Best's Report: Greater Oversight Needed as MGA Premiums Surge

Premiums within the US delegated underwriting authority enterprise (DUAE) segment grew by 14.9 percent to $81.4 billion in 2023, marking a third consecutive year of double-digit growth, reports AM Best. This surge is attributed to increased DUAE collaborations with insurers, leading to a notable shift of industry premium towards managing general agent (MGA) operations.

Certain lines of coverage, notably catastrophe-exposed property, commercial auto, and umbrella and excess coverage, have witnessed a migration to the surplus lines market due to market firming in recent years, with MGAs emerging as significant conduits for distribution.

"While softer pricing on other commercial casualty lines has placed downward pressure on total market premiums, MGAs working with recent start-up specialty commercial insurers have offset that impact and fueled top-line revenue growth for these insurers," said Greg Williams, senior director, AM Best.

The report highlights increased investor interest, as seven MGAs generated over $1.0 billion in premium revenue in 2023, up from five MGAs in the same category the previous year. Private equity firms are particularly attracted to MGAs due to their potential for stable cash flows through commissions and fees.

However, the report also warns against the risks associated with this burgeoning DUAE segment, especially when MGAs, managing general underwriters (MGUs), and program managers gain significant authority over underwriting, pricing, and binding decisions without adequate risk controls. Some MGAs have exploited their authority, writing unprofitable business to maximize commissions. Analysis reveals that affiliated programs were the third leading cause of impairments in the US property/casualty market from 2000 to 2022.

"Insurers must structure their relationships with these DUAEs with appropriate checks and balances," said Dawn Walker, associate director, AM Best.

In response to this segment's growth, AM Best introduced itsBest's Performance Assessment in 2022 to provide an objective, independent opinion of a DUAE's ability to perform services on behalf of its insurance partners. AM Best also affirmed its positive outlook for the DUAE market segment in November 2023.