The MGA Book
The MGA Book
A series containing excerpts from David Hughes forthcoming publication.
By David Hughes
CEO & Founder
1
So you want to start an MGA?
So you have an idea.
But are you really ready to start your MGA?
Finance and capacity are the last things you need to worry about at this stage.
Firstly you need to create your vision and plan.
And this plan needs to focus on how your MGA will create value.
This is not a full business plan. It is what I call a pro-forma. A single sheet of paper to help you decide.
"Do I have enough yet to create an MGA?"
Here is a copy of the ‘MGA pro-forma’.
I’ll discuss each of these critical questions in more detail in subsequent blogs:
"Who is my target customer?"
"How do I distribute to my customer?"
"What policy(ies) am I looking to sell/underwrite?"
"Why will my target(s) buy from me?"
"Which existing insurers provide policies to my target customers?"
"How will I add greater value than existing insurers?
Beware of pyrrhic victories
Sometimes a certain class of insurance will look underserviced, with little or poor insurance availability and with some level of technology tardiness.
Be careful. In the UK there are a handful of classes that have proven incredibly difficult to write profitability. And many times, they get underwritten through an MGA, until the binder is withdrawn.
Beware of entering a class that has always been challenging for insurers to make a profit. Insurance companies are full of bright, experienced people, so what makes you better?
"Unless you really do have the magic bullet, stay clear and aim for a different class."
2
Is there a future for MGAs?
I was head of capital management for AIG, UK & Europe. We had over USD10bn of capital to invest in our underwriting business. I worked directly with the Chief Finance Officer and Chief Executive.
A big part of my brief was to see how best we could deploy and utilise the capital. This meant reviewing the performance of product lines and supporting those which were making money and fixing and reducing those that were not.
The only problem was, we could only tweak, and any changes were slow to implement.
Why?
People
People are expensive to let go and hire. The costs sit with you. And talented insurance people are hard to find.
Infrastructure
Yes, you may have the systems, but they always need customising for new product lines. And then there is the legacy debt.
Distribution
Setting up a new distribution channel from scratch can take years to develop. You can buy a channel through acquisition, but there are many risks and significant capital investments above the risk capital required.
MGA Magic
MGAs allow insurers to deploy their capital with variable expenses. Yes, you may lose the benefit of economies of scale (although I’ve yet to see a big company really deliver on these). But at least insurers can increase or decrease capacity quickly, with immediate effect and variable expenses.
Make yourself an attractive capital investment for an insurer. So they freely and happily lend your their capacity.
"The future of underwriting is coming your way."
Underwriting will be done by more MGAs, with the support of large capacity providers.
3
The MGA Executive
Role: People
An MGA needs good people. People that you as the CEO can trust.
There are key roles that need to be managed:
1. Underwriter
2. Sales and distribution
3. Operations
4. Finance
A small startup MGA may see the CEO equivalent take the role of underwriter and sales/distribution. Supported by an operations person who will also manage the finances, with the support of an able bookkeeper.
As your MGA grows, these roles will become individual roles, and eventually teams. To get started, any capacity provider will need to believe in the feasibility of underwriting success.
Strategy
You’re the CEO and most likely founder of your MGA.
One of your key roles is setting the strategy for your business. You need to be constantly thinking about your goals: long, medium and short term.
You need to delegate, and you need confidence to carry through with difficult decisions.
MGA Magic
As CEO, delegate everything you can.
But don't delegate ownership and responsibility for capacity management and performance.
4
The MGA Executive Role: Strategy
Setting a strategy sounds complex. But keep it simple!
If you haven’t set one, don’t worry, you're not on your own. Why not use our MGA lifecycle model?
Identify where you are, and how you get to the point that borders the next stage.
Your strategy needs to be underpinned by a value proposition. And stay focused!
The Levers to a Successful MGA
To be a successful MGA you have one purpose. To add value.
Value can be created in many ways, but I've broken this down into five simple levers.
