Aon’s Bennett forecasts further growth of $60bn+ US MGA market

The $60bn-plus US MGA market will maintain its current growth trajectory for the foreseeable future with the sector buoyed by underwriting talent being drawn to the prospect of better remuneration and broader industry pricing that remains on the rise, Aon’s Doug Bennett has told Program Manager.

Aon US

The size of the US MGA and programs market remains a topic of debate, with data from statutory filings by carriers seen as under-reporting the true volume of business written.

In its recently published MGAs: A Market on the Move report, Aon suggested there is “a substantial gap” between reported premium figures and actual MGA volumes, as carriers do not have to report MGA direct written premium (DWP) when it is less than 5 percent of their surplus.

Aon said a “realistic estimate” for the current size of the sector in the US is $60bn to $65bn.

That range is based on its assessment of US MGA market premium for 2020 of $62.5bn, a figure derived from reported US MGA DWP of $51.4bn and an estimated $11.1bn of unreported premiums.

US MGA direct written premium by calendar year

Even based on reported DWP figures, it is clear the US MGA market has grown substantially over the past decade, from $29.7bn in 2011 to $51.4bn in 2020, an increase of 73 percent.

Bennett, a senior managing director within Aon’s Reinsurance Solutions, has spent over 30 years working within the US programs and MGA space.

In that time, Bennett told Program Manager he has seen “a lot of the ebbs and flows in the market”.

“I’ve seen good times and bad times, and today is definitely a good time,” he said, predicting that the market’s current growth trajectory will be maintained, fuelled by talent moving from traditional carriers to MGAs, a plentiful supply of capital and a strong pricing environment for most business classes.

“The incentive compensation that an MGA platform can provide to strong underwriting teams where they can really share the upside of their performance, either through profit commissions or equity stakes in the entity, is very significant,” Bennett said.

“It’s a secular shift, and I don’t know how insurance companies can really compete with that model because they’re not set up to share profits directly to specific underwriting teams,” he added.

MGAs’ capital-lite model

MGAs are also “very attractive from a capital perspective”, Bennett noted.

He described MGA platforms as “capital lite”.

Besides investments in human talent, technology and infrastructure, “the MGA model doesn’t require a ton of capital”, Bennett said.

2020 US MGA premium distribution by MGA size

The support provided to MGAs by the increasing number of hybrid fronting carriers in recent years has also helped the market grow, the Aon executive stated.

“Generally, those hybrid fronting carriers have $80mn to $100mn of capital, and the A- rating gets them in the market with a heavy reliance on reinsurance. They’re not tying up hundreds of millions, if not billions, of dollars in a statutory entity that’s heavily regulated,” he explained.

Bennett said “there is a lot of capital out there” looking to be put to work, and MGAs operating in highly specialised segments are attractive to insurers and reinsurers.

“A good MGA will have a unique underwriting approach and distribution channel for their specialty segment. They might have their own policy forms, or how they handle loss control engineering, or settle claims that are beyond the standard markets,” said Bennett.

“That specialisation always provides for good appetite on the part of the carriers and the reinsurers,” he explained.

Market conditions supporting MGA growth

Further supporting the MGA sector’s growth are general market conditions, with pricing largely continuing to rise, albeit perhaps at a slightly slower pace than in recent years.

“Rates are exceeding loss costs, at least at the present time in most lines of business. Segments like commercial auto that have historically been underpriced are now hopefully at least adequate, if not a little bit redundant, and some of that you see flowing through the MGA market,” Bennett said.

The nature of MGAs means they often write more specialised and esoteric lines of business, and Bennett noted that cannabis industry-related risks and transactional liability exposures have all increasingly found a home in the market in recent years.

Wildfire-exposed property is another area that is generating increased interest in the specialist sector, Bennett noted.

Looking ahead, Bennett said the cyclical nature of the (re)insurance industry means there will come a time when the MGA market’s growth is stymied.

“It’s key for an MGA to make their carrier partner and reinsurers an underwriting profit. If that starts to change, then we’ll see capital and capacity flow out of the market,” Bennett said.

“The market currently considers MGAs and some of the areas they focus on to be profitable, but who knows if in three to five years down the road that’s still the case,” he added.

Doug Bennett Aon PQ

But with inflation – both social and economic – expected to remain an issue for the next several years, Bennett predicted rates will remain ahead of loss costs and conditions will remain supportive for the MGA market to maintain its growth path.

However, Bennett warned the market must be mindful of any negative trends that arise which could result in capital leaving the market.

The Aon executive highlighted catastrophe-exposed E&S property as a case in point.

“A big part of the MGA market is E&S property, and to the extent that climate change continues to drive poor performance, the industry could devote less capital to property cat,” Bennett said.

“We’ve already seen that this year, where a number of carriers who devoted capital to the MGA market in property E&S have either retrenched or pulled out completely. Finding new E&S property capacity in the MGA marketplace is very, very difficult, and that could inhibit growth,” the Aon executive added.

US loss ratio trends for MGAs and P&C insurers