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MGAs, Affinity Brokers : Why More Bankruptcies?
To those familiar with the economic model of insurance brokerage, bankruptcy and judicial liquidation seem hard to imagine. However, the notable cases of SFAM and Luko, among others, have left a significant impression on the insurance industry microcosm.
We can attempt to identify three causes for this:
1- The Cyclical Purge
The wave of Insurtech creations, following the broader Fintech trend, has faced a severe correction since 2022 with rising interest rates. Like any economic cycle, it undergoes occasional purges. Insurtechs, often involving affinity brokers, typically target a mass market through online distribution models. Thus, the end of the Insurtech cycle has coincided with the decline of many affinity brokers or MGAs. This is the first reason.
2- Financialization Applied to Insurance Distribution
For many years now, investment funds have recognized the unique appeal of insurance brokerage [ref 1], particularly MGAs, which they favor in the U.S., the UK, and now in France. However, investment funds often imply leveraged buyouts (LBOs), debt, and repayments, leading to cash flow tensions that traditional, family-owned, and wealth-based brokerage models have largely avoided, thanks to their bank accounts filled with premiums collected on behalf of insurance companies. Financialization and the more “liquid” nature of this economic activity make it more susceptible to financial fluctuations and reversals. This is the second reason.
3- The Role of an MGA / Wholesale Broker
As the author of these lines has observed [ref 2], MGAs are hybrids between intermediaries and insurers. Their natural tendency sometimes pushes them to “move up the value chain” (to use the jargon), meaning acquiring or creating an insurance company to distribute its products. However, acquiring an insurance company can be very costly for an intermediary, leading back to point two: debt and financial risks, and potentially creating risks specific to insurers, such as those arising from insuring the risk itself. This is the third reason.
From these observations, the following premises can be drawn: The insurance brokerage model, by its very nature, has historically been more insulated from bankruptcy. However, its integration, particularly of wholesalers and MGAs, into the global and financialized economy has subjected it to normal economic vulnerabilities.