Taking a deep dive into the world of managing general agents and other delegated underwriting authority enterprises, AM Best reports that premiums generated by DUAEs are climbing, and interest in MGA acquisitions remains high.

In a March 1, 2022 report titled, “Delegated Underwriting Authority Enterprises Gaining Market Traction,” AM Best analysts note that DUAEs have “become an essential part of the insurance ecosystem,” going on to describe market conditions that are tailwinds for ongoing growth.

AM Best analysts also note, however, that MGAs and other DUAEs like carriers and other insurance market participants face the headwinds of inflation and staffing pressures to growth going forward.

“The entrepreneurial MGA market has gained traction and proven to be formidable enough to attract underwriters with excellent track records from larger, well established insurers.”

On the plus side, according to the report, hardening insurance rates in different segments of the U.S. commercial lines market drove MGA-produced premium growth of almost 15 percent from 2017-2020, including year-over-year growth of 5.5 percent. While rate increases are stabilizing or decreasing, near-term momentum in commercial auto, general liability, and cyber bode well for MGAs.

New capacity from fronting carriers is another positive factor for MGAs, the report says, noting that a lot of new insurance company startups have stepped into the market with fronting models over the last five years, following Markel Corporation’s 2017 acquisition of fronting carrier State National.

More generally, insurers struggling to innovate are benefiting from MGA relationships, the report suggests. “MGAs and the other types of DUAEs are far more entrepreneurial by nature. MGAs that have the capital resources to introduce and implement new technologies have a competitive advantage,” the report says.

On the other hand, “insurance companies have at times struggled with incorporating technological advancements that best serve their business needs, and the financial investment for new technological tools can be a significant headwind—trial-and-error can be costly.”

When insurers find the right MGA partners and successfully integrating new technologies into their operations, they can expand their product and geographic capabilities, the report notes. “Insurers that have developed partnerships with DUAEs have been better able to diversify risks in line with their risk appetite.”

Still MGAs and other DUAEs face the headwinds of economic inflation and a talent crunch just like the rest of the industry.

DUAEs that do not have adequate staffing and lack a strong pipeline for new hires could face tough times if they lose key management or staff members, especially if there is not a good succession plan in place, the report says.

While also noting that efforts to retain top talent could inflate the expenses of “lean, newer DUAEs,” the report suggests that the depth and quality of talent entering the MGA/DUAE market may, in fact, be significantly better than the talent that entered at different times in the past, attributing this assessment to “some market observers,” without identifying them.

“The entrepreneurial MGA market has gained traction and proven to be formidable enough to attract underwriters with excellent track records from larger, well established insurers,” the report says.

Turning to the inflation headwind and the impact that inflation could have on expenses, the report says that DUAEs that find their profit margins squeezed may try to counter that by raising commissions and fees. Lower profits could also bring down contingent commission levels.

DUAEs with diversified fee and commission sources should fare better in withstanding the difficulties of inflationary trends, the report suggests. If expenses begin to grow faster than revenues, DUAEs may try to expand their product bases to stay on par with increasing expenses.

Premium Growth and Top MGAs

The report begins with some basic definitions, first noting that the broad term DUAE includes MGAs, managing general underwriters, coverholders, program administrators, program underwriters, underwriting agencies, direct authorizations and appointed representatives. The report also provides specific descriptions of each of these types of DUAEs and notes that MGAs are the most common form in the U.S. market.

The growing number of MGAs collaborating with insurers to write specialty business is helping to fuel the increase in premium generated by MGAs, the report says, going on to summarize figures from an analysis of Note 19 of P/C carriers’ annual statements. NAIC reporting regulations for Note 19 require that companies disclose individual MGA premium data only for those MGAs whose premium constitutes more than 5 percent of the carrier’s policyholders’ surplus, the report notes, concluding that the $49.4 billion of MGA-generated direct premiums tallied from the notes is an understatement. Not only does the analysis exclude premium figures for smaller MGAs or individual programs that do not meet the 5 percent threshold, but it excludes a considerable amount of premium written through MGAs by Lloyd’s syndicates.

In spite of these limitations, aggregate premiums for both MGAs that are affiliated with carriers and those that are unaffiliated demonstrate a growing U.S. P/C MGA market overall.

For 2020, $30.6 billion of the $49.4 billion total came from affiliated MGAs, representing 62 percent of the total. Affiliated MGA premiums grew 6.4 percent over the four-year study period that began in 2017, but unaffiliated MGA premiums grew faster—jumping 32 percent to 18.8 billion in 2020 from $14.2 billion in 2017. The $18.8 billion figure represented 38 percent of all MGA premiums in 2020, compared to 33 percent in 2017.

Several charts and graphs in the report illustrate the premium changes and also set forth direct written premium rankings for both types of MGAs.

The top five unaffiliated MGAs, according to AM Best are:

  1. Hagerty Insurance Agency, Inc.
  2. Arrowhead General Insurance Agency, Inc.
  3. Travelers Texas MGA, Inc.
  5. E-Risk Services, LLC

The report actually has a list of the Top 20, and identifies the individual insurers that wrote the premiums and listed these MGAs in their statutory blanks for each of the 20 U.S. P/C unaffiliated MGAs.

According to the report, the top five carriers listing premiums meeting the NAIC statement requirement threshold that they wrote through one or more affiliated MGAs are:

  1. Philadelphia Indemnity Ins Co.
  2. American Agri-Business Ins Co.
  3. Scottsdale Insurance Company
  4. ACE Property & Casualty Ins Co.
  5. Universal Prop & Cas Ins Co.

Finally, the report lists the top 10 U.S. MGAs overall, also ranking them by direct written premiums. The following six with more than $1 billion each are shown in the report:

  1. Maguire Insurance Agency, Inc.
  2. Rain and Hail LLC
  3. ASI Underwriters Corp
  4. Evolution Risk Advisors, Inc.
  5. Diversified Services, Inc.
  6. United Insurance Management LC

Philadelphia Insurance reported $3.4 billion in direct premiums written through its affiliated MGA, Maguire Insurance Agency, while American Agri-Business Company reported $2.1 billion through Rain and Hail. The next four U.S. insurers with affiliated MGAs on the top 10 list—Scottsdale Insurance Company (Nationwide), ACE Property & Casualty Insurance Company (Chubb Limited), Florida-domiciled personal property insurer Universal Property & Casualty, and American Strategic Insurance Corporation (Progressive)—each generated between $1.0 billion and $1.5 billion in premium.

AM Best said it identified 663 distinct MGAs from its review of Note 19 of insurers’ 2020 NAIC statements. The growing number of MGAs collaborating with insurers to write specialty business is helping to fuel the increase in U.S. P/C premium generated by MGAs, the report said. In fact, AM Best identified 970 carrier-MGA relationships in 2020, up from 890 in 2019.

The report also describes ways in which DUAEs pivoted and embraced opportunities during the pandemic, charts the roles and responsibilities that carriers are granting to DUAEs, reviews the M&A landscape and discusses the use of MGAs in life and annuity businesses.

“As the industry gets further away from the market disruptions caused by COVID-19 and closer to economic recovery, AM Best believes DUAEs of all types will continue to be a relevant part of the insurance value chain,” the rating agency said in a press statement, noting that it has introduced the Best’s Performance Assessment—a framework for differentiating among DUAEs—in recognition of their importance.

AM Best officially launched the performance assessments last month.

Related article: AM Best Answers Questions as DUAE; MGA Assessments Go Live