Establishing an MGA: What do you need to know?
Back in September 2020, NuVenture entered the market aiming to help frustrated underwriters realise their ambitions in building an MGA. Since then, we’ve seen around 75 MGA opportunities at all stages of development. From a tentative conversation with an underwriter only just starting to consider whether an MGA is right for them, to the established plan that’s been “doing the rounds” to everything in between.
In almost all these discussions, common themes emerge. If you’re thinking about building an MGA, consider the following:
- Valuations: An investible opportunity has to reflect a compelling business plan and the experience of the founders. The fact that NuVenture gives the founders equity in the business is attractive, but the valuation of that equity on exit needs to reflect the value created for capacity providers and for the MGA. That relationship between remuneration and value creation doesn’t appeal to everyone.
- Differentiation: For an MGA to be successful it needs to provide some level of differentiation from its competitors. It doesn’t have to change the world. Those differentiating factors can be relatively modest changes to the way the product is delivered or the service provided, so long as it makes for a more efficient insurance eco-system. The time and effort required to develop a differentiated position is worth the investment.
- Goals: Whilst the potential financial rewards are obviously appealing, our greatest success has been with founders who want to build a legacy. That approach, and the implications of that around sustainability, respecting the agency relationship with capacity providers and building trust, is a key indicator of likely success.
- Capacity: Securing capacity for MGAs over recent years has become increasingly challenging. This is driven, in part, by increased regulatory scrutiny and internal governance requirements. Financing capacity for start-up MGAs with no trading history is clearly that much more difficult. We’ve had good success with capacity providers who had an existing involvement in a particular class of business and who want to grow in that space without incurring additional fixed costs.
Feedback also suggests that utilising up-to-date technology is attractive to capacity providers as it both evidences good system control and data validation, and also provides for improved reporting capabilities and access to data. That being said, in terms of sourcing capacity the reputation and track record of the founders cannot be stressed enough. The best technology and data are unlikely to secure capacity alone, the founder must also be a credible individual.
- Strategy: Many insurers have a very clear strategic approach to the direct business they write but for delegated authority business there is a tendency to be more reactive. There is a clear opportunity for capacity providers and MGA incubators to work in partnership to identify areas of growth and/or products where and MGA could deploy improved technology to drive greater efficiency and improve combined ratios. The capacity provider identifies a gap in their portfolio or a class they want to grow in, and the incubator takes on the task of identifying the underwriters and setting up the MGA.
Going it alone (with help)
Breaking away from a large organisation to build an MGA is – undoubtedly – a culture shock. The idea of launching a new business can be overwhelming; all the tasks involved can be difficult to get your head around. But, with the support of MGA incubators (like NuVenture), budding entrepreneurs can become part of an efficient team that allows them to focus on what they do best: assessing risk and building broker relationships.
Full service support
MGA incubators are effectively a means through which entrepreneurial underwriters can source all the capabilities, disciplines and services a new MGA needs – from capital and actuarial support to technology and access to the data that ultimately drives the efficiency of the business.
Having that team around means new MGAs are better equipped to tackle some of the industry’s biggest challenges.
Built for Success
There is no “one-size-fits-all” recipe for developing a successful MGA. What is becoming abundantly clear is that those businesses that combine a clear plan, reputable founders and the right support will be in the best position not just to grow, but to thrive.