The MGA, a trendy (but not so new) beast Why?
On February 3rd, 2021, the underwriting agency Centrix announced its decision to join the Managing General Agents Association (MGAA) – the only association in the UK that represents and promotes the Managing General Agents (MGA) industry and its members. “A natural choice,” according to the newly created MGA (2019) fancying to expand its presence in the London market.
Both in the UK and in the USA, the MGA system has been existing since the 1990’s and expanding promptly: 300 Anglo-Saxon MGAs account for c. 15% of the specialty risks in the London and American markets. Four types of MGAs coexist in the insurance market: those belonging to reinsurers, insurers or brokers as well as independent MGAs. In France, c. 20 MGAs already exist in 2021. Prominent Insurtechs – such as Luko, which raised €50 million at the end of 2020 – have also opted for this underwriting agency model. MGAs’ fever seems to have won over investors as well witness their attractiveness…
As they are relatively unknown in France, where does this “MGA enthusiasm” come from?
The advantages of the MGA system over the traditional channel of insurance brokerage.
The MGA constitutes a sort of outsourced service company providing the insurer or reinsurer not only with the commercial relationship with the insured but also with all the technical (risks underwriting), after-sales (claims management and settlement) and administrative (accounting and premiums’ collection) functions. The MGA can work for one or more (re)insurers.
From a commercial point of view, insurers or reinsurers may be interested in contracting with an underwriting agency for its knowledge of a particular risk that insurers and reinsurers do not control and for which they do not wish to invest time nor human resources. From an economic and financial point of view, the interest of the underwriting agency model lies in its stability compared to brokerage activities.
Technically, the MGA is an ideal channel for dealing with affinity risks as it allows group negotiation with suppliers (insurers or reinsurers) and serves as a single point of contact with policyholders. This affinity model matches exactly the basic model of Insurtechs: simplified and automated underwriting to a large customer base.
Additionally, the MGA automizes what traditional insurance cannot (or at the very least, struggles to) do and allows reinsurers – which are more and more fond of direct insurance – to access knowledge of the direct market from which they are normally unfamiliar with.
From an ethical point of view, the MGA can help resolve the eternal conflict of interest for the broker who is both paid by the insurer and the agent of the insured. The MGA is – at least in theory – clearly the agent of the insurers. While it does not yet correspond to a specific category provided for by French law (as is the case in Belgium for example), it still corresponds to a technical and commercial reality in structural development.
Last but not least, the advantage of an MGA is to maximize the company or group’s income by combining brokerage and underwriting agency activities, while also allowing greater control over the insurance product marketed by the insurance or reinsurance intermediary.
As a part of a long-term strategy, MGA status can also be an intermediate step towards an insurance company certification – especially for Insurtechs – as the MGA team acquires valuable experience on the entire insurance value chain (actuarial, underwriting, claims management, marketing, legal, accounting, etc.) giving it increased legitimacy in view of its approval by the Prudential Control and Resolution Authority (“ACPR”).
Regulatory and legal aspects related to the creation of an MGA
So far, the French system (both regulatory, legal and accounting) ignores everything about the MGA category.
The vast majority of the already existing MGAs on the French market belong to brokers. The creation of an underwriting agency first involves the need to meet the conditions required by the regulations relating to the intermediation and distribution of insurance.
In addition, an insurance intermediary registered in one of the countries of the European Economic Area (“EEA”) may exercise its activities in another EEA country via the freedom to provide services or the freedom of establishment – in application of the European Passport. Given that the European regulatory framework is unified, the choice of the country of establishment of an underwriting agency generally depends on fiscal, accounting or commercial considerations strongly related to the MGA’s creator’s aspirations.
Legally, an underwriting agency can be set up in the usual structures allowed by French corporate law (SA, SARL, SAS, etc.) and most often takes the form of partnership agreements, delegation agreements/underwriting missions and/or claims management. In case of delegation agreements, special attention must be paid to the contractual templates suggested by (re)insurers which sometimes make the delegated intermediary liable for most of the risk.
Given the growing attention paid by the ACPR to the proper performance of brokers’ missions (confer the latest sanctions), it is possible that French law will eventually have to recognize this new activity resulting in a split of the two roles of the broker (confer infra). While waiting for this hypothetical reform – the practice already preceding the law – French actors will have to cautiously and pragmatically handle the tools offered by the existing framework which is flexible enough to embrace the current fever.