Elaine is a Marketing Associate at ReSource Pro Compliance
When I worked as a Compliance Coordinator, my most complex projects
usually often began with the apparently simple statement, “I want to get licensed as an MGA nationwide.” It wasn’t that the folks on the other end of the call weren’t wonderful people (they were) or that the licensing process for an MGA was that much more difficult than any other type of agency licensing (okay, it kind of is). It was that so very few people I spoke with—even experienced agency owners and producers—met the regulatory definition of “managing general agent.” It’s a term that we use very broadly in the insurance industry on a day-to-day basis. But the actual definition is very specific.
What Is an MGA?
The NAIC model regulation defines a managing general agent as “any person who (1) manages all or part of the insurance business of an insurer (including the management of a separate division, department or underwriting office); and (2) acts as an agent for such insurer …”
The exact wording of each state’s MGA definition varies slightly, but the fundamental principle is the same. In other words, an MGA acts—in a limited way—as an underwriter. The contract between the MGA and the insurer spells out its specific duties, but generally MGAs perform some or all of the following tasks:
- Bind coverage and issue policies
- Process endorsements to existing policies
- Underwrite and price policies
- Negotiate commissions
- Appoint retail agents
- Adjust losses and resolve claims
- Collect premiums and maintain agency balances
- Receive or prepare account reports and communicate them to the insurer and state regulators, as required
Who Can (and Can’t) Be an MGA?
Many of the people I spoke with performed some or all of the tasks listed above. But the definition of an MGA also includes some restriction that made many of them ineligible to be licensed as MGAs.
The NAIC model regulation goes on to explain that an MGA must underwrite “an amount of gross direct written premium equal to or more than five percent (5%) of the policyholder surplus as reported in the last annual statement of the insurer in any one quarter or year …”
Additionally, an MGA must do at least one of the following:
- Adjust or pay claims in excess of ten thousand dollars ($10,000) per claim
- Negotiate reinsurance on behalf of the insurer
Again, the specific requirements vary from state to state, but it’s the minimum premium standard that’s the most common stumbling block.
An Overview of the MGA Licensing Process
Those who do meet the criteria to apply for an MGA license often find the process much more complex than that for applying for a producer’s license. (And speaking of producer licenses, lots of states require MGAs to hold active licenses that cover the products they will be managing and services they provide before they apply for an MGA license.)
First, a number of states still process MGA license applications on paper, often using state-specific forms. Next, some states offer MGA licensing for individuals and business entities, while others license only entities or only individuals. Some states require both an entity and an individual from that entity to be licensed while others require only the entity to be licensed.
In addition to the license application, states often require potential licensees to provide proof of financial stability. This proof usually takes the form of bonds, errors and omissions (E&O) policies, and financial audits completed by independent parties.
Bonds may be surety or fidelity bonds, depending on the state. The amounts vary widely. In many states, the bond requirement reflects the volume of monies the MGA handles. Most commonly, it’s a percentage of the gross direct written premium. Fortunately, states usually set a cap for bonds. These also vary from state to state, ranging from a minimum of $5,000 (thank you, Idaho!) to a maximum of $500,000.
E&O policy amounts vary, too. It may be a set figure for all MGAs or a percentage of the gross direct written premium. In those states that use the percentage system, there’s usually a minimum amount, too. The MGA pays whichever sum is greater.
States often want to review and approve the contracts between MGAs and insurers, too. This ensures that contract language meets the states’ regulatory requirements. Even in states that don’t “require” contracts be submitted, it’s a good idea to have them on hand. Several states require MGAs to be able to produce contracts on demand.
The states sometimes have other requirements as well. These range from fingerprint requirements to requesting a copy of Articles of Incorporation/Formation to state-specific questionnaires and forms. Insurers may also need to file appointments for their MGAs with regulators.
Several states don’t issue an MGA license per se but require MGAs to go through a very similar process to obtain a registration, designation, or endorsement (Hey, a license by any other name).
Additionally, a number of states do not issue a managing general agent license at all. In these states, those providing MGA services will need to secure alternate licenses, such as property and casualty producer licenses, surplus lines licenses, and even adjuster licenses. The functions it will perform on behalf of an insurer in the state determine which licenses a managing general agent needs.
So, If I’m Not an MGA, What Am I?
For those who don’t meet the requirements for an MGA license, alternative licensing is essential. Licensing needs to reflect the products the “not-an-MGA” administers for its insurers. Most MGA-like agencies serve the property and casualty market. For them, P&C producer license(s) are a must. If they place business outside the admitted market, surplus lines licenses are also necessary. Additionally, adjuster licenses may be required if entities’ responsibilities include adjusting claims.
Remember that if the firm is being licensed as an agency, an individual license for the same lines of authority will likely also be required. This licensed individual serves as the Designated Responsible Licensed Producer (DRLP) for the agency’s licenses.
The Evolving Role of MGAs
Given the complexity of the process, you might ask, “Why would anyone want to be a managing general gent?” The answer is that the role of MGAs is evolving as we speak.
At the turn of the last century, MGAs were a way for insurance companies, who were typically based along the Eastern Seaboard, to meet the needs of geographically isolated clients throughout the western states. Insurers could serve such clients without maintaining full offices in the distant locale. Less than a century later, however, evolving communication technologies and the internet made it practical for insurers to deal directly with clients nationwide. The number of MGAs declined.
Now, however, MGAs are resurging. Carriers want to improve efficiency and reduce costs without sacrificing the client experience. MGAs, which can optimize their staffing and processes for specific functions, offer an ideal means to achieve this goal.
MGAs also serve as gatekeepers of specialist insurance[EN1] markets. Their smaller size and ability to focus on a narrow product range and/or a specific geographic region make them an ideal fit for specialty products such as cyber-risk insurance, flood insurance, etc. Partnering with MGAs gives carriers access to these niche markets without the start-up costs and investment of time required to develop similar expertise.
The MGA may have another role to play as well. Insurtech firm Next Insurance made the move from digital agency to insurance carrier. CEO and co-founder Guy Goldstein stated that their time as an MGA was a very intentional part of this business plan. Whether other MGAs, especially other insurtechs, will follow Next Insurance’s lead remains to be seen.
Additionally, many insurtech firms utilize the MGA structure as an intermediate step in their evolution from digital insurance agencies to insurance companies.
Two Great Resources for MGAs
Texas and Florida issue more MGA licenses than any other states. Here are links to the sections of their state statutes that pertain to managing general agencies:
Find out how ReSource Pro helps insurance agencies and producers meet their licensing and compliance needs by visiting our compliance page.