MGAs - Casualty Actuarial Society

By Benoit Carrier, Aon Benfield

MGAs How They Work, Industry Results, Market Trends

Midwest Actuarial Forum Cincinnati October 6th, 2017

1 Aon Proprietary & Confidential

Table of Contents

What is an MGA – Description – Distribution Channels – Compensation – Pros/Cons for Insurers – MGA Associations – Program Market : General Categories

Industry Results – Assumptions – Premiums – Loss Ratios

Market Trends

– Competitive Trends – Growing Trends

Actuarial Roles in MGA Market


What is an MGA

The Managing General Agency (MGA) market places risks not easily accepted by standard (risk) insurers, risks categorized as specialty risks.

MGAs have greater access and expertise in these specialty markets.

MGA business often focused on certain classes of risk and sometime location. This MGA business referred as program business.


What is an MGA (continued)

MGAs represent insurers and act as intermediary between retail agents or wholesale agents*. * Wholesale agents place business brought to them by retail agents.

MGAs handle administrative functions (underwriting, quoting,…),

sometimes loss control and claims.

Analogy : MGA is like a department of an insurance company doing everything except claims (with few exceptions).


Distribution Channels

Retail Agent

Insured

MGA

OR

Wholesale Agent

Retail Agent

Insured

Insurer


Compensation

MGA gets paid a commission for : – Writing risks – Underwriting, quoting,… at point of sale – Other functions.

Typical to have a contingent (profit) commission if loss ratio below a

certain threshold.

Higher cost for insurer offset by not needing staff for MGA functions. Specialty loss ratio can also be lower than standard loss ratio.


Pros / Cons for Insurers

Pros MGAs more nimble, react more quickly to changes in business conditions (smaller organization, business written on surplus paper with less regulatory constraints). MGAs have greater access to specialty markets which can be more profitable than the standard ones. Easy entry/exit strategy.

Cons

Higher acquisition costs. Less control on writing the business ( mitigated by appropriate referrals and commission terms).


MGA Associations

Target Market Program Administrators Association – Membership requires administration of one program with binding authority

and minimum gross revenue of $1M. American Association of Managing General Agents (AAMGA*)

– For wholesale distribution market.

National Association of Surplus Lines Offices (NAPSLO*) – Surplus lines for non-standard, unique and capacity risks.

* AAMGA and NAPSLO merged on August 1st, 2017 to create the Wholesale Specialty Insurance Association.


Program Market – General Categories

AAMGA Model – Insurance company designs the program and Underwriting

Guidelines – seeks wholesale distribution partners with limited binding authority – Scottsdale, Western World, Capitol Indemnity, UAI / Penn America

Target Markets Model – MGA designs the program and Underwriting

Guidelines and seeks carrier partner. Final guidelines collaborative process but more driven by MGA. – QBE, Lexington, Everest National, Zurich

Fronting Model – MGA designs program with Reinsurer behind Fronting

Carrier. Usually direct insurers act as majority reinsurer behind Fronting Company. Collateralization and Catastrophe limits can be barriers to entry.


Table of Contents



Market Trends




Industry Results - Assumptions

No MGA line of business (lob) in NAIC annual statement Insurers with MGA premium >= 5% if policyholder surplus must report MGA

info in Note 19 Note 19 includes MGA, type of business written, total direct written premium

(not broken down by lob)

Note : Texas Supplemental “A” for County Mutuals also contains MGA info (only for Texas).


