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Rapid Premium Growth Warrants Greater MGA Oversight

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In its latest market segment report, the rating agency said “MGAs provide a cost-effective way for (re)insurers to cover niche or emerging risks for a fraction of the investment required for carriers to establish in-house expertise.” MGAs may bind coverage, underwrite and price select risks, settle claims and bind reinsurance on behalf of an insurance company.

In 2023, direct premiums written (DPW) generated by MGAs grew 14.9% year-over-year to $81.4 billion. This followed robust growth of 19.5% in 2022 and 17% in 2021. Specialty, hard-to-place risks are driving business, the report noted, and the market is expected to grow due to new entrants into the insurance market.

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Insurers employing a hybrid model have some programs managed by MGAs, with in-house underwriters managing other programs, the report stated.

“These hybrid relationships have helped grow premium market share generated through MGAs, with insurance carriers relying on MGA expertise for a large share of the distribution and underwriting for these programs,” AM Best said.

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In addition, the report noted that MGAs act as a distribution channel for surplus lines business, “contributing to three consecutive years of double-digit premium growth.”

Strong customer relationships, robust frameworks for managing account information and monitoring performance and specialized expertise are markers of successful DUAEs.

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“MGAs with specialized product or line of business knowledge have differentiated themselves in the market, providing carriers with risk management and governance infrastructure, in addition to underwriting and pricing acumen,” the report added.

Tokio Marine’s Philadelphia Indemnity Insurance Company maintained its position as the insurer generating the highest direct premium written (DPW) among the top 20 US P/C insurers using MGAs in 2023, the report found.

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Ten insurers (including Philadelphia Indemnity) wrote more than $1 billion in 2023 DPW through affiliated or unaffiliated MGAs, an increase from only seven such entities in 2022.

A.M. Best cautions insurers that some MGAs have abused their authority—writing unprofitable business to increase commissions—and recommends carriers structure their relationships with DUAEs to include appropriate checks and balances.

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Analysis of the U.S. P/C market for the years 2000 to 2022 revealed that the third leading cause of impairments was “due to affiliated programs.”

Prioritizing due diligence in selecting distribution partners, especially when delegating significant underwriting and pricing authority to DUAE partners is recommended.

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“Stakeholders will need to take precautions to ensure that management and underwriting incentives are aligned to prevent excessive risk-taking at the expense of policyholders,” authors of the report added.

A strong enterprise risk management (ERM) program is recommended to protect against inherent risks provided through MGA affiliations.

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Private equity (PE) funding for MGAs has grown in recent years and is another area of concern. PE investment allows insurers to capture market opportunities they might not otherwise capture, and because MGAs often require lower operating capital since they don’t underwrite risk directly, it can lead to higher returns on investment for PE firms.

Since PE firms typically exit their investments within a few years to realize better returns, MGAs may feel pressure to prioritize short-term growth over long-term sustainability or strategic initiatives, the report added.

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AM Best
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