Understanding the Opportunities for Insurance MGAs and MGUs

I received a call the other day from an insurance attorney I have known for more than 15 years. He had a client who was interested in forming an MGA. Neither he, nor any of the attorneys at his firm, was up to speed on the subject and he suspected (correctly) that I would be able to answer his questions.

Having gotten this call I was prompted to do a little research to see what information on MGAs is available on the internet. I was surprised to discover that there is a lot of unclear, unhelpful, and flat-out inaccurate information not just regarding MGAs but MGUs as well.

This prompted me to put together this post outlining the similarities and differences, and why an insurance agency might want to consider expanding into these service areas.

Start by Consulting with an Expert: Here’s Why

If you feel your business objectives require or justify forming an MGA (MGUs are different vehicles, as we’ll address below). I highly recommend that you consult with an insurance regulatory expert as one of your first steps. Why? Because in my experience agency owners and executives typically believe they need to form an MGA when in fact they frequently don’t.

A lot of variables go into determining whether forming an MGA will be necessary, and every case tends to be unique. But the time, effort and especially costs of forming an MGA are not trivial. So having an expert scrutinize your business needs is a smart first step that can, as demonstrated in this clip, save you a lot of time and money.

MGAs and MGUs: Similarities & Differences

At a fundamental level, insurance agencies licensed as MGAs manage insurance programs for and on behalf of insurance carriers. This is typically because the MGA has expertise in a market segment that the insurance carrier doesn’t have, or because the program to be administered is in a geographic location not served by the carrier.

MGAs provide any one or more of the following services for and on behalf of the insurance carrier: underwriting (creating insurance programs, evaluating policy holder risk, pricing coverage and binding insurance products), sales, policy administration, claims adjusting, claims payment and management. The specific authority conferred upon the MGA by the insurance carrier will be defined pursuant to the agreement between the MGA and the carrier.

At a high level, an MGA providing the full complement of services of an insurance carrier, as listed above, is effectively performing the role of a carrier. In this scenario, what distinguishes the full-service MGA from a carrier are the carrier’s financial resources to pay claims.

By contrast, MGUs are limited to performing underwriting services only, for and on behalf of the insurance carrier. Of course, if the MGU also wants to, for example, sell the insurance products it is underwriting the MGU would have to obtain, at a minimum, a producer license in the relevant line of insurance.

Relationships within the Insurance Ecosystem

Both MGAs and MGUs interact with various stakeholders within the insurance ecosystem. This includes other insurance agencies, insurance carriers, and insureds. Here’s a brief overview of the relationship with each group:

1. Insurance Carriers: MGAs and MGUs work closely with insurance carriers. They derive their entire authority from insurance carriers to provide underwriting and other services, pursuant to the agreement between the carrier and the MGA/MGU.
2. Insurance Agencies: MGAs with complete agency authority work with retail agencies across the entire insurance spectrum, including underwriting, production, adjusting, processing, and claims payment. MGUs also work with agencies, but their scope of interaction is limited to underwriting.
3. Insureds: MGAs and MGUs do not work directly with insureds, however an MGA may work directly with an insured in the case of an insurance claim.

Why Launch an MGA or MGU?

The decision to launch an MGA or MGU is a strategic one, driven by the desire to unlock new opportunities and fortify a traditional agency business. Several compelling reasons underpin this decision:

1. Diversification and Specialization: Establishing an MGA or MGU allows agency owners to diversify their product offerings, specialize in niche markets and provide coverage where coverage may not otherwise be available (e.g. geographically remote areas). This diversification not only attracts a broader client base but also provides new revenue streams.
2. Enhanced Profitability: By assuming a more active role in underwriting and risk management, MGAs and MGUs stand to share in underwriting profits. This enhanced profitability can be a significant motivator for agency owners seeking to grow their businesses.
3. Market Access and Control: MGAs and MGUs offer agency owners greater control over the underwriting process, allowing them to tailor products to specific market demands. This increased control translates into improved market access, enabling agencies to carve out unique and competitive positions.
4. Strategic Partnerships: Collaborating with insurance carriers and other agencies and businesses within the insurance sector fosters strategic partnerships that can lead to shared resources, expanded market reach, and mutually beneficial growth opportunities.
   

Forming an MGA or MGU: What is Required?

The decision to launch an MGA or MGU is not to be taken lightly. Both endeavors demand careful planning, regulatory compliance, and a strategic approach. Here's an overview of what's required for each type of entity:

MGU Requirements

1. Specialization: MGUs succeed by identifying unique niche markets where they can bring to bear specific knowledge that the carriers they work with do not possess.
2. Risk Management Capability: MGUs must possess robust risk management capabilities and expertise.
3. Carrier Relationships: MGUs must establish solid carrier relationships.

MGA Requirements

Full service MGAs in addition to the capabilities outlined above must also have the following.

1. Requisite Licensing. MGAs must obtain the necessary licenses from the state insurance departments in every state in which it provides MGA services.
2. Expertise. Policy administration and claims management expertise is essential.
3. Technology. MGAs require specific technology and systems beyond what a traditional insurance agency might utilize including but not limited to management of the claims process.
4. Compliance Officer. MGAs must have in place an individual whose job it is to oversee standards and systems to ensure that it is compliant with all applicable regulations. 

Maximizing Business Potential by Launching an MGA or MGU

Launching an MGA or MGU presents a strategic opportunity for insurance agency owners and executives to diversify their offerings, enhance profitability, and solidify their position in the market. Understanding the nuances of each entity, their relationships within the insurance ecosystem, and the requirements for launching them will help you choose the right path for your business.

As you consider this strategic move, it's essential to partner with a knowledgeable and experienced team. At 3H Corporate Services, we specialize in guiding insurance professionals through the process of launching and managing the licensing and compliance of MGAs and MGUs. If you have any questions or are ready to embark on this exciting journey, don't hesitate to contact us. Together, we can unlock the full potential of your insurance business.