How Insurance MGAs Can Secure Long-Term Capacity

How Insurance MGAs Can Secure Long-Term Capacity

MGA101 is an eduseries designed for aspiring MGAs, where insurance veterans Chris Lowell (Managing Director, InnSure) and Somil Jain (Principal & Senior Consulting Actuary, Lewis & Ellis) break down the what, why, how, and where of risk capacity.

In the third episode, Chris and Somil outline key discussion points MGAs should raise with potential capacity providers to assess long-term fit. Chris frames these considerations around three core questions:

• Financially, how well is the risk capacity partner prepared to support the MGA?
• What financial terms and options are available to the MGA?
• What is the ideal dynamic the MGA aims to establish with its risk capacity partner?

This blog unpacks the first two questions, also offering insight into the capacity providers’ perspective during these conversations.

Capacity Provider Expectations Explained

Ideally, carriers want their MGAs to scale quickly and write a significant amount of premium. From a reinsurance perspective, however, the quality of the risk matters more. An MGA’s intent to build and distribute a successful product shouldn’t come at the expense of loose underwriting that erodes risk capital.

For example, in a portfolio of USD 100M, if only USD 40M is a good risk, the other USD 60M exposes the capacity provider to avoidable losses.

In their conversations with MGAs, capacity providers are essentially trying to gauge the quality of underwriting, explains Chris. They also want to see that an MGA’s first-year premium projection is both realistic and achievable in order to align on volume and long-term strategy.

As Somil notes, some carriers might say, “We’re not going to write more than 5 million,” while others won’t consider programs writing less than 20 million. Aligning on premium volume is an important first step before moving into more strategic considerations.

Evidencing capability (low loss ratios, for example) along with clear communication of intent helps capacity providers decide whether to support an MGA. For more on what capacity providers are prioritizing in MGAs, check out our blog on key factors to consider when looking for capacity in a hard market.

With that context, here are the financial check box items unpacked:

Financially, how well is the risk capacity partner prepared to support the MGA?

Somil likens this aspect of capacity discussions to investment conversations: Sometimes, an investor might be interested but may not want to lead on the deal. Similarly, a carrier or reinsurer might agree to take on a share of the risk, say 25%, but prefer a more established capacity provider assume a larger portion and lead due diligence.

This above can work for the MGA depending on their setup, so it’s important to understand the distinction between the amount of risk a carrier is ready to write and the amount they’re willing to keep.

For example, a carrier providing the paper to write up to 10 million USD in premium might be willing to cover only 3 million USD of risk capital in case of claims. Carriers in these set ups are called fronting carriers- you can learn more about the types of risk capacity setups here: How to Start an MGA: Understanding Risk, Paper and Capacity Providers - Insillion

MGAs might also come across carriers that are willing to cover risk, but lack the surplus capital required to support the full premium volume on their own. In such cases, MGAs should have a discussion with the capacity provider on how the arrangement would work if they were part of a syndicate, where multiple capacity providers come together to cover an MGA’s risk.

What financial terms and options are available to MGAs?

Does the carrier (or in some cases, the reinsurer) have the authority to write in the state or geography where the MGA intends to operate?

Some carriers may have limited jurisdiction, with the ability to write only in the Northeast, for example. Clarifying details surrounding jurisdiction is an important checkbox item — If the carrier supports the MGA’s target market and strategy, they could be a good long-term match. A broader jurisdiction is generally more advantageous, as it allows flexibility for future expansion both geographically and across additional lines of business (LOBs) in those states.

This discussion should also cover whether the carrier has the authority to write specific admitted or non-admitted lines that the MGA intends to offer.

Some carriers are happy writing “small” amounts while some carriers only want to write “larger” businesses. How these terms are quantified varies from one risk provider to another, and so alignment of business strategy to achieve the target premium should also be explored.

Conclusion

The right capacity partnership goes beyond funding — strategy, support, and alignment all play a critical role in an MGA’s long-term growth. In the full video, Chris and Somil explore partnership responsibilities, support dynamics, and much more — watch it for insights on building stronger, long-term capacity partnerships.