Quantifying the Qualitative Value of Managing General Agents:
A Factual Report from the Front Lines

August 2003

Some have stereotyped MGAs as the “dumping ground” for business that cannot be written in the admitted market. This is just not the case, as evidenced by the growth seen since September 11 and the arrival of the hard market. The surplus lines market is out-performing the U.S. property-casualty admitted insurance market, and the role of the MGA is integral to its success.

by Ronnie C. Moore, CIW
American Association of Managing General Agents

The dynamic developments of the insurance market during the past two underwriting year cycles have substantiated the integral role of and need for managing general agents (MGAs). In addition to continuing the qualitative underwriting and service of unique and specific risk exposures, the wholesale distribution network has taken on the additional business opportunities from standard market carriers who have refocused on their core product lines since the events of September 11, 2001.

Consequently, having the ability to call on longstanding partnerships with domestic market carriers, reinsurers, brokers, Lloyd’s, and London Company Market colleagues, MGAs have established a unique value proposition of driving underwriting profit in a broader array of classes of business and product lines of coverage than ever before.

Causes of Current Market Conditions

The present status of the insurance market and rising premiums have been influenced by a number of converging factors combining to create the circumstances within which all components of the industry now must operate. These include the following.

• Reduction in reinsurance capacity and reinsurance recoverables
• Replenishing of surplus after paying World Trade Center and related claims
• The prolonged struggles of the equity and investment markets following Enron, WorldCom, Arthur Andersen, and other corporate irregularities resulting in a reduction in net investment income and a strain in investor confidence
• Restatements of financial results, charges against earnings for general operations and the strengthening of indemnity and incurred but not reported (IBNR) reserves due to deficiencies in the environmental, asbestos, construction defect, mold, professional liability, and other lines of business
• A loss of $49 billion (15 percent) in available market surplus over the last 4 years
• Deterioration of loss trends driven primarily by severity
• Increasing claim and allocated loss adjustment expense costs
• Concerns over terrorism, the economy, and homeland security

Insurer insolvencies have also contributed to the current environment. Over 100 property and casualty insurers have been declared insolvent since 1999. A.M. Best reports 75 percent of the failures were primarily caused by “deficient loss reserves,” a conclusion with which Standard & Poor’s agrees, noting “recent insolvencies were mostly due to widespread under-reserving.”

Surplus Lines Results Outpace the Market

A review of nonadmitted premium data reported on Schedule T of the NAIC Annual Statutory Statement notes the surplus lines market alone has expanded more than sixfold over the course of the past 20 years, from an estimated $2.2 billion in direct written premium in 1981 to $15.7 billion in 2001. The U.S. property and casualty market, by contrast, has had more moderate growth from direct written premium figures, which increased from $95.5 billion to $356.8 billion during this same period.

As a percentage of the total property and casualty industry, the surplus lines market increased its penetration from 2.4 to 4.4 percent during the period of 1981 to 2001. Schedule T reports further note growth in commercial lines market share, which comprises the majority of surplus lines direct written premium volume, increased from 3.9 percent in 1981 to 8.4 percent in 2001.

In terms of industry combined ratio results, property and casualty insurers posted a 107.2 percent increase in 2002, with a return on equity of 4.6 percent. Reinsurance company results in 2002 were at a rate of 121.3 percent. By contrast, industry experts estimate excess and surplus lines carriers achieved a 95 percent combined ratio in underwriting year 2002.

MGA Results Are Profitable

I recently became president of the American Association of Managing General Agents (AAMGA). The 77-year-old trade association is composed of 480 member agencies, insurers, reinsurers, brokers, third-party administrators, premium finance agencies, and other businesses providing valuable services to the wholesale marketplace. While the definitional aspects of what a “managing general agent” is vary from various regulatory and industry sources to the extent of the individual operations of the agencies themselves, the current 260 active managing general agents of the AAMGA represent a strong component of the overall market.

A survey of our membership conducted in August 2002 revealed that in underwriting year 2001, the 254 domestic MGA members alone employed 10,583 people, working in 438 storefronts in all 50 states, and produced $10.9 billion in annual written premium, in both admitted and surplus lines business. Further, 92 percent of the insurance carriers utilized by AAMGA members maintain an A.M. Best rating of A– or better.

The Prospect for Sustained Growth

Thus, when viewed from the underwriting, operational and service perspectives, the 2002 “Special Report—Annual Review of the Excess and Surplus Lines Industry,” published by A.M. Best, properly concluded that “the surplus lines market will continue to experience greater premium volume and increased operating margins, as potential for profitable growth is now at its strongest level in almost two decades.”

The foundation of this independent forecast is based not only on the supportive historical data, but more importantly on each MGA’s:

• selective pursuit of business opportunities and customers
• execution on developed business and strategic plans for the agency and the individual lines of business
• consistent application of disciplined underwriting
• continuing education to train and expand staff competencies
• development of young professionals entering the market
• relentless commitment to performance and service
• distinct focus on results achieved by managing general agents, in partnership with those producers, brokers and markets with whom they have maintained a trusting relationship

Line of Business Expertise

From niche lines like energy, technology, directors and officers, employment practices liability, nursing homes, day-care centers, kidnap and ransom, and commercial transportation, to general workers compensation, general property and casualty, and excess/umbrella programs, today’s MGA maintains a consolidated expertise gained by years of firsthand experience, and epitomizes the insurance representative of the free market economy. The wholesale marketplace remains vibrant and expanding.

Unfortunately, some commentators have stereotyped and misunderstood MGAs as the traditional “dumping ground” for business that cannot be written in the admitted market. As shown by the facts and historical developments of the past 2 decades, this is simply not the case.

“Entrusting” the Pen

It is my view that commentators have often misperceived the relationship between MGAs and their markets as one where the insurer “gives away the pen” to the managing general agent. For something to be “given away,” it must be relinquished; title or ownership is surrendered. Essentially, the matter is abandoned. This unfortunate misnomer as it relates to the transaction of business with MGAs is factually inaccurate.

Based on an MGA’s past performance, its business plans, and the competencies of its professional and administrative staff, the fact is that underwriting authority is not “given away” but rather is “entrusted” to the MGA by the insurer. At the end of the day, the agent’s ability to maintain the privilege of the business and continuing the relationship with the insurer and reinsurer is based on the MGA’s performance and results during the contract term, and nothing more.

Planning + Communication + Performance = Profitable Results

No professional or personal relationship can survive, let alone thrive, without a diligent commitment to proactive and regular communications. Insurers today are in our offices as we are in theirs: through technological advances, documents are regularly reviewed electronically or physically; audits and reviews are diligently undertaken and reviewed candidly. Only in this manner can both sides measure performance and, where necessary, make corrections or validate the initial strategies, in order to realize the expectations with which they entered the contractual and professional relationship.

MGAs also continue to maintain substantial skin in the game. Their brand is defined by an almost fiduciary-like responsibility to the business entrusted them and by employing underwriting and service skills that will produce sustained underwriting profit and profitable combined ratios. Profit commission opportunities are also dependent on a firm management of the portfolios. No insurer will maintain its relationship with an MGA whose results are deteriorating.

Conclusion

The historical enhancement in the amount of direct written premium in the wholesale market segment and continued expansion of opportunities to service the exposure concerns and offer solutions to business problems is based not on what amounts to “risky ventures.” Since the end of the Civil War when the concept of managing general agencies first developed, MGAs have continued to provide the highest quality of services to the marketplace. We intend to keep it that way.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author’s employer or IRMI. This article does not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.