We look at the most common risks faced by MGA-backed insurance syndicates and explain how to avoid the drama.
Managing General Agents (MGAs) have become an ever-growing element of the insurance network. This is particularly true in the Lloyd’s and specialty markets, where they often act as the distribution and underwriting arms of insurance syndicates.
For insurers and syndicates, MGAs bring strategic benefits such as flexibility, skills, and access to underserved markets. But they also present challenges.
1. Misalignment of interests
An MGA’s primary source of income is commission, which is derived from the premium underwritten. The higher the premium, the higher the income (usually) for the MGA. At the same time, syndicates are focused on underwriting profitability. This mismatch in the parties’ goals may result in an over-aggressive underwriting or risk selection by the MGA that doesn’t match the syndicate’s appetite.
On the other hand, if there is too much influence by syndicates on the underwriting ability of the MGA, the arrangement may become unsustainable by constraining their competitive advantage.
To tackle this, both parties should agree underwriting strategies and performance goals. This means aligning their risk appetites and producing incentive plans that ensure long-term profitability for both.
2. Lack of transparency and data quality issues
Syndicates often depend on MGAs to provide key data on underwriting, claims, and bordereaux reporting. So if the data is delayed or of poor quality, it can mask emerging trends, complicate actuarial analysis, and potentially lead to inaccurate reserving – too much or too little – on the syndicate’s books.
Poor-quality data may also make it harder for an MGA to properly manage risk, provide a high level of service to existing customers, and attract new business.
To address this, MGAs and syndicates can establish clear data standards and commit to regular data audits. They can also jointly invest in automating systems and reporting processes to improve consistency and reporting. These moves will reduce risk for both parties.
3. Regulatory and compliance gaps
MGAs and syndicates operating in many jurisdictions face the challenge of complying with multiple local regulatory requirements. That exposes them to reputational and financial risk.
For example, MGAs based outside Europe could face scrutiny over General Data protection regulation (GDPR) compliance if they don’t fully understand the local rules. The syndicates may be fined and asked to implement remedial compliance measures to satisfy regulators.
Syndicates should work closely with MGAs to understand local regulations, maintain compliance certifications, conduct compliance reviews, and agree clear contractual obligations for regulatory adherence.
4. Diversification to reduce concentration risk
Concentrating too much premium through a single MGA or distribution partner creates key person risk and portfolio concentration. It could mean losing key broker relationships and underwriting staff which, in turn, may lead to a significant decline in premium renewals for syndicates. MGAs may also be badly affected if they lose the underwriting capacity from the syndicate.
To avoid these risks of concentration, syndicates and MGAs should develop strategies to diversify their relationships and services. They might, for example, agree on non-exclusive terms, allowing both to work with other parties and collaborate across regions and product lines. This should ensure that a loss in business in one segment doesn’t cause ongoing viability concerns.
5. Fourth-party risk from outsourcing
MGAs may outsource certain functions, such as claims handling, IT and data processing, sometimes offshore. This helps the MGAs (and indirectly the syndicates) to reduce costs. But it also creates ‘fourth party’ risk, such as operational or reputational issues when arrangements don’t go to plan or they receive poor service, leading to customer complaints.
MGAs and syndicates should both be involved in vetting third-party service providers, conducting due diligence, and performing regular reviews. This collaboration should lead to transparency, quality service, and accountability, and therefore reduce operational and reputational risks.
6. Underinvestment in technology and controls
MGAs and syndicates sometimes use legacy systems or manual processes to perform their tasks. This increases the risk of errors, fraud, or cyber breaches. These, in turn, could lead to financial losses, including ransoms, disruptions to operations, and the exposure of client data. Why does this happen? It’s usually because financial constraints lead to underinvestment in technology and controls.
MGAs and syndicates should work together to establish minimum IT security standards and jointly invest in the latest technology, automation, and cybersecurity solutions. This should help both parties to reduce costs, avoid errors, and mitigate risks.
7. Claims leakage and reserving inaccuracy
Ineffective claims management may lead to claims leakage or inaccurate reserving. This responsibility needs to be carefully and jointly managed.
It’s best if MGAs and syndicates establish claims authority limits, maintain open communication, and conduct regular claims audits. They can have joint claims oversight and training to ensure a fair settlement, accurate reserving, and appropriate claims outcomes.
How we can help
Although MGA-backed syndicates enjoy the luxury of flexibility and access to specialist markets, the arrangement could cost both parties dearly if they don’t work collaboratively.
They must treat each other as strategic allies and work together to develop effective governance mechanisms and robust data and compliance frameworks. The key to success lies in partnership and integration, not delegation.
If you have any questions on issues covered in this article, please contact Satya Beekarry or Ranjeet Kumar.
