Start-up MGAs’ survival depends on brokers

Forming an MGA is relatively easy for experienced underwriters with a good opportunity and the support of insurers. The difficult part is acquiring a sufficient volume of quality business in a crowded market to ensure the effort doesn’t simply burn out. To ready the business for sale or third-party investment, an MGA must put a critical mass of profitable business onto the books, which demands more than modest success. A small book yielding modest income is not enough. Gaining that magical balance of scale and profitability quickly is the solution, but how?

Brokers will make or break any MGA. Unfortunately, simply building a new one does not automatically mean that they will flock to it. A proactive approach with potential distribution partners is essential. A sustained awareness of timing and cash flow are also critical: MGAs typically launch with sufficient cash to survive 18 months to two years, after which they must at least break-even, or they will run out of money and collapse.

To pass this hurdle and get to the finish line, relying on a limited panel of brokers for distribution falls woefully short. Instead, MGAs must form their own relationships with key brokers early on and build up the numbers. Ideally, such relationships should be in place before a new venture is launched. However, the transferability of relationships may be uncertain when trading begins without the insurer’s logo. That challenge is even greater when the MGA is writing general business, rather than speciality or niche products. When the product is vanilla, brokers have little incentive to choose a start-up over a giant national carrier.

In an increasingly crowded and competitive environment, broker relationships supported by high-quality niche products are key to the success of any start-up MGA. Such niches are not easy to find, but MGAs which uncover and fill them have much higher survival odds than those that offer only undifferentiated mass-market products. Early engagement with brokers is vital, because they understand the changing needs of potential insureds better than anyone, and can help to get a launch MGAs product offering right.

Any new MGA needs to source a diverse portfolio of business, whether by product or geography. To begin with two or three solid producer relationships may be sufficient, but it is important to add to that number quickly to ensure longevity. Building awareness of a speciality niche, and forming new broker relationships around it through a concerted, personal effort, are essential strategies.

Broking and underwriting are two sides of a tight partnership which delivers appropriate, high- quality products that insureds need. The other element of course is the appropriate level of funding and high-quality services and that is where Asta gets involved. However, to ensure that the successful start-up of a new MGA is a profitable proposition, and therefore an attractive asset for investment, it’s important not to neglect the necessity of building new relationships with a broad panel of distribution partners.