Who holds the pen?

From reading the headlines recently you might have thought that this is not exactly the most propitious time to be a managing general agency. The reason for such pessimism? None other than the consolidator supreme, Giles Insurance's chief executive Chris Giles, who warned at the end of last year that the days of MGAs going forward are not exactly going to be the most pleasant.

His comments were made in the wake of the decision by Giles to end its trading relationship with agencies Primary General and Fusion and instead to underwrite the business, understood to be worth some £4m, via its own schemes and facilities. According to Chris Giles, consolidators simply do not need third party agencies any more.

Yet while the approach from the broker consolidators might not exactly be the most welcoming, that taken by the insurers seems to be somewhat different as MGAs continue to write a wide range of business in the UK market and new agencies have continued to spring up in recent months, seemingly dispelling the notion that this is a doomed species. If anything, the present environment seems to be a particularly welcoming one for MGAs, capable of taking away much of the tiresome administrative load from carriers at a time when reducing frictional costs is an imperative if a business wishes to remain competitive.

At the end of the day, loved or loathed, the actual concept of an MGA remains slightly ambiguous. Most agencies worth their salt are keen to stress that they are not simply a glorified wholesale broker but are instead virtual insurers - companies that do everything an underwriter does except carry the risk.

However, how true is this in reality? Surely in a world of increasing commoditisation there is little room for the bespoke policy? So the thinking goes, most insurers want to keep a tight grip on the risks they are liable for, leaving little flexibility for agencies to actually underwrite.

Paul Upton is chief underwriting officer at MGA Evolution Underwriting, which he describes as "a fully modern managing general agency."

"We have full-binding authorities across a range of products and we also have our own brand, which means we are not associated with any broker," he says. "We also have our in-house risk management division, which means we can do our own risk management surveys. Our business is done on our own technology system and we feel we've invested a huge amount of money for our size."

"This is a 100% insurance company, though without our own capital, so we are very much 'plug and play'. Other underwriting agencies are different because they are either broker-owned or else are outposts of a carrier's offices."

Upton continues with a dig at the competition: "If you look at some MGAs that have been established recently then you have to ask where the value lies; what's the benefit in just being another branch of an insurance company? You have to be able to do things cheaper than insurers and there are things an agency can do that an insurer can't, such as broker management."

Upton says that the policies themselves vary in the extent by which they are different from others available in the open market: "In some cases we have developed covers by ourselves in consultation with carriers, whereas in others we have used pre-existing policies. If you look at motor fleet, it's a fairly homogenous product so there's really no point in seeking to re-invent the wheel."

Ian Russell, underwriting director at agency APC, appreciates that the MGA market itself is also far from uniform: "There are two types of underwriting agencies out there. On the one hand there are those wholesale brokers that set deals up with an insurer or insurers. In that case they set up a system and there's not much to it; it's just a sausage factory. There is then the real underwriting agency, which actually underwrites the risks from start to finish. That is what we are. We have a full pen to write property, liability and combined business, so we underwrite on behalf of four syndicates at Lloyd's utilising relationships that have been built up for over a decade.

"The syndicates do leave everything to us. For example, we have a binding authority to write sums insured up to £10m, which is probably bigger than some syndicates themselves are able to write."

It seems that, as far as APC is concerned, it definitely holds the underwriting pen. "We set rates, excesses, policy wordings and terms and conditions," says Mr Russell. "So we are underwriters. The risk carriers are Lloyd's syndicates that let us get on with it because we know what we are doing. Brokers sometimes ask us to speak to an underwriter and we say we are that underwriter."

Marketing

For other MGAs, the way they market themselves is slightly different. Charles Earle is chief executive at Arista, an MGA launched only last year that specialises in property, liability and motor. "We present ourselves to the marketplace as a commercial insurance provider founded on high-quality staff using legacy systems to ensure we don't have high frictional costs," he says. "To a broker we are a commercial insurance provider; the fact we are an agency is neither here nor there to them.

"We present ourselves and operate as a commercial insurer and we make the decisions on property and liability business," he continues. "Insurers give us delegated authority but in the end we make the decisions. This company is just over a year old and, when it was starting up, we sat down with our insurers to say that this was what we needed, so our policy wordings and rating algorithms were created in partnership with them.

"We insure up to £20m on property and day-to-day individual risk decisions are made by Arista underwriters in our regional network, who have personal authority. Occasionally, somebody is in a situation where they can only underwrite so far and can't go any further so they have to refer the risk to head office, but that's what you'd expect. As such there's a lot of authority we exercise ourselves; it's just reinsurance-type questions that have to go back to head office."

Mr Earle appreciates that underwriting agencies prove to be a very broad church, however, and that some of them have very light holds on the underwriting pen: "At one end are brokers with schemes, while at the other end there are companies that do everything an insurer does except take the risk. We've tried to be different in having our insurers as principal shareholders in the business, a decision that has helped. Some underwriting agencies go wrong where they fall out with their insurers."

It would appear that maintaining the crucial relationship between an agency and its carriers is key when it comes to having serious underwriting authority, according to APC's Ian Russell, who uses his company as an example: "This year we set up that £10m pen, whereas last year it was £3m: the longer you are in the market and can provide results consistently then the better that relationship becomes and there's an increased likelihood of you being able to write more."

Still, as he points out, it is not the same for everyone: "We have a lot of scope here but it's not the same for others. I know underwriting agencies that have set rates with 5% discretion."

Be careful when you hand over that slip to check who really has the firmest grip on the signature at the bottom.