The managing general agent (MGA) sector is one of the fastest growing segments in the insurance industry, with reports showing MGA growth outpacing the property and casualty market even during the 2020 pandemic.
MGAs are thriving, but you may wonder what exactly is an MGA, their job, and how they fit into the insurance distribution picture. Below we take a deep dive into these questions and others to see if becoming an MGA is right for you.
What is an MGA?
There are a few main ways insurance is distributed to the masses, be it to small business owners, large corporations, or personal consumers. Some ways include agencies, brokers, MGAs, and carriers.
Wholesale brokers are liaisons between retail brokers and insurance companies, often helping clients get specialized types of coverage. While MGAs are a type of wholesale broker, they’re unique in that they act as agents of the insurer. And unlike traditional brokers and agents, they can underwrite policies and handle other services customarily done by insurers, including:
- Binding coverage
- Performing insurance underwriting
- Pricing insurance policies
- Appointing agents in an area
- Settling claims
MGAs usually sell unique insurances requiring specialized knowledge to underwrite policies, such as surplus line or professional liability insurance. While they typically work with commercial lines of insurance, they may sell personal types of insurance in remote areas without an insurer branch.
MGAs earn a percentage of the commission that would typically go to the insurance agent. If MGAs share some risk with the insurer, they can also participate in underwriting profit or loss. That means when an insurer’s earned premiums are greater than its expenses and claims, MGAs can earn part of the underwriting profit. But when earned premiums are less, they’ll share in the underwriting loss.
What about MGAs in Reinsurance?
Reinsurance is when insurers purchase insurance for themselves to cut their losses in large events like natural disasters. It’s essentially insurance for insurance companies, and is a way for the insurers to spread out their risk.
MGAs sometimes work directly with reinsurers. For example, they might create reinsurance programs for specific business lines in niche markets where no other interested carriers are available. If the MGA can’t design a program where an underwriting profit is possible, they may instead take the approach of insuring against a single or defined package of risks. In cases where insurance companies are cutting their product lines, MGAs in reinsurance can help them find another underwriting company.
How Are MGAs Helpful to Insurers?
MGAs are growing in popularity because they provide several key benefits to insurers. One is their specialized experience, a valuable asset when insurers are looking to move into different product lines or markets.
MGAs can make the transition smoother without the carrier needing to invest in staff, training, equipment, office space, and more to create a regional office, especially in rural areas where regional offices make less financial sense.
The MGA would also be more familiar with the insurance business risks associated with the specialized coverage they offer, and are better able to underwrite and price these policies than a carrier entering the market.
In addition to having the systems in place to issue policies, MGAs also have platforms to collect premiums and create insurer reports, cutting down time on an insurer’s administrative tasks.
What’s the Difference Between an MGA and a Broker?
When you’re buying insurance, brokers work with you to help you find the best insurance coverage for your needs. They’re an intermediary between you and the insurer. They’re also often more generalist in nature, serving various customers through various insurance products. You can count on them having your best interests in mind because they don’t have to be loyal to one or more insurers. In fact, some states make it law for brokers to have a fiduciary duty to you.
There are three types of brokers: retail, wholesale, and surplus lines. While MGAs fall under the wholesale category, they are different in that they’re an intermediary between retail brokers and insurers. MGAs usually specialize in specific markets or products and act on behalf of and in the interest of insurers. Their fiduciary duty is to the insurer, not the customer. MGAs may, however, still work with people in finding affordable policies matching their desires.
MGAs and brokers earn a commission from insurers on policies they sell, but MGAs also take a portion of the underwriting profit or loss when they’re in charge of underwriting.
MGAs carry out several functions requiring trust from the insurance carrier. It can take longer for MGAs to develop the business relationship necessary to create partnerships with carriers than it would for brokers. Independent agents and brokers who are new to the industry and looking to get insurance appointments can do well by working for an MGA. It’s an out-of-the-box way to gain experience in a niche industry, learn from someone with more expertise than you, and acquire underwriting skills. These can all help you get insurance appointments if you later decide to strike out on your own.
MGA vs. MGU: Are They the Same?
According to the International Risk Management Institute (IRMI), the term “managing general underwriter” (MGUs) is sometimes used instead of MGA in life and health insurance companies. In those industries, the terms are used interchangeably with no discernible differences between the two. While the same can be said in other industries, MGA is often the preferred term in property and casualty insurance. Both MGAs and MGUs can underwrite policies.
Are GAINSCO and MGA the Same?
No, GAINSCO and MGA aren’t the same. The former is a property and casualty insurance company in Texas called GAINSCO Auto Insurance. State Farm Automobile Insurance Company owns them. GAINSCO caters to the non-standard personal auto insurance market, and specializes in minimum limits personal auto insurance.
The confusion lies in the fact that they operate through MGA Insurance Company, Inc. This company is an independent insurance agency with independent agents, and isn’t synonymous with the MGA insurance sector as a whole.
The Bottom Line: MGAs Work for the Insurer
MGAs are valuable insurance brokers who work primarily on behalf of the insurer. They’re specialized agents who perform a variety of the same duties that insurers do, helping insurers expand into unfamiliar markets and regions without having to heavily invest in in-house resources.