules that gave regulators more oversight of MGAs, AM Best noted. Among other changes, the law bars some officers, directors and executives at insolvent insurance companies from acting as MGAs in the state.
Other states may want to take note.
“Insurers must structure their relationships with these DUAEs, whether unaffiliated or affiliated, with appropriate checks and balances,” the AM Best analysts wrote.
Increasing ownership of the enterprises by private equity firms mandates greater scrutiny, and AM Best “expects insurers to perform appropriate due diligence to prevent insurer insolvencies from MGA relationships,” the report said.