Why brokerages are turning to MGA ownership

Canadian brokerages are showing greater interest in owning managing general agents (MGAs), observes Sean Duggan, senior vice president of special risks and claims at KRGinsure.  

Whether by acquiring or launching their own MGAs, brokerages are increasingly seeing the financial value in owning MGAs, he said.  

“Essentially, it’s creating another revenue stream for the brokerage through the MGA,” Duggan said. “It also has an additional financial benefit in terms of increasing its enterprise value and making a brokerage look more attractive to potential buyers — particularly private equity, for example — because you’ve got this diversification and enhancement of revenue beyond the traditional broker model, where they’re collecting commissions from business placed in the market.” 

There’s also a strategic value for brokerages owning MGAs, said Duggan. 

“It gives brokers more control over capacity. In a sense, they’ve got more of a direct relationship with a market that can customize tailored solutions for clients. It can be more of a safe harbour for coverage in a hard market.” 

In Canada, MGAs act as intermediaries between insurers and brokers. But unlike brokers, they don’t deal with clients directly. Rather, MGAs have delegated authority from insurers to underwrite policies, handle claims, and perform other insurance functions. They often cover specialty markets or risks that are hard to place with primary insurers. 

MGAs are generally regarded as one of the fastest growing segments in the P&C sector.  

“The MGA channel [is] being supported more and more by insurance companies outsourcing their distribution to provide capacity,” Duggan said. “They’re nimble, they can customize solutions, they’re focused on specialty products, they underwrite very well. And there are advantages to their model, which the insurers have seen — that’s the reason they’re outsourcing some of the underwriting to the specialty underwriting to these MGAs, and supporting them with capacity.” 

In the last five or so years, several examples exist of Canadian brokerages buying or launching MGAs.  

Drawing the line

That said, brokerages owning MGAs must remain sharp about maintaining a divide between its distribution operations and MGA operations.  

“An MGA has to be impartial in the marketplace, because they’re going to be writing risks for not just the broker that owns them, but for other brokerages as well,” Duggan said. “There has to be that separation in the marketplace.” 

Compliance controls for MGAs have also “significantly increased,” following Toronto-based MGA TruStar’s lawsuit against its former CEO, whom it accused of siphoning company funds for his own personal use.  

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The allegations have not been proven in court. But the situation has prompted regulators to change the way they approach MGAs as business entities. 

“The baseline of controls and due diligence has certainly increased,” Duggan said, adding the additional compliance controls will benefit brokerages buying MGAs. 

“You can’t judge the entire MGA landscape by one failure,” he said. “The MGA model is increasingly successful, as I mentioned. And major carriers are continuing to support MGAs by providing capacity support, which I think validates the model.” 

Alyssa DiSabatino

Alyssa Di Sabatino has been a reporter for Canadian Underwriter since 2021, covering industry trends, market developments, and emerging risks.