Oleksandr Rohovnin With leading insurer brokers serving millions of people and making tons of money, you might wonder how multi-million-dollar giants like State Farm Group, Berkshire Hathaway, and USAA manage to satisfy their clients all over the globe with tailor-made insurance solutions. Well, the answer is simple: MGA.
Even though the abbreviation might seem unfamiliar to you – as it does to most people, even those with significant experience in insurance – the essence of it is pretty simple. MGA, or Managing General Agent, is an insurance agent that has the power to perform the functions on behalf of the insurer.
If you’ve been using different insurance services for a long time, chances are you’ve also worked with an MGA agent at least once without realizing it. This is not a big deal, but, of course, it’s always better to know the full lowdown on what you’re dealing with.
Without further ado, let’s dig deeper into what MGA is, what specific functions they perform, and why you may need them in some cases.
What Is MGA and Why Do They Even Exist?
With over a trillion dollars written in premiums annually, the ever-expanding U.S. insurance market caters to every need and whim through both classic – life insurance, health insurance, homeowners insurance – and specific insurance services. But the bigger and the more competitive the market becomes, the harder it is for a single insurance company to stand out.
Two main issues arise, both leading to the emergence of MGAs:
- For insurers, it’s too expensive to open offices in every place where they want to operate. It might be financially impossible to open offices in distant places like North Dakota and Western Oklahoma, so insurers would rather cooperate with a knowledgeable third party than squander resources.
- Not all insurers possess enough expertise in specific types of insurance. Popular types of insurance like life insurance, homeowners insurance, or auto insurance are never a problem for an average insurer, but the situation is different when it comes to exotic – and some might even say weird – policies like, say, feet insurance or alien abduction insurance. For the mentioned types, insurers would like to have someone with relevant experience and mindset.
Therefore, most big insurers cooperate with MGAs, vesting them with power to:
- Underwrite – to determine the risk of insuring and calculating the price of coverage.
- Bind coverage – to confirm that the coverage is in place even though the policy hasn’t been issued yet. For example, if you’ve just bought an insurance policy, then you can agree with your MGA over the phone that the policy becomes valid at the end of the call, even though the paperwork hasn’t been issued to you yet.
- Settle claims – pay money to a policyholder according to the insurance contract.
From the perspective of a client, it doesn’t matter whether you deal directly with an insurer itself or its MGA representative. For insurance companies, though, it’s crucial to make partnerships with reliable MGAs so that they could cover larger geography and scope of insurance services.
Brokers vs. Wholesale Brokers vs. Surplus Lines Brokers vs. MGAs
Not only may the number of parties involved in the process insuring your life, car, property, or feet vary, but also the very terms and definitions that describe these parties, which may lead to confusion. The best way to avoid confusion, though, is to differentiate between insurance brokers, wholesale brokers, surplus line brokers, and MGAs.
- Insurance broker. Acting as an intermediary between a client and an insurer, an insurance broker helps the client choose the best policy to fully cover his or her needs at the lowest possible (optimal) price. Insurance brokers represent clients, not insurers, which is why they cannot bind coverage on the behalf of the latter. At the same time, brokers live off commissions from selling policies.
- Wholesale broker. A subtype of an insurance broker, a wholesale broker doesn’t have any contact with the insured. However, unlike retail brokers, wholesale brokers work directly with insurance companies. More often than not, wholesale brokers have special expertise in particular types of coverage, which makes them valuable to insurers. Wholesale brokers are divided into two subtypes: surplus lines brokers and MGAs.
- Surplus lines brokers work with retail agents and insurers to help the insured to obtain coverage.
- MGAs are entitled to perform the function of the insurance company.
MGAs have proven to be extremely valuable for streamlining narrow-focused and time-consuming issues as they possess the expertise that the insurance companies they work with lack. MGAs make insurance services personalized, which is just what most clients need and want.
MGAs vs. MGUs
In the great mix of terms of the insurance industry, the difference between insurance brokers, surplus line brokers, and MGAs isn’t the only one to address. Even greater confusion arises when the terms MGA and MGU are involved.
Now, while the Internet is abundant with “key differences” between an MGA (Managing General Agent) and MGU (Managing General Underwriter), these two terms refer to an intermediary performing the same scope of jobs: underwriting, binding coverages, and settling claims. Therefore, an MGA and an MGU are the same, whereas the slight differences you might find in different sources are pretty subjective and – more importantly – will not have any practical meaning.
MGAs and Underwriting Risk: Here’s Why MGAs are Frowned Upon by Some Insurers
As you might have guessed, even though the services of an MGA are similar to those of the insurer itself, these two are not equal. What’s more, being a third-party, an MGA does not take underwriting risk, which means it won’t be held responsible for any loss coming from expired policies, underestimated liability, underpriced policies, etc.
Paradoxically, MGAs are not responsible for their actions, but it is what it is. Theoretically, an unscrupulous MGA – and here let’s remind you that MGAs make money off commissions from selling policies – can sell a policy at low rates or abuse its partnership insurer in any other way to grab the fee…just like some cunning insurance agents do!
It goes without saying that most MGAs don’t do that, but since the possibility does exist, MGAs have a dubious reputation among many insurers. On the bright side, there are lots of MGAs with a spotless reputation, so insurance companies can always choose one of those.
Top USA MGAs
Having doubled in numbers in the last decade, MGAs thrive on delivering tailor-made solutions for complex and specific tasks. The top-5 biggest MGAs in the U.S. are (the represented companies derive more than 50% of their sales from acting as an MGA):
- Risk Placement Services.
- Schinnerer Group.
- All Risks Ltd.
- Burns & Wilcox Ltd.
- S. Risk Insurance Group Inc.
Each of the mentioned MGAs has an annual premium volume of over $300,000; for some of them, the volume exceeds one or several billion dollars.
Oleksandr is an expert in deep research. He covers insurance topics across four major insurance verticals – auto, health, life, and home insurance – while taking into account the legal landscape of the state in question. Come rain or shine, you can expect regular quality blogs and timely updates from Oleksandr.
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