MGAs: The Fast Track to Innovation?

They sit in a hazy nether region between brokers and insurers. Outside of insurance, most people will never hear of them. Even those who know of their existence are often only vaguely aware of the role they play. Yet MGAs (managing general agents) offer one of the best ways for new, and established, companies to enter into insurance and benefit from an existing large customer base or to take advantage of the best emerging technology. Want to generate underwriting income without raising massive amounts of capital or waiting a year or more to get regulated? Setting up an MGA may be the answer. A number of the headline popping insurtechs start-ups (BoughtbyMany, Slice, Hippo, Trov, Ladder, Lakka, for example) have chosen the MGA model, often finding insurers or reinsurance partners willing to provide capacity and investment. The concept may not be well understood, but it's no surprise that many emerging companies are curious about how to set up as an MGA. On April 2, our monthly InsTech London evening event focused on MGAs. The room was packed with close to 300 attendees. We had 13 companies on stage, and everyone of them was different. So what’s going on? Brokers to the left of you, insurers to the right… There are five common ways for insurers to connect with their clients: 1) go directly to the consumer 2) use a comparison website, 3) work with a lead generation company (mostly U.S.), 4) work through a broker and 5) use an MGA. Like a broker, an MGA doesn’t retain any capital. Unlike a traditional broker, an MGA is able to "bind" or underwrite risks using third party capital. The MGA gets access to capital and fulfills its regulatory requirement by reaching an agreement with one or more insurers that are prepared to “delegate” their underwriting authority to the MGA. The concept is not new, but it is evolving. Traditionally, most MGAs were happy enough occupying a specialist niche, operating as a class of wholesale broker. This enabled insurers to access unusual (“specialty”) lines of business that they found expensive or hard to source on their own or through a traditional broker network. See also: 3 Steps to Succeed at Open Innovation   In recent years, a new type of MGA has emerged. There are increasing examples of this "delegated underwriting" model being adopted as a stepping stone for companies that want to act like, or become, a full insurer. The MGA still needs to get regulatory approval but has a choice of options for getting up and running more quickly. Underwriting capital is provided by one or more insurers or reinsurers, but the MGA usually retains responsibility for managing the client and its brand. To the uninitiated, the MGA looks no different than an underwriter, offering much of the benefits with limited downside. This is already a big market. Over 300 MGAs underwrite in excess of 10% of the UK’s £47 billion general insurance market. MGAs have traditionally been a major source of incoming business for Lloyd's, representing over one third of its £32 billion capacity. In excess of 4,000 MGAs (also known as “coverholders") from around the world are backed by Lloyd's syndicates. Insurance is provided for property, airlines, motor, livestock and much more. The role of Lloyd’s as the “insurer of last resort” is particularly suited to complex or non-standard business sourced through MGAs. This has made London one of the major underwriters of the U.S. excess and surplus market, covering risks that the major carriers don’t want to take on (for example, beachfront homes in Florida). John Rowlands, formerly at reinsurance broker Guy Carpenter, explained the appeal of the MGA for insurers: “It’s difficult for insurance companies to grow premiums organically. Insurers value MGAs’ specialist product and geographic expertise and distribution, which gives the MGA the ability to underwrite opportunistically and take advantage of market conditions. Insurers are able to strategically grow and diversify with lower execution risk and costs.” John has since joined an MGA himself. Now it's no longer only about insurers looking for help with distribution. The new breed of MGAs are pushing the boundaries beyond the original model. They want to be calling the shots, and in some cases are looking for no more than a "fronting insurer" to provide capacity but with less influence in how the business is run. For a transaction-focused insurtech, MGAs not only offer a quick route to market but are also starting to make the insurtechs attractive to VCs. In the slow-moving world of insurance, MGAs may provide one of the best opportunities to build up a business that can be sold in 10 years or less (timelines that are appealing to VCs). Insurance carriers, brokers and private equity firms have also been getting more active buying into MGAs. Valuation multiples (of EBITDA) are moving beyond the historic range of eight to 12 times up to the high teens. Perhaps not as sparky as the household names in the mainstream tech world, where multiples of 20 or 30 are common, and some in excess of 100 (Amazon, Netflix). There are few (maybe none) analytics or tech companies in insurance with a similar ability to scale exponentially year after year to justify such multiples. MGAs offer a safer, if lower, return. Who will underwrite my MGA? London may be providing capacity for thousands of MGAs, but when it comes to supporting the more recently formed insurtech style MGAs, Munich Re is, by a long way, the most active, and adventurous, provider of