Setting Up a Delegated Authority Insurance Program
Aside from the capitalization requirements to pay for the management and marketing of the program, consideration needs to be given to a number of key areas that represent essential components of the arrangement.
As the insurance policy represents the product being sold, consideration needs to be given to the policy design. The design of the policy will ultimately differentiate an MGA from its competitors, either by branding or by content.
The MGA needs to be aware of any legal and regulatory requirements in the design. Whilst any policy will ultimately need to be agreed by the insurer partner, time can be saved by reviewing other policies provided by the insurer and replicating any unique language (such as that used for complaints handling or regulatory information).
Good practice is for policies to be well laid out with a contents section showing sections of the policy broken down. The contents should include sections introducing and describing the product, detail of the coverage, claims procedures, exclusions, definitions and any legal language required.
Any wording needs to be clear and appropriate for its audience. Clarity of the policy will reduce misinterpretation and complaints by customers.
Many MGAs brand their products to give them a distinctive look and feel. This allows the MGA to create its own brand identity, making its brand synonymous in the eyes of customers with the chosen name, as opposed to the name of the insurer. This is an important feature should the MGA need to change its insurance partner, since policyholders normally perceive their relationship to be with the name of the product as opposed to the insurer.
Trademarking where appropriate should be considered, as well as the purchase of a unique domain name.
An existing portfolio of business that has reached an appropriate size and maturity may contain sufficient data to create its own rating table and underwriting guidelines. A key component of creating a rating table and underwriting guidelines will be the data that the intermediary converting to MGA status will have access to, particularly for claims for which the data can often be held by the insurer and not shared with the intermediary.
Pricing can sometimes be provided by the insurer but an actuarial analysis can be an important feature in creating an independent venture where the intellectual property remains with the MGA.
An actuarial analysis can also assist in the creation of the underwriting guidelines by addressing the required variation in rates for different acceptance criteria or deductible levels. This can act as a good starting point for discussions with a prospective insurance company partner.
Rates produced by actuaries are normally presented on a pure loss cost basis. These will demonstrate what the claims experience should be in order to produce a zero percent underwriting profit or loss. The rates will then need to be adjusted or loaded for the underwriters required profit margin, as well as for the MGA’s commission as well as taxes.
Commissions should reflect the cost of marketing, either direct or through an intermediary channel and also be viewed as separate components. From an insurer perspective, the ideal arrangement is one where the MGA covers its costs and makes a small profit through the commission but then has the ability to increase this profit through growth and underwriting performance. In the case of the latter, an enhanced commission known as a profit commission can be built into the agreement so that the MGA shares in positive underwriting results.
Underwriting and Claims Handling Guidelines
Along with the insurance policy and rate tables, the underwriting (and claims handling) guidelines represent an important component of the arrangement and will form part of the agreement with the insurance company partner.
These should cover the circumstances under which the MGA can accept business and on what basis. Underwriting guidelines should include a rating table as well as any pre-agreed loadings or discounts for variations in sums insured, exclusions and deductibles. This is often t a document that grows with the MGA, responding to actual experience, and can be used to broaden the responsibility and permissions being granted by the insurer to the MGA.
Administering a Delegated Underwriting Arrangement
The ability to administer and service policies is a key component of a successfully delegated arrangement. As the MGA is to all intents and purposes acting as the insurer, the insurance company that it partners with will want to be assured that the MGA has the systems in place to issue policies, collect premiums and create the required reports to the insurer.
Many administrative systems are available nowadays at a comparatively low cost, including on-line policy issuance and premium collection software which can be licensed and white-labelled for a relatively small cost.
Partnering with an Insurance Carrier
Once all of the above components have been satisfied, insurance partners can be approached to support the arrangement. In reality, this process is not left to the end but conducted in tandem with the above.
The MGA’s relationship with the insurer is key to the long-term success of a delegated arrangement and as such care needs to be given to selecting the right partner. The insurer will need to be licensed in the territory in which the MGA is operating but other factors need to be taken into consideration. These include the length of the agreement, financial strength and whether the individual at the insurer is someone that the MGA can build a professional and strong relationship with.
Any agreement should contain a cancellation provision, recognizing that whilst the contract is legally between the insurer and the policyholders, the policyholders are the customers of the MGA and cannot be taken over by the insurer in the event of cancellation.