29.7B34.4B

39.3B 40.9B 41.6B

2011 2012 2013 2014 2015

Sources: SNL Financial, NAICS, Individual 10-K filings, AXCO, StoneRidge Advisors, Inpoint Analysis

The MGA universe is comprised of around $42B in premium and has significantly outpaced overall P&C growth over a five-year period

US MGA Direct Written Premium $B

MGAs wrote $41.6B of premiums in 2015 (8.9% five-year compound annual growth rate)

$42.4B in 2016 according to Conning

Despite accounting for a small segment of the total US market (7.1%), growth in the MGA space has far outpaced US P&C growth over a five-year period (8.9% vs 3.8%)

New players are entering the market due to the continued soft market and market attractiveness

Acquisitions of MGAs have also increased in soft market conditions, with insurers looking to M&A as a quicker method of growing their business without the need to invest in infrastructure and talent

Number of Active MGAs

399519 534 577 610

2011 2012 2013 2014 2015


Sources: SNL Financial, NAICS, Individual 10-K filings, Guy Carpenter: Annual Specialty Insurance Program Issuing Carrier Survey 2014, Aon Benfield broker insight, Inpoint Analysis 1: Any MGA writing multiple lines of business is included in Multi-Line premium

6%

13%

13%

13%

19%

19%

31%

33%

47%

53%

67%

Homeowners

Umbrella

Professional Lines

A&H

Motor Liability

Workers Comp

Motor Liability

Umbrella

Inland Marine

Property

General Liability

Key

Commercial

Personal

MGAs tend to specialize in specific lines of business, with commercial lines generating increased interest

$6.8B

$5.0B

$4.2B

$3.0B

$1.7B

$1.5B

$0.7B

$0.4B

$0.4B

$0.3B

$0.2B

$0.1B

$17.9B

$23.7B 57%

Based on a survey conducted in 2014, there is a greater appetite for growth in commercial lines as opposed to personal lines with General Liability a particular area of interest

Workers Comp, Medical Liability, and Property saw significant increases in percent of respondents who were writing or interested in growing in these lines

57% of premium stems from MGAs focusing on a specific line of business, most notably Motor, Crop, and Property

The majority of multi-line MGAs write Property as one of their lines

Line of Business Breakdown

Appetite for Growth by Line of Business 2015 Single Line MGA Premium

2015 Multi-Line MGA Premium1

Aviation < 1%

Flood < 1%

Marine 1%

Professional Liability 1%

Credit, Surety, Bonds 1%

A&H 2%

Casualty 4%

Other 4%

Workers Comp 7%

Crop 10%

Property 12%

Motor 16%

Multi-Line 43%


Sources: SNL Financial, NAICS, Individual 10-K filings, Inpoint Analysis

MGA Market Distribution

West | $4.0B | 10%

Midwest | $8.3B | 20%

Northeast | $4.3B | 10%

South | $20.1B | 48%

Region 2015 MGA Premium | % of US

Key

Premium is heavily concentrated in the South − Florida and Texas are by far the largest regions

by MGA region in the South An additional $5.0B of premium is not allocated to a

region and is written either in an unknown location or by a US insurer outside of the US

2015 MGA Premium Distribution by Region

More than 600 MGAs were active in the US market in 2015

The majority of premium (63.8%) remains written by MGAs with less than $500M in premium with higher premium% for the $500m – 1bn MGAs.

The market is concentrated, with the top ten MGAs accounting for 30% of the $41.6bn of 2015 MGA premium

2015 MGA Premium Distribution by MGA Size

26.7%

37.2%

17.0%

19.1%

<$100m $100m - $500m $500m - 1bn >$1bn


Source: Aon Benfield broker insights, Guy Carpenter: Annual Specialty Insurance Program Issuing Carrier Survey 2014, Inpoint Analysis

10%

9% 12%

1% 3% 3% 3%

25%

65% 65%

52%

36%

42% 42% 41%

25% 25% 26%

36%

54% 55% 55% 56%

50%

0%

10%

20%

30%

40%

50%

60%

70%

2006 2007 2008 2009 2010 2011 2012 2014

State-specific Regional National

While demand for MGAs with a nationwide offering remains, interest in state-specific MGAs is growing

Insurers looking for MGAs who can provide a state-specific service hiked significantly in 2014 to 25% since the last survey result of 3% taken in 2012

A focus on nationwide service is evident, with the majority of respondents looking for MGAs that are able to provide national service since 2009

