MGAs forge strong ties with reinsurers

Niche market business is attractive to reinsurers

By Phil Zinkewicz

Back in the 1970s and the early 1980s, managing general agents (MGAs) experienced something of an ebb and flow in their popularity. In hard markets, insurers often shunned the business of MGAs because of the volatility of some of their client accounts. In soft markets, when insurers were endeavoring to increase volume as premium rates declined, they handed the underwriting pen to MGAs in hopes that they would bring in new business to which the insurers did not have access.

Although the majority of MGAs were diligent in their responsibilities to insurers, a few miscreants took advantage of insurers’ hunger for new premium dollars. In one famous case, an MGA based in a Latin American country managed to obtain the pens of insurers that were eager to attract new premium dollars to invest during the high interest rate years of the early 1980s. This MGA wrote business for its insurers that was certain to produce huge underwriting losses four or five years down the line. It also illegally retained for itself much of the premium it collected. Its operations spread worldwide, and some of the largest insurers and brokers lost hundreds of millions of dollars. Other disreputable MGAs followed the same course.

When these schemes were uncovered, trade groups like the American Association of Managing General Agents (AAMGA) and the National Association of Professional Surplus Lines Offices (NAPSLO) worked to clean the house of dishonest MGAs and restore the reputation of the MGA community.

Reinsurers hit hard

During the era of rogue MGAs, reinsurers were hit particularly hard. For a while, reinsurers refused to consider providing coverage for primary insurers that placed business from MGA producers. Today, the situation is dramatically different. Steve Nunn, a director of the London-based reinsurance broker BMS, lived through those years and is very happy that things have changed.

“There was a time when primary insurers had to almost disguise the fact that they were offering a reinsurer an MGA account,” says Nunn. “Many insurers entered into MGA business with no method of policing it. The insurers would just write the business, pass it on to reinsurers and take the override. Remember the Legion Insurance Company, which had no interest in what it wrote. It just passed the liabilities on to reinsurers and took its cut. But things are not that way any longer. Most MGAs today are reputable, and most insurance companies are doing a good job of policing the business. As a matter of fact, we frequently attend AAMGA conferences to get in on the ground floor with MGAs.”

Today, Nunn says, most MGAs handle niche market business, and that’s attractive to reinsurers. “Today, MGAs spend time and resources to build programs around business that primary insurers never even thought of. I place most of my reinsurance in the London market. Our underwriters are interested in program business because they believe they can manage it; and managing it is extremely important. In the normal reinsurance relationship, there are two parties involved—the primary insurer and the reinsurer. That’s difficult enough to manage. But with an MGA account, there are three parties involved, so more care is needed. The reinsurer really needs to understand what the MGA is doing.”

Another consideration, Nunn observes, is whether the program is in the admitted or the nonadmitted market. “The more enduring programs are probably in the nonadmitted market,” he says.

“Many MGAs are taking a share of their own risk,” Nunn continues. “That’s a great positive for MGAs because it shows they really believe in the program. MGAs are able to capture particular exposures in a general category and concentrate on those particulars. For example, we placed an MGA account with a program dealing with drug and alcohol rehabilitation. On the face of it, the program doesn’t sound attractive, but the MGA has been writing this account for 40 years. Many MGAs have become particularly savvy about setting up their own reinsurance arrangements. We take a very active interest in getting to know the MGAs we deal with,” Nunn says.

He concludes: “The way MGAs write business today and how they are policed and reinsured in the marketplace is healthier than ever before.”