capital. Ingenie, Wrisk, BoughtByMany, WeFox, Zego, Trov, Slice, Next, Nimbla, Jetty, Drover, Blink, Simplesurance and So-Sure have all received backing from the reinsurance giant. None of these will make any noticeable impact on Munich Re’s results in the next few years, but unlike most other reinsurers or insurers Munich Re can afford to think long-term. It clearly sees the MGA model as a significant way to access new markets and new technology. Furthermore, the company isn't afraid to double down on its partnerships by also offering investment capital and a trading infrastructure for MGAs. Other insurers, including Lloyd’s syndicates, are offering capacity to the newcomers. Few can match the financial strength or have the willingness to take risks of one of the world's biggest reinsurers, but we're starting to see some intriguing new approaches by insurers and investors willing to get more actively involved in the MGA space. I’ll be back in the future with coverage of other capacity and infrastructure providers in this space that we have got to know well through Instech London such as Insurtech Gateway, Beazley, Hiscox, SCOR, MSAmlin, Evari and Xceedance. Death by data The growth of MGAs may have provided an efficient way for insurers to access niche markets, but it’s also been something of a free-for-all when it comes to sharing information about the risks. This has resulted in a horrible mish-mash of data formats and means of sharing data that even seemed outdated 25 years ago. Digital may be replacing paper, but pdf files and spreadsheets, exchanged via email, proliferate and create major inefficiencies and potential for errors. Everyone knows the situation needs to change. There is a flourishing community of both start-ups and mature businesses developing solutions to standardize formats, centralize processes and cut through the noise. Some are going directly to source, hoping to link up the information provided by the original policy holder directly with the capital provider and cut out the noise in the middle. At some point, the market will figure it out. In the meantime, any MGA that can suck data in from its clients and deliver essential analytics to the capital provider without the need to re-key anything is worth keeping an eye on. Technology: Boon or burden? Not surprisingly, many of the new MGAs have been set up – and received investment – on the premise of using new technology to improve risk selection and gain efficiencies. In established markets, such as property, tools may be provided by and even paid for by insurers. In areas such as emerging risks, most notably cyber, companies such as Zeguro and Envelop Risk offer their proprietary technology as part of the benefit they claim to offer to insurance partners and clients. The value of their IP is built into their proposition (and their valuation). More traditional MGAs are increasingly being required to use new technology to improve underwriting risk selection and data transfer. This can create more costs and complexity, particularly if they are dealing with more than one capital provider and multiple systems requiring specialist skills. There is still a lot of inertia, particularly among smaller companies. MGAs that can continue to acquire and retain clients, and keep losses below an acceptable level, can still call the shots. Few insurance carriers are willing to risk losing profitable MGAs by imposing new technology on them. See also: AI and Results-Driven Innovation   Stuck in the middle with who? What does the rise of MGAs tell us about the future of insurance? Evolution in most markets tends to squeeze out the people in the middle. Friction and thus cost is removed, the fewer people there are in the chain. Those that possess the capital or own the customer are usually the winners. The continuing rise of MGAs suggests that we may be seeing the shift moving in the other direction. Is the middle going to squeeze out those on the edges? On the one side, the placing broker is under threat of getting replaced by direct-to-consumer offerings powered by detailed data and advanced analytics. On the other side, traditional providers of insurance capacity are increasingly having to compete on price and strength of security with the more highly diversified global capital markets that can access analytics that once only existed in-house at insurers. Meanwhile, the agile MGA, with multimillion dollars of investment, is able sniff out the best markets and the cheapest capital. MGAs are growing more powerful, but they are probably not going to become the dominant force in insurance. More likely is that MGAs will continue to evolve as an efficient way to build and launch new and enhanced insurance propositions, tightly linked to excellent analytics and richer sources of data. We may say see the emergence of some mega-MGAs, with income similar to the larger insurers. A few will grow up and decide to become fully fledged insurers. A couple could morph into becoming the analytics platforms of choice for the industry (it still needs one, by the way). Some will fail. But most will cash out, and be folded into their bigger, older, more traditional insurance and broking cousins. It's only been possible to dabble lightly in this topic. Whatever the future is for MGAs they are definitely one way of accelerating the impact of innovation. This fascinating and slightly mysterious area of the insurance market deserves more in-depth assessment. Please feel free to comment below with any areas to explore next, and, of course, all additional insights are welcome.