Brokers suggest that despite MGAs increasingly having the capacity to write business via a nationwide license, a number of insurers prefer to use MGAs on a more local basis where they have a strong expertise, reputation and access to a deep retail agency network

Insurers’ Preference in Terms of MGA’s Geographic Reach / Scope


Sources: SNL Financial, NAIC, Individual 10-K filings, Inpoint Analysis

MGA market continues to perform the P&C industry, excluding crop

MGA-focused loss ratio performance was about seven points better than the P&C industry from 2011-2015; 54.4% average vs. 61.6%

MGA results were negatively affected by Crop’s 91.8% average loss ratio

Excluding Crop, MGA loss ratios averaged 51.5%, or 10.1% better than the P&C industry overall

The performance of MGAs can be partially attributed to the stricter governance of MGAs by insurance carriers starting in the late 1990s

Overall Market Performance 2011-2015

Average Loss Ratios

P&C market: 61.6% MGA-focused insurers (>75% of book): 54.4% MGA-focused insurers, ex Crop: 51.5%

69.0%

71.0%

64.0%60.0%

54.4%

70.0%68.0%

60.0% 61.0%

61.6%

55.0%57.0%

52.0% 53.0% 51.5%

2011 2012 2013 2014 2015

MGA Market P&C Market MGA Focus x Crop


Sources: SNL Financial, NAIC, Individual 10-K filings, Inpoint Analysis

Excluding Crop, the MGA market has strongly outperformed the P&C industry in loss ratios, though results vary by line

Writers of MGA business have outperformed the overall P&C industry across the majority of lines of business

Property, as one of the largest lines, contributed significantly to MGAs’ outperformance with a 36.2% average loss ratio versus 54.6% for P&C

MGAs writing Flood, Credit/Surety/Bond, and Aviation performed at least 5% points better than the P&C industry

Line of Business Performance 2011-2015 Average Loss Ratios

17.0% 15.5%

26.5%

36.2%

45.2%

6.7%

57.8%

71.9% 67.3% 70.1% 68.7%

101.9%

81.2%

56.6%

47.4%

54.6%

49.3% 50.1%

61.6%

73.1%

64.0%

69.3%70.4%

100.3%

MGA Focused P&C Market


Table of Contents



Market Trends




Competitive Trends

Lot of capital flowing in MGA market : – Drives down rates – Creates new opportunities as capital needs to be utilized – Generates merger & acquisition activity.

Alternative capital also continues to expand its presence as alternative

to traditional market (hurricane Harvey and Irma could slow down this trend).

Technology (use of analytics and artificial intelligence) generates alternative ways to buy insurance through the internet.


Growing Trends

MGA people are entrepreneurial. MGA start ups following insurance company mergers.

More difficult to automate placement of specialty risks, MGAs will

remain vital in this market.

Emerging risks require quick, specialized solutions. MGAs well positioned to provide these solutions (see next three slides).


Prosthetics

Robotics

Surgical Instruments

Organ Procurement Organizations

Fecal Banks

Emerging and evolving risks, opportunities – MGA market can deliver value


The Cyber Opportunity

(1) Company loss ratios weighted by direct earned premium. Note that all numbers reported to the NAIC are on a direct basis.

Cyber Insurance Premium Estimates Current and Forecast

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

$2.0B-$3.0B

$7.5B-$10B

$14B

$20B

Top 5 US writers have

>60% of direct written

premium

Loss Ratio:

41.5% As reported to NAIC in 2015

An additional

~$450M of US risk is

placed into Lloyd’s

…but, how large is the systemic risk?



Table of Contents



Market Trends





Actuaries can work for the MGA, Insurance Company providing the paper, Reinsurer, or Reinsurance Broker facilitating the MGA placement.

Actuarial roles :

– Reserving analysis (IBNR) – Prospective pricing (expected loss ratio) analysis – How to price this specialty lob ( loss costs, …) – Peer or industry results in a given MGA market – Reinsurance structure and pricing – Industry or market feasabiltity studies – Placement discussions.

MGAs - Casualty Actuarial Society

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