In today's complex insurance landscape, Managing General Agents (MGAs) play a pivotal role that many insurance professionals and the public don't fully understand. This episode breaks down everything you need to know about these unique insurance intermediaries.
Whether you're an experienced insurance professional or new to the industry, understanding MGAs is crucial in today's evolving insurance marketplace. This episode provides:
An MGA is a regulated insurance delivery vehicle. Regulated as a broker, but usually having underwriting acumen and authority. They MUST partner with an insurance company in either a direct relationship where the carrier is bearing risk or in an indirect relationship where the carrier cedes all the risk to a reinsurer(s). The latter is called a fronting carrier as the MGA is essentially paying the carrier for permission to use its license to issue a policy under the carriers state authority.
TRANSCRIPT
What is an MGA
[00:00:00] and welcome back to Ask a Nerd where we take real questions from real operators, building the future of insurance. No fluff, just straight answers from real people who've done it themselves. Yeah. Alright, today's question comes from James in Chicago and he writes, I've been hearing a lot about MGAs, but I'm still not totally clear on what they actually do.
Do they underwrite? Do they use carrier rates? I might be interested. So thanks for this question. There's a lot of confusion, so MGAs live in the middle and let's unpack really what that means. So the way I like to try to describe this, it is a vehicle, it is a vehicle that you, where you can actually conduct insurance transactions.
So what does that mean? An MGA is when you're in it and you're actually operating it, it's like a part broker. Part wholesaler feels like a carrier. 'cause they can do underwriting, they can do [00:01:00] claims, but not always. They're actually co and in the InsureTech revolution they've been technologists as well, actually building technology.
So I'll start there when I, what. Yeah, un unpack that. So they're in the middle. Yep. They're in the middle of transactions and let's, they're a vehicle. Let's talk about what they are and what they aren't. So when we talk about the definition of an MGA, it's a managed general agent. And we also have the concept of managed general underwriters in MGU.
So we talk about, when we talk about the nomenclature of this, when we identify ourselves, we'll say I work with MGAs, I work with MGUs, I'm a program business. And what that means is that you. This is so great. So we have individual brokers. So when we think about the insurance value chain of distributed members, along it, we have brokers.
And when we think about an individual broker, it's somebody who is going and working with individual. They can be producers, they can be retailers. They're individual brokers and they're working with to sell they're selling insurance, they're distributing other [00:02:00] people's products. And I think that's the way to think about it.
They are distributing other people's insurance products and when you think about an MGA, they can distribute their own products and they can distribute the carrier's products. And so yes, they are leveraging the capacity of a carrier and of reinsurers, and this is where they're able to this. It costs a hundred million dollars to go to market as a carrier.
So to come and start as an MGA, it enables you to niche down to, to have a very specific focus. Yeah. And it enables you to leverage the licenses and the balance sheet of other players to be able to go to market with something that is uniquely your own. So in, I think an interesting way that shows like how the regulatory authorities think of an MGA is actually regulated as a broker.
So they're considered from the regulatory authority part of the distribution. Okay. So [00:03:00] an MGA stands for managing general agency. So there's agents, there's that word in there. So there's an, there's a kind of an assumption that. This MGA is distributing, they're selling something. They're actually regulated as a broker or an agent, whereas an MGU, and a lot of these times these can be used interchangeably.
Sometimes an MGA will be called an MGU, even though they're an MGA and vice versa. But an MGU that you managing general underwriter, the core responsibility for an MGU is underwriting, whereas the core responsibility for an MGA is. Can be underwriting, can be distribution, can be so many different facets that a, that agency gives them wide authority or wide capability of working with.
It's a spectrum. Lots of different entities. But here's where, here's what they are not, they're not an insurance company, so they're not licensed as an insurance [00:04:00] company. They actually don't have capital, which it's not their own capital. That they can use to pay claims. So I think one easy way to bucket them is that they're part, they're regulated as distribution, so they're part agent, but an MGA is typically underwriting as well.
So that means they, what are they underwriting? They must be working with someone they're under, they're working with insurance companies, they're working with carriers, front, carriers. Capacity in holistically, and they are leveraging the assets that the other players have Correct. To be able to write and distribute products.
Okay. And I think the definition of capability, they are capable of partnering with so many different entities in the insurance ecosystem. That's why they are so attractive. So I work with MGAs that.[00:05:00]
Hey, wholesale, I work with MGAs that hold the pen. So they're more of an MGUI work with MGAs that do billing, that do claims that kind of, some of them are simply, they work with a program administrator and all they do is they sell and they typically sell and distribute others' products. Yeah.
So they have this massive flexibility in how they can operate. That has been, I think, the attraction and why we've seen such a big explosion because as Michelle said, unlike a carrier where it's gonna take tens, sometimes hundreds of millions of dollars to go to market. With an MGA. And if you've listened to some of our other videos here, the two and two principle, it's probably gonna take you about $2 million of operating capital to get an MGA off the ground and sell your first product in about two years.
To do, to execute on that. So all of that time that's leading up to it is, why does it take two years? You have to find [00:06:00] an insurance carrier that you can partner with. You cannot issue a policy by yourself. The state regulatory bodies will not allow you to do that. So you have to find an insurance carrier that could be an actual carrier, or as Michelle termed it, a front, which means.
They're, you are essentially renting their license to issue a policy in a particular state, and in that particular scenario and structure, there's usually a reinsurer that's actively involved in this transaction so that it can function smoothly. You are going to need to find distribution that could be your own.
