The MGA model has been very popular in the last decade, with a significant number of them operating in the construction professional indemnity (PI) insurance market.
MGA stands for “Managing General Agent”. There is not one simple description of what they do as they can perform a variety of roles, and those in turn depend on the levels and type of authority they have been given.
A defining characteristic is this however. An MGA is not an insurer. It is an entity which has been given delegated authority by one or more insurers to perform functions on their behalf.
A common authority is to accept premium and bind cover on an insurer’s behalf. This function is logistical and allows the insurer to extend its reach in terms of the geographical areas in which it can operate.
Another is to underwrite business for an insurer, providing quotes and binding business on that market’s behalf. The underwriting authority delegated will be subject to various restrictions, and quoting authority will vary greatly between different MGAs.
An MGA might also have authority to deal with claims up to a certain value on an insurer’s behalf, although this is less common.
Just these three examples show that the function of individual MGAs varies greatly, but the model followed in the PI market in recent years is very much that of an “underwriter for hire”.
PI business is an area that insurers treat with caution, as claims are often 6 figures, and regularly in the millions. As such the financial damage that a bad underwriting decision can do to an insurer’s bottom-line can be severe. Insurers therefore limit underwriting authority, and the effect is to concentrate decision making with key individuals possessing the experience and knowledge to consider more significant risks. This isn’t always externally obvious as an insurer may have a number of underwriters. However some of these may be more junior, with their authority restricted. As such, when a case exhibits certain features it goes outside of their authority and they have to refer it to a central point for a decision. There are therefore multiple routes all leading to key people within the insurer.
This creates a restriction on the amount of business which an insurer can consider. There are physically only so many business submissions they can consider, and only so many underwriting decisions a central authority can make.
An MGA established around one or more experienced underwriters and possessing substantial underwriting authority can represent a significant increase in the number of submissions that the insurer can consider.
Often this isn’t simply a case of additional resource as such an experienced underwriter represents two further advantages to the insurer.
PI is complex business given the wide range of professions which exist, and the wide variety of substantial work or projects undertaken within individual fee areas. The insurer’s own underwriters cannot be expert in every type of profession or project. As such there will be cases where that underwriter will look at a submission, and the thought process will basically be - I don’t know this type of work – it looks heavy – I don’t understand it – I shouldn’t touch it.
If the MGA has an underwriter who IS experienced in that type of work, a more sophisticated analysis can take place, considering the individual features of the firm, and perhaps leading to a more positive underwriting decision (Yes it is heavy, but they are very good at it, and they have the checks and controls which I want to see...I’m going to quote).
The MGA therefore increases the types of business an insurer can consider and sensibly underwrite.
It is also the case that the PI market is very much built on relationships. An MGA underwriter may well have relationships with different brokers, claims handlers and key providers to the insurer providing them capacity. As such the MGA can open doors to business or lower trading costs which the insurer otherwise would not have seen.
In the soft market years following 2005, the UK PI market saw a number of new entrants and increased financial capacity in the market. Competition between different insurers became intense, leading to what was very much a buyer’s market. MGA’s proliferated, as insurers needed to maximise their opportunities to quote. As premium income fell due to competition on price, insurers also had to look closely at internal costs, and therefore if an MGA represented economies in administration, or claims handling, then this was yet another advantage.
This soft market has ended. The UK PI market has now entered significantly different conditions, with insurers looking at their PI books closely due to problems with losses, lack of profitability and anxiety regarding future claims. Some insurers withdrew from the PI market in 2018, constricting the available market for PI insurance.
As insurers review their exposures and profitability, there has been a clamp down on delegated authority. The insurers want to establish firm control on what risks they are underwriting, which has led to a heavier emphasis on central internal authority and reduction or withdrawal of underwriting authority in other areas. This emphasis has not always originated from their board demanding better results and increased controls. For example, Lloyds of London reviewed its poorest performing PI syndicates in 2018 and required them to submit business plans for a return to profitability.
Some MGA’s have been casualties of this focus and review. They may have been backed by insurers who took an early decision to withdraw from the market. Alternatively they may have found that their insurer wants to centralise its underwriting decision making and no longer wants additional business channels. The result in either case is that when the MGA’s authority expires, it is not being renewed by their insurer, and the MGA is not finding other insurers willing to employ them.
As such, the PI market is continuing to constrict as MGAs representing additional market access and niche underwriting are falling away. This is creating logistical burdens, and delays are increasing as increased quoting traffic is trying to make headway through a fewer number of quoting channels.
PI market conditions for consulting engineers are perhaps the worst that have been seen in a decade, and firms should be alive to the difficulties they may face. For more information about positive steps firms can take to put themselves in a better renewal position, please see the advice note published by ACE here.