As managing general agents (MGAs) and managing general underwriters (MGUs) examine their next steps as businesses and investment opportunities, some are attracted to fully taking on the role of carrier.
This route is by no means an inevitability for MGAs/MGUs, yet there are many factors that make this a compelling idea that deserves consideration by serious leaders in the industry.
Why start as an MGA/MGU if you’re looking to be a carrier?
For many fledgling insurance businesses, starting as an MGA or MGU (check out our coverage to understand the difference) is a no-brainer.
The disadvantages of being a carrier mostly come in the form of capital requirements. It takes a lot of money to ensure you’re solvent. From state surety deposits to required claims-paying reserves, guaranty fund payments, and any number of ticky-tacky state fees, having money is the springboard for launching a carrier.
Advantages to MGA/MGUs are numerous: the gravity and reputation of a carrier without the funding requirements, the ability to start slow-burning growth in a niche, strategically learning the ropes in a market before tackling more responsibilities. This model has experienced a renaissance for the last decade for these reasons and more.
Even the early days of MGAs/MGUs were about carriers starting agencies that also handled underwriting, as a way of expanding into a region or specialty in a way that gave the insurance carrier some flexibility. So, why step into a model that seems to swim upriver from that history?
Increasingly absorbing risk
If you’re familiar with the MGA Act (and, for those reading this and interested in this subject, you really should be), you know that, by definition, MGAs and MGUs are entities that take on some degree of the carrier’s role and responsibility in underwriting, and possibly in claims-paying. So, definitionally, you’re taking on risk.
And, if industry commentary is to be believed, carriers prefer working with MGAs that take on more of those risks and responsibilities. Even in 2011, as MGAs and MGUs saw a sharp increase, columns like this noted the only MGAs worth holding a contract with were the ones willing to take on significant underwriting responsibilities, and preferably claims-paying responsibilities, as well.
This clearly brings us to the question: Why go the carrier route? The obvious answer: If you’re already taking on the responsibility, then why not also reap the rewards?
It’s not quite as simple as all that, there are many reasons to not go full carrier, which include things like heightened financial requirements and scrutiny. Right now MGAs/MGUs are still so misunderstood even within the industry that pinning down who exactly is responsible for what in a given distribution channel often is a matter of the distinct contract between a particular MGA and carrier. Industry defaults seem inclined to look to carriers for the bulk of compliance responsibility. All of these speak to the advantages of remaining as an MGA.
Many new-breed MGAs and MGUs are inextricably linked to insurtechs. They enjoy reputations linked to technological advancement that give them at least the perception of being on the leading edge of the industry. The temptation to lean into that, and dominate the niche markets they already occupy, is understandable. Being grounded in transformative tech as a new hot carrier can move a company past the systems that are both a source of long-term strength and current struggle for many legacy insurers.
Another strong consideration in favor of becoming a carrier is that MGA insurtechs are often investor-backed. Having an investor appetite can both provide the funding necessary to become an insurer as well as motivate the decision to aim for a more lucrative slice of the market.
Options for MGAs/MGUs looking to become carriers
MGAs and MGUs aiming to become insurance carriers may take a variety of paths to this increased-liability (and, hopefully, increased-profit) position. However, these myriad journeys are largely split into two:
- Buy a carrier
- Build up and transform
Why would an MGA buy an existing insurance carrier?
For MGAs looking to move across the swim lanes into that of carriers, buying an existing carrier can give MGAs benefits such as:
- An experienced team familiar with industry rules and regulations
- An existing reputation with consumers and producers
- An entity that’s already registered with regulatory bodies
Of course, this can backfire in terms of cultural differences or tarnished brand reputations. Inheriting existing problems is always a risk in buying a business. Yet, having internal experience can help you identify regulatory risks and compliance processes in advance, and vetting any merger and acquisition prospects thoroughly can overcome this objection.
Why would an MGA become a carrier outright on its own?
An MGA might be better positioned to enter the carrier arena in its own right. If that’s a route you want to take, you’ll need to ask yourself:
- Do you have a strong growth funnel?
- Is your reputation stronger than some of the carriers in your space?
- Do you have the ability or interest in moving beyond your current line or niche of underwriting?
- Would raising capital handcuff your profit?
- Would growing past our current carrier partners spell doom?
For more on deciding whether to join the insurers who started as MGAs, Carrier Management has a helpful article on factors that can make or break this consideration.
Also, before you go jumping off into transforming your business, we’re going to caution you that our brilliant blog is a point for consideration and that you will be responsible for your due diligence in understanding the regulatory requirements as they apply to you no matter what business structure you operate under.
At AgentSync, we work with carriers, MGAs/MGUs, agencies, and many organizations that have transitioned through each of these business models. While each comes with different layers of responsibility and has different producer licensing compliance needs, our team provides support for all. Watch a demo to learn more about how we can support your MGA’s needs, both today and in the future – whatever that might hold!