You could be the full responsibility. You could go direct to consumer. You have, you could go, you could wholesale a distribution endpoint, you can have embedded experience. You can have besides the broker flow, you can just, there there's a multitude of ways in which you need to explore a customer journey.
Wholesale, retail, direct to consumer are probably the three. The three standard ways for an MGA to get to market. [00:07:00] So when you think about an MGA, some of the initial core philosophies of what you need to have, and you think about the pillars. So you need distribution, you have to have capacity, and you need funding to be able to achieve this journey.
Yeah. So you need operational funding, so that's the $2 million. You need operational funding and during that course you need to get insurance capacity. So you need to get funding and in order to achieve the capacity, you are going to need unique data and Okay. Depending if you're going to hold the pen and underwrite, I think we, so we should send a link to the video that we did Yeah.
Around, Hey we did all of this stuff and we're still can't get an insurance company to partner with us. We'll add a link to that. But if you're going down this road, so listen, we've. Oh, hopefully we've now properly explained what an MGA is and you're going down this road. Like you still gotta build something special.
Yeah, you still have to have some niche [00:08:00] ni niche. Potato. You need niches. Get it. It could be the data that you bring. So I'll, I like to refer back to my co-founding of my MGA. We were specialty, we were in the catastrophe in the flood space. And what we decided to do, we decided in parallel to have two programs that we would work towards in our initial state.
One would be commercial flood and one would be residential flood. On the commercial flood side, different strategy. We decided we needed to go more wholesale. We would work with retailers, but we decided wholesale, going through the wholesale market was going to be our best bet to get wide adoption and access to the marketplace.
So we found wholesalers early on, very early, Michelle, like that was one of the first things that we did well before we even got into some insurance capacity [00:09:00] was we partnered with some wholesalers and then we essentially built the product around what they would need to sell it to retail. As well.
Personal line side, completely different story. We work predominantly with with retail agents and retail brokers around solving that particular problem. And similarly, we were engaged with the distribution market well before we got even a sniff that we were gonna get any sort of capacity on the insurance and reinsurance side.
With the, our residential program, we did use an insurance front. So this was a reinsurance dominated program. And on the commercial structure we used a traditional carrier and partnered with them. And they did the, they did their negotiations with their reinsurers, but we brought something special to the table.
We brought a new way to underwrite flood that was. That was our specialty. But if you've been watching this, you can [00:10:00] see that's just not nearly adequate enough to be successful in the MGA space. Is there anything else you wanna round out this topic with? Because I feel like we answered, so MGAs sit in the middle, they are the A stays for agency, so they are regulated as the.
As the, as part of distribution, their compensation, which we'll do a full session on compensation, unit economics of how an MGA works, all of that. They're predominantly compensated by commission because they're part of distribution. So they're in the expense ratio with the wholesalers, with the brokers, with the agents.
They're part of that part. They, so they have to bring something to the table around distribution. They're typically underwriting. And they typically have some competitive advantage, whether it's data or algorithms or technology. They have something where they can underwrite different, better, faster than a carrier can.
And that is why [00:11:00] a carrier would look to partner with the MGA. We didn't really talk about that. What's the value proposition for the carrier? It gives them access to markets faster, better underwriting, potentially better distribution. So because they sit in the middle, they can create a. They can create a multifaceted value proposition to the marketplace.
I think the only other thing that I would add on is that MGAs can work with multiple carriers. It doesn't have to be a varied, like one-to-one. It is very much of the ecosystem where an MGA will work with many brokers. MGA will work with many carriers. And so when you get to that point, so when you're starting out it's a lot of times you're trying to find one.
One broker, one, one carrier that you can work with. But yeah, but because of the flexibility of the vehicle, A, it can be one-to-one, it can be one to many. It can be many to many. You get many brokers. There's complexities when you add many carriers. There's complexities when you add many. And [00:12:00] sometimes the MGA gets a little bit of the short straw because they have to deal with both the carriers and the brokers, and we like them all.
There, there is some nuance there around managing the relationship. And keeping all sides happy when you are completely in a business relationship with multiple stakeholders who all have distinct interest. Yeah. In the, in, in the initial stages, because you're bringing so little to the table, usually the carriers and your brokers and your, or your wholesalers you're partner with generally have more leverage Yes.
In the relationship. We will go into this in future episodes, but one way the MGAs can begin to. As they show their acumen, as they show that like they can produce on the loss ratio, that they're actually executing, get there. It's a good product for the marketplace, so brokers are lining up to want to sell it.
That dynamic, the leverage dynamic begins to shift and that's when negotiations and that's where. As in terms of the [00:13:00] economic value of A MGA and why investors in particular are so interested in them when an MGA hits that inflection point and they're going through that scaling process, unlike a carrier, unlike a wholesaler, unlike some of these other entities that they're in the middle of the MGA has the most set of tools in its toolbox to create value for investors, for the organization and the marketplace.
Yeah, and that's where. You have different levers. You have profit loss sharing, you have different levers that you can enable, but you have to make sure you don't get squeezed too much in the beginning. And that's, and we're, that's part of, and we see MGAs become insurers and we see MGAs become reinsurers.
So it is the most flexible vehicle that we have to get to market to create. Create design and create really innovative product solutions. It is the most flexible vehicle we have. With that [00:14:00] said we take your questions. So if you have any questions about this particular episode, put it into the comments.
But if you have any questions about MGAs in general and stuff that you want us to tackle, put those in the comments as well and we'll get to them. Until next time. Until next time, this is ask the nerds.