MGA101: Essential Aspects of MGA Risk Capacity Contracts

MGA101 is an expert-led discussion series designed to demystify common queries surrounding MGAs & Risk Capacity for product innovators, underwriters and anyone else looking to simply understand this insurance model. 

Chris Lowell (Managing Director, InnSure) and Somil Jain (Principal & Senior Consulting Actuary, Lewis & Ellis) highlight important MGA capacity contract terms to pay attention to in the video below. Here’s the breakdown on what those terms mean, and why they make a difference: 

What are Ceding Commission and Fronting fees? 

Ceding Commission is a sum paid by the reinsurer to the MGA (or the insurer the MGA is partnered with) to cover acquisition costs like underwriting, marketing, and admin.  It is a source of income for the MGA and is calculated as a percentage of the ceded premium, often structured to increase with improvement in underwriting performance (e.g., lower loss ratios).  

Ceding commission is an umbrella term for Known ceding commission and Contingency commission:

• Known commission is the standard ceding commission guaranteed upfront, usually a fixed percentage of premiums. 
• Contingency Commission is the additional compensation tied to underwriting performance, paid only if certain conditions are met or if profit is generated. Simply put, this commission is contingent upon the insurer making a profit.     

A Fronting fee is the fee an MGA, or in most cases, their reinsurer pays to the fronting insurer to use their license/paper to issue policies. It is usually set as a percentage of GWP and is paid periodically based on the MGA’s premium reports. 

Why does this matter?

A high ceding commission boosts the MGA’s revenue, while a low fronting fee keeps operational costs down. All else staying the same; MGAs benefit from having a higher ceding commission and a lower fronting fee, explains Somil.

What does Loss Count signify?

When an MGA enters a capacity agreement with a fronting carrier or reinsurer, they're trusted to underwrite policies responsibly. 

Loss count refers to the number of claims, or open losses the MGA is allowed to have at any given time. It is essentially a performance metric which signals that the MGA’s underwriting may be off track if too many claims occur. 

Why does this matter?

As a way to keep underwriting quality in check, the capacity provider might increase oversight, pause new policy issuance, renegotiate terms, or even pull back capacity If an MGA exceeds the agreed upon loss count.

What is Loss Corridor?

A loss corridor is a clause in the agreement that says, “If losses exceed a certain threshold, they don’t all need to be covered by the reinsurer. Instead, the insurer take on portion of these losses in a specified proportion.” 

Example: 

• Loss corridor is defined between 85% and 120% loss ratio
• Corridor sharing is defined as 50% insurer / 50% reinsurer
• If actual loss ratio is 110%, the 25% above the 85% threshold is shared equally with each party absorbing 10%. 

Why does this matter?

This clause curbs any recklessness on the MGA’s part by making them financially responsible for some losses if the underwriting is below satisfactory.

Projecting Accurate Premium figures 

As a final takeaway, Chris and Somil advise projecting and committing to realistic business volumes during capacity discussions. Many carriers set minimum premium expectations, often in the $50–100 million range. This naturally limits the pool of partners willing to consider financing an early-stage MGA.  

Being transparent and accurate about premium projections helps ensure alignment with the right capacity partners and supports more constructive contract discussions. The intent of these contracts isn't to penalize underperforming MGAs, but to ensure that the economics of the partnership make sense for both parties, laying the foundation for a sustainable, long-term partnership.