MGAs must evolve to prosper

For most MGAs, the margins are too thin to afford additional value-added services, and it’s forcing agents to sell lower-commission products, according to industry experts who spoke at our 2010 Distributors’ Summit in Niagara-on-the-Lake.

One discussion, entitled “Past, Present and Future,” explored historical trends and factors that have shaped the current state of insurance distribution in Canada. “It is time for MGAs to create a new value-added approach to competing in the marketplace,” said Jim Burton, chairman and CEO of PPI Financial Group. “The marketplace has reached the end of the commoditization cycle.”

He observed the MGA marketplace could no longer afford to operate on skinny margins and rely on service fees as an override. “We need to give service,” he said.

But there’s a problem. “The cost of IT alone is probably 5% of your gross; the cost of supervision and any matter of self-selection is probably 4% or 5%,” said Burton. “And so you add that on top of your gross load, not even adding some of the other technical services, and it’s a rather scary proposition.”

Agents, on the other hand, are struggling without sufficient tools and training, he said.

“The agents are not succeeding. They’re not being trained. They’re not being given technical backup. They’re not being given software choices and tools to help them be more competitive.”

Burton stressed agents realize what they have is far from adequate. “They want more education on marketing concepts. They want more sales support and software. They want more technical support to help them understand what they’re doing in these markets, mid-scale as well as upscale.”

There is growing demand for specialized products with value other than just the lowest price. “[Agents] want administrative support and financial stability in their MGA.” There seems to be a need for a trusted relationship that gives a “sense of home and stability,” said Burton.

Consumers driving change

The consumer is also playing an important role in changing market dynamics. Consumers, said Burton, are choosing substance over style.

“The consumer has continued, over the last number of years, to grow progressively demanding.” He said they’re no longer interested in just the glitz—they’re interested in the actual experience.

Consumers today want a consultative approach with customized solutions, and need specialists as opposed to generalists. “They need a team approach in terms of the marketplace,” says Burton.

With this consumer mindset, MGAs have their work cut out for them. “Their objective is to provide the agent with the services, the technical support, the products, and the software tools they need to be much more professional in serving their client.” However, he says, too little is being done in the marketplace today.

Keys to sustainability

Burton also offered his views on what insurance companies need to do in today’s environment to make the transition to tomorrow’s world.

“Firstly, the insurance companies are challenged to try and rationalize their internal sales organizations.” They are consistently looking at downsizing what used to be a very large operation, “because they can’t afford that infrastructure if they’re going to pay the money to the MGA,” reasoned Burton.

Secondly, they must begin to price the products appropriately. “There isn’t a company in Canada today that can continue to price the LCOI product as it is.” Burton made reference to impending legislation that, once in effect, will mean the end of that product series. “But until it gets there, we still have many companies that are now pricing non-profitable products, trying to get brokerage business from the MGA marketplace.”

Thirdly, companies must attract distribution at a higher value proposition. Referring to a 2008 study, Burton said companies are aware that they need to select a true MGA—an organization with well-oiled marketing and sales support, producing strong new business volumes, with good advisor oversight capability. “A solid and sustainable business model, contemporary technology, and sound financial standing,” are also necessities, he added.

Companies are now realizing they can no longer throw anything at MGAs and pay a high override with no obligation to serve.

Future of MGAs

Consolidation – there’s no better word to describe the future of MGA distribution. It’s a trend that has been around for the last five or six years, and is still growing, according to Jim Virtue, president and CEO of Financial Management Group, which controls and operates seven regional MGAs.

Virtue believes the trend will continue. “I don’t see any doubt in that. And I think it’ll largely be driven by the insurance companies and compliance,” he said.

“You’re also going to see the insurance companies looking to the MGA for assistance in the areas of compliance.” In addition, he predicted the “companies are going to come to the conclusion that it’s very hard for them to oversee 150 or 180 MGAs.”

He likened the situation to the automotive industry, which ran into trouble for having too many points of distribution. It was too expensive to keep all of them and the numbers had to be pared down.

“I think we’re going to see that, [and it] will help drive consolidation in the industry,” said Virtue.

This points to tough times ahead for small MGAs producing less than 5 million of FYC on the risk side. The reason, he said, is they’re not going to have access to all products and companies, which will force their brokers to deal with other MGAs on certain product selections.

This will lead to the emergence of a group of larger MGAs that will have better resources on all fronts: lead generation, administration, compliance, technology.

“It will be very difficult for the smaller MGAs to continue to hold their margins, and it will be very difficult for them to compete with these larger, better-resourced organizations that are going to emerge,” said Virtue.

He took the insurance industry to task for not making its products attractive. “We’re not doing a great job on distributing insurance. I think we can improve that dramatically,” he said. “I don’t think the Canadian consumer today is really being served all that well. We truly do have an underinsured world. Most people you meet really don’t have enough insurance.”

Distribution is a three-legged stool, and it’s important to ensure all three legs are strong, said Virtue. “The insurance company has to make money out of this, the broker has to make money, and the MGA has to make money.”

If any one of these legs is broken, then the system doesn’t work. He said companies must work with their suppliers so that lowering term rates is not the only trick in the book. “All that does is squeeze margins.”

Virtue said the cycle has gone on too long and has to stop.

“How low can they go? Hopefully we won’t test that,” said Virtue.