The Five MGA Value Levers
1. Segment
Identify a customer segment that is either not serviced or under-serviced by existing insurers'.
2. Underwriting
Underwrite a segment more profitably than existing insurers'.
3. Technology
Overcome technology barriers that existing insurers struggle to conquer.
4. Product
Create a product that is more trusted than existing insurers'.
5. Brand
Generate a brand that is more trusted than existing insurers'.
MGA Magic
Make sure you have at least one of the five MGA value levers in your MGA proposition.
5
The MGA Executive
Role: Lifecycle
1. Idea:
You have a plan (0–20+ years)
You have an idea and incentive to create an MGA:
1. To get paid more for doing what you already do
2. To take control of your future
3. To create a better work-life balance
4. To build a solution to meet your insureds needs
5. You’ve identified a customer need and want to fulfil it
6. You’ve created a great bit of technology and want to use insurance to deploy it/commercialise it
7. You’ve seen other people become wealthy from creating an MGA
8. Because you were made redundant and need income
2. Start up:
The journey begins (3 years)
Seed investment to get going, often regulated under an umbrella arrangement from a regulated entity (broker, underwriter or MGA). The focus is on getting the following set up:
1. Business plan
2. Capacity
3. Systems
4. Underwriters
5. Distribution
6 Claims handling
7. Cash
Target Annual GWP: £5m
3. Creating lifestyle:
(3–7 years)
Your business is running well, and now you can grow your income with a view to reaching a healthy amount to give you a good income by:
1. Securing more than one capacity provider
2. Leveraging your data
3. Increasing distribution
4. Developing a brand
5. Developing claims expertise in house
6. Refining underwriting and pricing to improve loss ratios
Target Annual GWP: £10m - 25m
4. Building an empire::
(5 - 10years)
You’ve been enjoying the lifestyle business. And many MGA owners stop there. But some want to drive forward. Building a bigger operation by adding new classes, some complementary to current product lines, others opportunistic. Activities include:
1. Adding new product lines
2. Expanding distribution to other channels
3. Small scale acquisition
4. Developing actuarial and analytical capabilities in house
Target Annual GWP: £50m - 100m
5. Global Domination:
(10+ years)
Looking to take your business international, you make the leap few other MGAs do. Either with the help of investors, a partnership or from retained earnings:
1. Expansion into international territories
2. Acquisition of MGAs
3. Investors or partnerships often provide growth funds
4. Aggressive GWP growth
5. Multiple capacity providers with complex reporting needs
6. Significant back-office functions such as finance, reporting, systems etc
7. Professional CEO recruited to take lead on expansion, with you becoming chairman or non–exec
Target Annual GWP: £100m - 750m
6
The MGA Executive Role: Capacity Management
An MGA is nothing without its product. The binding authority exists between a licensed insurance company and the MGA. Without that, there is no underwriting, no income, and no business.
Getting capacity, managing it, and delivering performance are primary roles of the CEO of an MGA.
You may delegate day-to-day capacity management, but you should ensure your finger remains on the pulse and that any potential issues are raised immediately and handled effectively.
There are 5 key stages in the lifetime of a binding authority:
1. Finding and getting new capacity
2. Managing and tracking performance
3. Collecting a profit commission
4. Renewing the binding authority
5. Exiting the binding authority
Many MGAs will strive to get more than one insurer to support them.
This is sound risk management advice, however it does increase the management time in monthly meetings, insurer pack creation etc.
Carrier Strategy
For MGAs with less than £5m GWP, it is strongly advisable to keep with one carrier and focus on the business to grow it and meet performance targets. Only start to expand capacity relationships when you are entering the 'lifestyle' stage of MGA growth (read more here).
In the early days, you have limited time, resources, and energy to devote to the difficult and costly process of getting extra carriers onboard. We go back to that keyword, focus.
MGA Magic
Develop more than one insurance relationship only when your annual premium income exceeds £5m, otherwise, you risk losing focus.