MGA Symposium: Uniting for survival

By Mark Noble | May 29, 2008 | Last updated on May 29, 2008
4 min read

To turn a profit from declining margins, MGAs realize they need scale. In the past, the solution most talked about has been acquisition but at this year’s Managing General Agencies Symposium, hosted by ADVISOR Group, it’s another A word that has people talking — alliance.

According to a survey conducted on behalf of ADVISOR Group, seven out of 10 MGAs still cite acquisition as their most likely avenue for growth. Bigger is not always better. Part of the appeal of MGAs is the perception that they offer personalized service and advocacy not readily available from the large dealers — and certainly not available directly from carriers.

Terri DiFlorio, the outgoing president of the Canadian Association of Independent Life Brokerage Agencies (CAILBA), and Caron Czorny, the incoming president of CAILBA, offered two back-office solutions that can be an alternative to outright acquisition.

DiFlorio, who is the president of HUB Financial, Canada’s largest MGA, says her company is offering its back-office capabilities to other MGAs.

“There is a lot of pressure on the margins that we have. The cost of technology and compliance [are not helping],” DiFlorio says. “There is consensus we will have compliance in all of our operations soon.”

DiFlorio says while there are numerous technology solutions out there, independently operating them as a smaller MGA is not cost-effective, and it’s becoming very difficult to find and retain individuals with strong back-office and compliance skills.

“We all talk about pressure of retaining and retaining good advisors. One of the challenges we are going to also have going forward is attracting and retaining good employees,” DiFlorio says. “We’ve got a couple of situations right now where we simply do the back-office processes for somebody. They retain their status as a national account or an MGA. We don’t take the insurance contracts on; they have it themselves. For the process of getting a case through or the in-force service that goes on, rather than offering that on an override share basis, we do that on a fee-base.”

DiFlorio says especially for niche-market MGAs who want to allocate their resources in certain areas, the cost savings can be drastic. She says for one MGA, the company was able to provide back-office support that the MGA had employed six people to do at a cost of less than one of those salaries.

Outsourcing to a large competitor is not the only option. Czorny, who is executive vice-president and chief operations officer of PEAK Insurance Services, explained how her firm has been able to create an alliance with two other MGAs to create one single back-office system.

Quebec-based PEAK was one of more than 30 MGAs that were cut adrift when, in 2006, Manulife chose to wind down Equinox Financial Services, which had provided contracts with four major carriers on one platform.

“There were 35 offices saying, ‘What do we do now? We’ve been pooling all this time for production requirements,’ ” Czorny says.

Initially, Czorny says 19 MGAs from across the country got together to discuss pooling their resources to create a similar platform, but it went nowhere.

“We formed sub-committees, and in the end, we did nothing,” she says. “The Quebec contingent of us thought, well, maybe that national thing was too big for us; let’s just try Quebec. We have two meetings with 10 Equinox centres, and that started to drop off. In the end, there ended up being three who were seriously interested in talking about how we could work together.”

PEAK allied with MGAs Equinoxe des Laurentides and HBO to create AgenZ. The three MGAs effectively remain competitors but own the same back office, and they all have the same insurance contracts, which are negotiated by AgenZ.

PEAK Insurance decided to give up its MGA contracts so that AgenZ Group would hold them. “That was not an easy decision,” she says. “We now have seven companies that hold the MGA contracts with AgenZ Group and are doing very well. We cannot take on any more, though, because we want to make sure we can meet the [carrier] production requirements.”

In addition to the contracts, the back office shares a staff, and the three MGAs under AgenZ have standardized E&O coverage. Czorny says the alliance has allowed them also to leverage expertise in certain areas, such as underwriting, from each other.

“At PEAK, we thought we were good at looking at cases that were declined or rated that we could go out and shop and help the broker. Really, we weren’t that good compared to the director of operations at one of the other MGAs, who is really good at that. She has digged her teeth into those cases and has more time to do that because she has a bigger team.”

The three firms do compete for clients, and, because they have different levels of compensation, they also compete for advisors.

“We are all about 50 kilometres from each other geographically. Of course we compete. We set our own compensation. We pull out our own service fees,” Czorny says.

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Mark Noble