How MGAs will grow by tapping into the coveted middle market

Managing general agents (MGAs) will see drastic commercial market share growth, spurred by a strong presence in the mid-market space and more common fronting capacity arrangements, predicts Steve Masnyk, the former executive director of the Canadian Association of Managing General Agents (CAMGA).

Masnyk predicts that over the next five to 10 years, MGAs in Canada will grow from underwriting about 20% of the commercial marketplace to close to 50%, as is the case in the U.S. and U.K.

“Now, there’s that gap of 30% and my prediction is that that 30% will be filled by mid-market business for MGAs. The future for carriers too, is the mid-market space. And the question they’re asking themselves is, ‘How do we get into that more?’”

Fronting arrangements, in which multiple insurers or reinsurers back an MGA with capacity to write larger risks, may be one answer to that question.

Why the expansion into mid-markets?

As it stands, the small- and medium-sized enterprise (SME) space is the ‘bread and butter’ of most MGAs. But Masnyk predicted in a LinkedIn post late last year that MGAs will become the dominant force in the mid-market commercial space, in which few MGAs — and carriers — play today.

“I’ve heard over the last year, two years, three years, that a lot of carriers want to get more of the action in the mid-market space and want to grow their market share in that mid-market space,” Masnyk tells Canadian Underwriter in an interview Jan. 9. “And one of the best ways of a carrier doing that is by outsourcing that to an MGA.”

Masnyk characterizes the mid-market commercial space as larger property and liability risks that need between $25 million and $30 million in capacity at the low end of the range, and up to $200 million at the highest peak of the range. (Smaller risks typically require up to between $25 million and $30 million in capacity.)

“The mid-market is kind of untapped, both by MGAs and carriers, who want to get a lot more mid-market business in their doors,” he says.

Since MGAs traditionally play in the smaller commercial space, they have smaller capacity backing. That means it’s almost unheard of for a carrier to provide, say, $100 million in capacity to an MGA, Masnyk says.

Fronting arrangements

To obtain larger capacity amounts, MGAs may look to fronting capacity arrangements. A lead carrier provides the paper and capacity, backed by reinsurers. For example, for a $100-million risk, the lead carrier provides 20%, or $20 million, with the remaining $80 million being provided by a handful of reinsurers.

“Those reinsurers have, over the last couple of years, been extremely attracted to do MGA business and provide capacity to MGAs,” Masnyk says. “Now, because they’re reinsurers, they don’t usually do that directly, they do that through a front.

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“So nobody takes a large chunk of that whole exposure. They all take pieces, but the MGA is able now to do mid-market-type business, versus if an MGA only has capacity to do, say, $10 million, then they’ll have to play in the small space.”

Masnyk predicts these capacity fronting arrangements will become a lot more common for MGAs. In the United States and United Kingdom, nearly half of MGA capacity is through fronting arrangements.

Jason Contant

Jason has been an award-winning journalist with Canadian Underwriter for more than a decade, including the past three years as associate editor and, before that, as digital editor for seven years.