The MGA Marketplace and Model of Choice
Exhibiting significant growth potential, the MGA sector is one of the most dynamic segments of the U.S. property & casualty insurance market. The continued expansion of start-up and incumbent MGAs is fueled by an ability to attract both significant investment and talented individuals, driven by the industry’s recognition of MGAs’ importance in allowing controlled and focused distribution of insurance solutions.
Indeed, a range of recently formed MGA platforms have managed to lure underwriting talent away from traditional insurers. MGAs have also embraced the digital age and can be a launch pad for InsurTech models that don’t require a standalone insurance company or a capital intensive balance sheet.
This growth is being supported by private equity and other capital sources, which created more than 20 ‘participatory fronts’ (standalone capital providers) to provide paper and reinsurance capacity with a small amount of risk retained.
Highlighting the renewed interest in this expansive market, the October 18-20, 2021 Target Markets Program Administrators Association Annual Summit attracted almost 1,000 paid attendees, comprising MGAs, program carriers and vendors.
Rising MGA Direct Written Premium
The MGA segment experienced a significant premium boost from calendar year 2019 to calendar year 2020 – a result of the admitted market shifting more premium to MGAs, and MGAs themselves bringing new products to market. Rate increases also contributed to premium growth.
It’s worth noting that insurers do not have to report the MGA direct written premium when it is less than 5% of their surplus, and a review of top U.S. MGAs’ estimated premiums strongly suggests that there is a substantial gap between reported premium figures and actual MGA volumes. Given this scenario, and in gathering industry surveys from Aon experts, we believe that a more realistic estimate for the current size of the U.S. MGA market is $60B to $65B.
U.S. MGA Direct Written Premium by Calendar Year
Note: 2020 figure includes estimate of unreported premium; other years do not include unreported premium
U.S. Commercial Rate Changes by Line of Business
Rate increases are contributing to premium growth and loss ratio improvement
2020 U.S. MGA Premium Distribution by MGA Size
Premium distribution among MGAs is stable; most premium (66%) is written by MGAs with less than $500M in premium
MGA Southern Region Strongholds
MGA premium is heavily concentrated in the Southern States, with Florida and Texas leading the way. Both states are exposed to natural catastrophes, and MGAs writing cat-exposed business are less risk averse than insurers in the standard market. In addition, Texas has a big energy market.
The premium concentration is compounded by the large non-standard auto markets in Florida and Texas, and by Texas’s attractiveness to MGAs using County Mutuals to write personal lines. The absence of state income taxes in both jurisdictions is a further incentive to insurance entrepreneurs.
Nationwide, around $1.7B of MGA premium (3%) remains unallocated to a region, being written either in an unknown location or by a U.S. insurer domiciled outside the U.S.
2020 U.S. MGA Premium Distribution by Region
MGA Loss Ratios Set to Bounce Back
The MGA average property loss ratio was lower than the property & casualty market over the 2010-2020 period. However, since CY 2017 the MGA segment’s loss and allocated loss adjustment expenses ratio trended higher than the property & casualty market due to MGAs posting more commercial property cat losses in recent years.
MGAs remain nimble, despite this, and will seek to improve their underwriting performance by raising rates and tightening policy terms.
U.S. Loss Ratio Trends for MGAs and Property & Casualty Insurers
MGA underwriting results are usually better than the property & casualty market
Note: A small number of specialty MGAs write crop insurance, which is a cat-exposed and particularly volatile line.
U.S. Commercial Property Catastrophe Losses ($M)
Higher commercial property losses in CA, FL and TX have a disproportionate impact on MGAs active in these regions
Average U.S. Loss Ratios by Line of Business (2010 - 2020)
Average loss ratios for MGAs are consistently lower across classes compared with property & casualty insurers
MGAs Push the Technology Envelope
MGAs are the insurance market’s innovation sandbox, allowing for concepts and solutions to be tested in a limited capacity. Compared with the more flexible MGAs, large insurance companies do not reorient easily and find it difficult to foster entrepreneurial efforts internally.
This is particularly true in terms of technological innovation, highlighted by MGAs’ successes in two areas: tech-enabled conventional MGAs and InsurTech start-ups.
- The potential gains for MGAs that invest in technology are huge: from reducing process friction with insurers and customers, to improving pricing and risk selection, and creating more flexibility to adjust program guidelines. Such investments are more accessible for larger MGAs as opposed to smaller MGAs and start-ups. Active front platforms (discussed later in Part 2 on new capacity sources), and incubator aggregators, help to alleviate the funding gap by providing smaller entities with access to technologies. Some insurers are considering how to support MGAs in this area as well.
- MGAs are a natural launchpad for InsurTech models that don’t need to build a standalone insurance company, and the entrepreneurial shell of an MGA is naturally well-suited to InsurTech companies. InsurTech MGAs come in many different forms, exploiting, for example, artificial intelligence-driven underwriting, innovative risk management techniques and many other technology solutions.
MGAs Attract Talent
The size and pace of MGA growth continues to have a ripple effect on the insurance industry’s talent pool. The industry is not attracting sufficient talent, putting pressure on employers to build compelling incentivization models. Many underwriters are attracted to the more creative incentivization models available from MGAs, where they are often offered an equity stake as a whole or within their operational cell.
The growth of InsurTech MGAs has also diversified the insurance industry’s human resources market. Much non-insurance talent has been attracted to the unique operational models of InsurTech firms, which often take the form of an MGA. The prevailing view is that traditional insurance talent is still under-represented in these InsurTech firms.
MGAs’ share of the U.S. property & casualty insurance market doubled over the last 10 years due to new product innovation and rate increases.
Agility helps MGAs move fast on underwriting discipline by raising rates and tightening policy terms to outperform large insurance companies.
Embracing technology as the insurance market’s innovation sandbox enables MGAs to test new concepts and solutions.
MGAs’ growth trajectory is being fueled by private equity and new capital sources, attracting talented individuals with compelling incentivization models.
Part 2: Diversifying Capacity with New Sources