MGAs: A Growing Distribution Channel With a Slippery Definition


Managing general agencies (MGAs) are in the news, either in their own right or as targets for acquisition. MGAs have historically been a profitable and high-growth distribution channel, especially for commercial and specialty lines. Vendors are increasingly targeting MGAs in addition to their core carrier bases.

But the definition of MGA is slippery. Though it has an official/regulatory definition, the term “MGA” is often casually used to refer to businesses that fall into a broader category. To add to the confusion, a firm may function as an MGA with one or more carriers and as an agency or broker with other carriers. 

What Defines an MGA?

MGAs are a type of retail or wholesale insurance distributor. They may be responsible for appointing agents and brokers, underwriting, pricing, binding of coverage, reinsurance cession, premium collection, and collection of premium and reinsurance cession on behalf of (re)insurers. Some may also adjust claims. The line can be blurry between MGAs, managing general underwriters (MGUs), and program administrators.

MGAs may be affiliated—i.e., owned and controlled by a single (re)insurer—or non-affiliated. In addition, some MGAs act as product distributors, while others invest in marketing directly to businesses or consumers.

Reasons for Acquiring or Launching MGAs

Brokers and insurers acquire or launch MGA operations for many reasons in what could be a growing trend. MGAs may be used to roll over books of business, expand into new geographies or product lines, access a strong retail distribution network, or increase underwriting reach without having to make significant investments in building out distribution.

MGAs do not take on risk; thus, they do not impact broker or insurer balance sheets meaningfully and offer their owners commission income as an additional revenue stream. Consequently, in most cases, they are not subject to state insurance department requirements around reserving. 

MGAs attract more entrepreneurial staff than insurers: This has business benefits (identifying and rapidly acting on market opportunities), but it can also lead to an opportunistic approach to technology issues (underinvestment) or to senior underwriters leaving insurers for MGAs. MGAs tend to be more agile than insurers. They can introduce new products and product modifications in a fraction of the time it takes traditional markets. MGAs are already offering solutions for cannabis, climate, and cryptocurrency risks, as well as the gig and sharing economies. 

Affiliated MGAs can be a means for carriers to retain senior talent who might otherwise leave for less restrictive and more innovative opportunities. Consolidation in the MGA space also increases the likelihood of a major liquidity event, another factor in attracting talent to MGAs. Some insurers invest in MGA systems as a mutually beneficial arrangement. MGAs can leverage their market knowledge to offer specialized coverages at a lower cost, increasing insurer profitability. Some insurers have sliding commission arrangements with MGAs based on loss experience to align MGA incentives with their capacity to write better risks. 

The MGA M&A Market

The MGA merger and acquisition market is quite active. (Re)insurers seek to control their distribution chains and acquire more profitable business that grows faster than standard commercial lines. MGAs are driven to merge to ensure they retain business from the larger brokers consolidating their relationships. Insuretech firms are participating in the insurance market without the capital and regulatory burden of becoming insurers. Private equity and venture capital firms see a fragmented market with attractive growth prospects and margins. However, many attractive targets have already been acquired.  

Selling Solutions to MGAs

By starting with modern platforms, newer MGAs can offer improved customer experience, increased efficiency, and enhanced underwriting. Incumbent MGAs may be dealing with multiple systems from acquisitions, underinvestment, and other sources of technical debt. MGA vendors should negotiate pricing with MGAs to be revenue-based rather than premium-based: The MGA business model is based on commissions and fee income rather than premiums. Consequently, MGAs have significantly smaller IT budgets than similarly sized insurers. Fortunately, their IT requirements are typically less comprehensive, and their core systems may double as financial systems of record, further reducing IT requirements. 

If you’d like to discuss our key findings for the changing environment for MGAs, please read our new report Business and Technology Trends, 2023: Property/Casualty MGAs, or contact myself, Eric Weisburg, or Martin Higgins to continue the conversation.