Rising to the challenges requires a partnership approach for MGA formation

8th July 2024

Davies CEO, Intermediary & Market Services Matt Lane explains the challenges faced by those who are looking to form an MGA in the current market and why having a partner you can trust is key to overcoming those hurdles.  

The dream of creating your own MGA is becoming a reality for ever more entrepreneurs in the industry. For many having spent years working for a larger company the ability to create something new and to build from the ground up is a huge attraction. 

However, getting from the business plan to conducting business can be fraught with problems and frustrations. 

The first is a question of capital. You need capital to support your ambitions, to pay your staff and create the operations from a finance function to the IT systems. Therefore, you need an investor who will support your aspirations to become an MGA. To do so they have to believe your business is worthy of their capital and investment. That investment may come at a cost. If they think your business is a risk then they may demand a high rate of return on the investments or equity in the business, and as such you are faced with losing part of your company before it even starts to take shape. The other issue is that many investors are not aware of or understand the insurance sector and therefore the potential pool in which to find your capital provider is smaller than most. There is also a challenge on timing – how quickly do they want their return versus your own timeline. 

The second challenge is capacity. For MGAs they need to find a carrier willing to back you with the capacity needed to allow you to underwrite your chosen risk class. It is a question of belief. They need to believe in you, they need to believe in your vision, they need to believe in the risk class you are looking to enter, and they need to believe your record. You, however, also need to be able to navigate the carrier’s risk appetite. With capacity traditionally renewed on an annual basis you need to be confident in the support of the carrier and their commitment beyond the first 12 months. As such you need someone who understands the landscape and those carriers who are keen on your risk class and have the ability to put you in touch with the right partner. 

The next challenge is what I describe as management overstretch. As an underwriter, you want to be market facing and focused on the job of creating and delivering revenue and growing brand value. However you need to access capital, you need to find capacity, you need to build your organisations, and you need to look at areas such as IT systems, compliance, marketing, claims capabilities and finance. 

It is highly likely these are areas where you will have little or no previous experience, but they all need to be addressed. 

That overstretch can also lead to the challenge of what is best described as strategic misstep. The pressure to carry out multiple tasks can lead to stress and with it mistakes. Often, they can be significant and long lasting. The pressure to find a capacity provider or investor can lead to hasty decisions which leave you with a partner who is not aligned with your business or your future strategy. It might be the choice of an IT system that is not fit for your purpose but is a significant investment and one which cannot be abandoned. 

The next challenge faced by many is how to solve the dilemma of the chicken or the egg. You need capital to finance the business but the investors want to know you have the capacity in place to write the risks. However, the capacity providers want to know you have the investment in place to deliver on your aims in the risk class you want to underwrite.  

Regulatory approval can take 12 months if you are an MGA, and you have to ensure that you have not run out of road before you even start to transact business, and everyone wants assurance that your business operations are well designed and their implementation well progressed. Everyone in the process needs to be happy but you can struggle to identify what comes first to bring all the pieces into place. 

At Davies we have been working with our clients, to surmount these challenges and support them on their journey – we are fully independent. It also means that by working with us we are not looking to have a say on how you manage the business or the direction of travel you choose to take. If it is your great idea, you do not want to be indebted to anyone.  

We provide the expertise and the experience you need to operate as an MGA. To reduce the execution risk and benefiting from our lessons learned launching new MGA’s, our clients have a single point of contact with our business and we then co-ordinate our different operating units in order to deliver what the client requires be it IT, compliance or operational and finance management. 

At Davies we understand that compliance in particular can be a major hurdle and obtaining regulatory approval takes at least 12 months. Our platform will allow start up MGA’s to be operational in just three months. 

The fact that the operational challenges have all been addressed can make capital and capacity conversations far easier, safe in the knowledge that the business is ready and regulated. They can take assurance from the fact that the MGA had partnered with Davies. 

More importantly we allow the business leaders to focus on building the business and generating revenue rather than being bogged down in management and operational dilemmas. 

If you would like to continue the conversation, get in touch with Chief Executive Officer, Intermediary & Market Services, Matt Lane at matt.lane@davies-group.com

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