Managing General Agent (MGA)

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Publié le 17/05/2024 par Jérôme Goy

INSURANCE LAW

An insurance distributor in full expansion facing the limits of the law After Anglo-Saxon insurance, the distribution model of the Managing General Agent (MGA) is booming in the French market. Let’s review the advantages as well as the limitations of these new types of distributors, which until now have the status of brokers under regulation.

Investors are keen on MGAs (Managing General Agents). The word becomes magical when it touches French brokers because it refers to an appreciated reality for its cash flow and valuation coefficient. An economic model that generates profitability, very high recurrence, often growth, without mobilizing capital… the bankers’ dream!

In the United Kingdom and the United States, the MGA system has existed since the 1990s and is developing rapidly, with the 300 Anglo-Saxon MGAs (1) accounting for approximately 15% of specialty risks in the London and American markets. Two main typologies of MGAs coexist in the Anglo-Saxon insurance market: MGAs belonging to professional actors such as reinsurers, insurers, or brokers, on one side, and independent MGAs on the other. In France, there are more than twenty of them to date. Prominent Insurtechs – such as Luko, which raised €50 million at the end of 2020 (2) – have opted for this underwriting agency model. Not to mention the “wholesale brokers,” who, like April, present themselves abroad as MGAs. Or Anglo-Saxon companies establishing themselves in France, such as Volante. Why such enthusiasm for this model still little known in France?

Advantages of MGA compared to the traditional brokerage channel:

The MGA constitutes a kind of outsourced service provider providing to the insurer or reinsurer, in addition to the commercial relationship with the insured (or reinsured), all technical supports (risk underwriting), after-sales (claims management and settlement), and administrative (accounting and premium collection).

The MGA can work for one or several (re)insurers. From a commercial point of view, the interest for an insurer or reinsurer to policy with an underwriting agency mainly lies in the knowledge of a particular risk that it does not master or does not wish to master and for which it does not want to invest neither time nor human resources. From an economic and financial point of view, the interest of the underwriting agency lies in its stability compared to brokerage activities.

Technically, the MGA is an ideal channel for handling affinity risks: group negotiation with suppliers (insurers or reinsurers) and single point of contact for insured parties. Indeed, this so-called affinity model exactly matches the basic model of Insurtech: simplified and automated underwriting for a mass clientele.

Finally, the MGA makes automatic what traditional insurance does not know (or knows little) and allows reinsurers, increasingly fond of direct insurance, to gain a direct market insight from which they are inherently distant. Ethically, the MGA can help solve the eternal conflict of interest of the broker, a representative of the insured but remunerated by the insurer. The MGA is, at least in spirit, clearly the representative of insurers (even if it remains a broker, therefore a representative of its clients, the insured). While it does not correspond (yet?) to a specific category provided by law (as is the case in Belgium, for example (3)), it corresponds to a developing structural technical and commercial reality. Last but not least, the advantage of the

MGA may be to maximize the revenue of the company or group combining brokerage and underwriting agency activities, while allowing better control over the insurance product marketed through the insurance or reinsurance intermediary. The status of MGA can also be an intermediate step towards approval as an insurance company as part of a long-term strategy. The MGA team gains valuable experience across the entire insurance value chain (actuarial, underwriting, claims processing, marketing, legal, accounting…), giving it increased legitimacy for approval by the Prudential Control and Resolution Authority (“ACPR”).

Regulatory and Legal Aspects Related to the Creation of an MGA

While, among the twenty or so French MGAs today, the vast majority belong to brokers, at present, the French system, whether regulatory, legal, or accounting, knows nothing about the category of MGAs. That being said, the creation of an underwriting agency in the insurance or reinsurance field involves at least the need to meet the conditions required by the regulations governing the intermediary and distribution of insurance and/or reinsurance products.

Furthermore, an insurance intermediary registered on a register of one of the countries of the European Economic Area (“EEA”) may carry out its activity in another country of the EEA via the freedom to provide services or the freedom of establishment, in application of the European Passport. Since the European regulatory framework is unified, the choice of the country of establishment of an underwriting agency is generally based on fiscal, accounting, or commercial considerations according to the aspirations of the MGA creator. MGAs in France most often opt for the status of insurance brokers.

 Legally, an underwriting agency often takes the form of partnership agreements, delegation/mandate agreements for underwriting and/or claims management. When the legal format is that of delegation, particular attention must be paid to the contractual models proposed by (re)insurers, who sometimes impose heavy responsibilities on the delegated intermediary.

Mandate of the Insured or the Insurer?

The MGA, registered as a broker, is, in contrast to the insurance agent, the representative of its insured clients to insurers. This position of the broker as a representative of its insured clients is explained by its history: formerly agents representing insurers, the position of representative of insured clients gave the first brokers, a hundred years ago, the freedom they lacked compared to insurers. But the possibility for the broker to also be the representative of insurers gives MGAs the flexibility they expect: two opposing objectives, one unique status.

Being the representative of parties with opposing interests, insurer, and insured, inherently carries the risk of conflict of interest.

However, magistrates sometimes overlook these practices and sometimes infer, from the broker’s status as the insured’s representative, the consequence that the insurance policy taken out through a broker should be interpreted in favor not of the insured but of the insurer, who becomes indebted to a policyholder advised by a professional (4). While this jurisprudence, surprising, is debatable and debated, it nonetheless reveals: being the insured’s representative entails heavy consequences for the latter. However, if the broker is, at the same time, a broker in the strict sense, MGA, i.e., a representative of insurers to sell their products, the conflict of interest becomes glaring.

The recurring debate, currently ongoing, on the prohibition of commissions in life insurance, is part of the same discussion on conflicts of interest: how can I advise and represent someone’s interests effectively to suppliers who remunerate me…? It is also worth mentioning that some brokers are subsidiaries of insurance companies.

The existence of MGAs only stirs the pot: it pushes to the limit the possibilities given by the legal, extensive status of brokers, to the point of showing their potential internal contradiction. MGAs are a revealer of these limits.

The question, if one wants to go through a thorough examination, revolves around three points, well known to lawyers:

1- The conflict of interest itself: The conflict described above has been discussed. It should be added that the mere suspicion of its existence undermines trust. “Some brokers attempt to mitigate the risk by indicating, a priori, the existence of such a conflict to their clients in their general sales conditions. If necessary, the disgruntled client will encounter the delicate problem of proof: the existence of a conflict of interest is not sufficient to demonstrate the prejudice suffered by the client/insured.

2- Disclosure and secrecy

The law has provided a partial answer: the obligation for intermediaries to disclose their capital links with insurance companies. But this obligation does not cover, by far, all the links that may exist between insurers and insurance distributors.

3- Independence

If the first two points were resolved, the third would remain: ownership of the intermediary’s capital. The most scrupulous professions regarding conflicts of interest are subject to the prohibition of having in their capital investors foreign to their own profession or to a related profession (legal, accounting). It is difficult to imagine such a prohibition applying to MGAs or insurance brokers today.

A historical leader in brokerage once confessed to dreaming of creating a “professional order of brokers”… it is unknown whether he included MGAs in it.

Given the increasing attention paid by the ACPR to the proper execution of their missions by brokers (see the various sanctions recently pronounced (5)), it is possible that French law will one day recognize this new activity, which would allow the two schizophrenic roles of the broker to be separated (see below). Pending this hypothetical reform, practice precedes the law, and the Anglo-Saxon financial world prevails over that of the continent; French actors will have to handle with caution and finesse the tools, not necessarily appropriate, provided by the existing framework. Provided that they handle its subtleties, the current framework is flexible enough to allow MGAs to grow within it.”