MGAs are embracing the insurtech revolution - but regulators are keeping a close eye on the governance implications of the new technologies.
First published in Insurance Day.
In today’s market a major challenge for insurance businesses looking for growth is access to new customers – a challenge solved by an increasing focus on managing general agent (MGA) start-ups, expansions and acquisitions. Examples include launches such as Firestone Surety (backed by Fidelis) and Volante Global in the US, while in Europe MGAs including Castel, Barbican and Acappella have been acquiring teams to build out their offerings.
The appeal of setting up an MGA is clear; it is quick, cheap and relatively light-touch in terms of regulation. MGAs have typically been founded by high-quality individual underwriters or teams who believe they can do better in control of their own destiny. As such, they have underwriting experience, product knowledge and marketing expertise. From an insurer’s perspective, they provide a flexible distribution channel that can be bolted on to an existing business. There are upsides for consumers, too: having more MGAs leads to greater competition, more choice and access to different and innovative products.
In its simplest form, when an MGA is tied to a single insurer, operations are quite straightforward. It is not acting on behalf of a broker, there is no sub-delegation of underwriting or claims, so there is no risk of conflict of interest. However, when an MGA starts to work with two or more insurers, things get more complicated. If competing products are offered this may raise questions about competing remuneration, mis-selling, misrepresentation and anticompetitive behaviour. Caution needs to be taken over the way the products are represented to brokers and advice given. Sub-delegation also needs to be handled with care to avoid conflicts in the role of the broker and to clarify responsibilities for risk transfer.
As MGA models become larger and more complicated they begin to attract regulatory interest. There may be a need to ring-fence parts of the business; to create separate legal entities with different staff and business plans with their own governance and control, systems and information and data barriers.
Checks and balances
At the end of the day MGAs and the insurers they partner with all need to comply with the regulations applicable to them. As an extension of an insurer’s business, an MGA needs management systems in place to identify, assess, monitor and control operational risk, including implementing policies and internal controls. But there is a risk this means insurers can impose more and more of their regulatory requirements on the MGA.
The MGA needs to be aware of ongoing changes and requirements in the insurer’s compliance protocols and systems, particularly IT and data, which can be hugely time-consuming and expensive. All this is difficult enough to manage with a single insurer. When an MGA is working with multiple insurers the task can quickly escalate to mammoth proportions. As it does so, the efficiency of the MGA model is diminished. The very qualities that underpin its appeal are being lost as a result of controls imposed by the insurers.
However, there are signs technological developments could make some of these operational challenges a thing of the past. Developments such as blockchain and artificial intelligence (AI) can help to automate some of the underwriting and claims processes, reducing costs while increasing the quality and efficiency of service. As technology is streamlining back-end processes, it is also potentially reducing the burden of compliance.
We are also seeing the arrival of a new breed of MGA, driven by the insurtech revolution. For example, in December 2017, app-based insurtech MGA Wrisk – whose insurance partners include Munich Re, Hiscox and QIC – received full authorisation from the UK’s Financial Conduct Authority. Wrisk offers macroinsurance, which enables buyers to take out multiple types of insurance through a single process in a single plan with a single provider. It uses AI and real-time data, enabling far greater personalisation and flexibility than traditional policies.
Insurtech presents MGAs with tremendous opportunities. They can use their flexibility and size to adopt new technologies much more quickly than the giant insurers. They can move quickly to work with new companies that are seeking to fuse modern technology, immense pools of data and innovative ways of working, without the hangover of traditional models or legacy systems to deal with. Nevertheless, regulators are monitoring developments closely and, while many are embracing insurtech, the picture around governance is still emerging. MGAs and insurers alike would be wise to keep a close eye on developments.