MGAs find new function as the insurance industry's innovation 'sandboxes'

Global Insurance Law Connect (GILC) has launched its report, Innovation abounds: opportunities for growth in the global MGA market, providing insights from 18 countries into the proliferation of MGAs in the global insurance market and the distinct regulatory environments in each jurisdiction.

The report found that the use of MGAs varies significantly around the world. In certain markets, MGAs are used to fill capacity gaps and introduce niche underwriting ideas, while in others they can help larger insurers remain innovative or showcase and support outsourcing models for claims and distribution.

Gillian Davidson, Chair of Global Insurance Law Connect and Partner at Sparke Helmore, commented, “Despite some recent predictions that the MGA market would soon become saturated, GILC’s research found that it continues to be a rapidly growing market that is increasingly providing solutions the commercial and consumer markets have struggled to fulfil.”

MGAs expected to take-off in less developed markets

The report found that in multiple different ways, MGAs are healthy for the insurance market, and this is reflected in their ongoing growth and expanding geographical spread.

The US remains the largest market for MGAs, while the UK is also experiencing significant growth. The picture across Europe is more variable, with most European markets hosting some type of MGA ecosystem. Many markets are still in the early stages of development, providing opportunities for a future growth surge.

In less-developed markets, MGAs are also being recognised as a useful innovation tool and in some places, growth could be explosive. The wider Asia-Pacific market is expected to be a big growth area for MGAs including in China where MGAs remain in their infancy but are gaining ground in key financial centres. Another secondary market poised for growth is Latin America. While the maturity of the MGA sector varies greatly between markets, Brazil is leading the way with an increased relevance of MGAs in that country.

Risk innovation

Although innovation is widespread, the growth curve for MGAs shows two major themes. MGAs are used in almost every country to support expansion into niche or emerging lines and to bring innovative and cost-effective solutions to the consumer market.

Almost all countries see a growing role for MGAs in emerging and developing markets including in the technology space, and in providing cover for and assessing risks associated with climate change.  They also play a role in managing claims in the aftermath of worsening natural catastrophes.

Filling niche capacity gaps

Many consider niche and emerging lines as a natural fit for MGAs to provide insurance and reinsurance capacity.  This is due to the specialist underwriting knowledge available within underwriting agencies, allowing them to respond to market demand more quickly than traditional carriers.

The Australian MGA market—where MGAs are known as underwriting agencies and require an Australian Financial Services Licence to carry on financial services business—is one of the most innovative users of the structure. 

For example, the consolidation of the intermediary space has continued the concentration of the broker market amongst a handful of the largest companies. The provision of back-office services—research, agent training and computer software—is increasingly provided by the larger broking networks.  This means that smaller agents, dealing with clients, pay a fee for these services, which may be in the form of shared commission.

Another area that is expected to grow is around trade associations and industry bodies setting up discretionary risk mutuals for more challenging covers such as professional indemnity and public liability.  The mutuals self-insure the first layer deductible and then place upper layers into the more traditional insurance markets via MGAs.

Commented Gillian, “There is a growing role for MGAs in the Australian market as risk advisors and underwriting experts, in addition to placing risks.”

MGAs as an indicator of growth and innovation for any insurance market

Gillian concluded, “Essentially, MGAs serve as an informal zone for more experimental products and ideas worldwide. Their backing by recognised capacity gives them credibility, while their independent management and underwriting allows them to think differently about how to service clients and solve new risk problems.  For example, how to insure vulnerable properties in the face of climate change. These innovative attributes make them a valuable part of the global insurance ecosystem, attracting an increasing amount of GWP and interest from investors, including private equity.”

Click here to access the full report.