By Isha Marathe

April 4 - (The Insurer) - Acquiring or investing in an MGA can allow carriers to more easily explore new products and emerging lines, but choosing which MGA to align with and the investment strategy can dictate the success of the project.

During a panel at the InsurTech NY conference this week, Josh Bjorkman, senior vice president, digital partners at Arch Capital, said his company makes strategic investments or acquires MGAs depending on their needs and to build relationships with insurtechs and founders.

"MGAs represent (about) 10% of premiums in the market over the last 15 years … so there's a significant amount of opportunity (because) MGAs can get to certain parts of the market that incumbent carriers can't quite directly," Bjorkman said.

"We think about 'build versus buy versus partner' a lot at Arch, and working with MGAs … can be extremely advantageous versus the high risk that comes with trying to build something internally yourself."

However, an MGA partnership is more than an "R&D lab", he said, because they tend to be most successful as long-term partnerships. Some of Arch's MGA partnerships include TheGuarantors, reThought Flood and Now Insurance, and they are chosen by gauging compatibility with the capabilities of the company, as well as with their tech stacks and acquisition strategy.

"Sometimes we make acquisitions, sometimes we make investments. In each of (the aforementioned) companies … we did in a small equity investment," Bjorkman said. "And to us, that's really where the experiment is. It's not so much in the product part of it, but it's in the investment."

PAIRING THE RIGHT MGA AND CARRIER

Nicole Perrault, senior vice president at Vantage Risk, said she focuses on three criteria when developing an MGA relationship: partnership, patience and know your customer.

"(When) you talk about partnership, you talk about alignment. And I need patience between your investors, your risk bearers and you as the founders … because things are not going to go according to your business plan," Perrault said.

"You might not grow, your loss ratio might go sideways right away … So have those conversations early to say, 'How are we going to tread through this so you don't overreact and I don't overreact?'"

Acknowledging the sometimes spontaneous nature of MGA business, others on the panel said there are precautions to take and ways to check on the temperament of a partner.

Nick Scott, counsel at Troutman Pepper Locke's insurance practice, said carrier selection for MGAs "is the most important decision you will make in your trajectory".

"(The) program manager agreement is an incredibly important document. It both sets forth your legal rights and obligations, but it also sets a tone and a set of really important expectations that's highly relevant to how innovative you can be and how much flexibility and latitude you have," Scott said.

For Scott, the vital aspects of a contract include the "infamous" minimum production warranty clause, which defines whether an MGA needs to produce a certain amount of premium for the carrier. He cautioned that if an MGA is looking to be innovative, a carrier demanding high production quotas may not be an ideal partner, because it may pressure the MGA into giving up their direct consumer model and opting for broker distribution to reach the numbers.

Additionally, Scott stressed the importance of exclusivity clauses in the program manager contract and figuring out if they support or hinder the MGA's mission.

"The contract negotiation process … is a really great 'know your customer' exercise. It's one thing to (read) what the contract says, which is incredibly important, but it's also a nice way to observe how your carrier partner is going to behave in the lifecycle of the program," he said.