‘Double-Edged Sword’: S&P Scrutinizes Reinsurer Reliance on MGAs

Reinsurers that rely too heavily on managing general agents to access specialized underwriting expertise and distribution are facing scrutiny from analysts at S&P Global Ratings as the market softens, according to a new report.

The report, “Partnering With Managing General Agents Can Be A Double-Edged Sword For Reinsurers,” lays out the benefits and drawbacks of reinsurers’ MGA use. While referring to MGA use as a “compelling” tool for “reinsurers seeking rapid entry into complex lines of business where they lack internal expertise” among the benefits, the report also stresses the need for alignment of interests and governance controls at a time when private equity investors and brokers acquisitions of MGAs are fueling a growth story over underwriting discipline.

“When evaluating a reinsurer, we assess MGA usage relative to the overall portfolio. We may view substantial reliance on MGAs as a weakness in a [reinsurer’s] competitive position,” the report says referring to a component of S&P’s credit rating analysis. The report specifically identifies “lack of direct control over underwriting and potential challenges around risk management and compensation alignment” as factors weakening the “competitive position” measure.

“In our view, MGAs warrant careful scrutiny,” the report warns. “Operating outside the full oversight of an internal underwriting team, MGAs can introduce risks such as undisciplined underwriting, fraud, scandals, and misaligned profitability incentives….These risks are becoming more pronounced as reinsurers increasingly rely on MGAs to expand into the U.S. E&S market,” the report says.

Before offering warnings about the potential for MGAs to pursue aggressive growth to the detriment of insurer and reinsurer earnings, reputations and credit ratings, the report presents a series of charts showing the explosive growth of the excess and surplus lines market in recent years, which helped fuel a doubling of the size of the U.S. MGA market over the last five years.

“Within the E&S market, the MGA model provides a streamlined entry point” for insurers and reinsurers, the report says, noting that the capacity providers can “gain exposure to attractive lines of business by partnering with established MGAs that offer specialized expertise” instead of going the more arduous route of “building internal underwriting teams from the ground up.”

Focusing on reinsurer relationships, the report notes that global reinsurers are increasingly working with MGAs to tap into the growing U.S. E&S market, in some cases partnering with fronting carriers to increase access to certain parts of the market—small and midsize enterprise business, for example. “Although structured as reinsurance, much of this business resembles first-dollar loss primary insurance, helping to diversify P/C reinsurers’ traditional, severity-prone natural catastrophe portfolios.”

The report makes note of MGAs’ access to niche talent and distribution and highlights their agility as a defining strength of MGAs. “They can quickly adapt—launching new products, entering or exiting markets, and implementing modern technologies—without the constraints of legacy systems,” the report says, also noting that many MGAs leverage advanced analytics and AI-driven tools to enhance operational efficiency and underwriting capabilities.

Still, on the flipside of these benefits, “the growing preference for MGA partnerships over developing in-house underwriting expertise may signal a structural vulnerability for reinsurers, particularly if carriers don’t rigorously work to align the interests of both parties,” the report warns.

“We still see risk in the competitive positioning of reinsurers that rely heavily on MGAs as a material distribution channel,” the report says.

The analysts authoring the report recommend that carriers and reinsurers be discerning when doling out underwriting authority. They also review some of the strategies that MGAs can use to mitigate a key vulnerability—their reliance on external capacity—including partnering with multiple carriers (to avoid the risk of one being downgraded) and setting up owned or affiliated carriers.

At several points in the report, S&P references MGA use of affiliated risk-bearing entities as a positive factor for both MGAs and reinsurers—bolstering MGA credibility on the one hand, and mitigating misalignment with reinsurer profit goals as MGA owners of affiliated carriers participate in risk.

From a credit ratings perspective, the report states that reinsurers that depend materially on commission-only MGA platforms without profit alignment mechanisms and limited governance controls may face ratings pressure. Among other things, the rating agency will consider the proportion of total premiums sourced through MGAs and the robustness of internal risk controls in evaluating credit quality, the report says.

“As market conditions become less favorable, MGAs’ growth-driven incentives may encourage excessive risk-taking, leading to misalignment and outsize losses, making selectivity essential for any reinsurers that partner with MGAs,” said Taoufik Gharib of S&P Global Ratings, in a statement about the report.