In the know: capacity is limited and terms are tough, but managing general agents who have established their expertise are enjoying a flush of business. (Industry Strategies: Managing General Agents).

Straddling the disparate worlds of agents and insurers, managing general agents rely on close relationships with both to establish and cultivate business ties.

Their responsibilities vary widely, but generally MGAs are insurance brokers dealing in property/casualty insurance and, to a much lesser degree, in life/health, and mostly on a regional basis. They are wholesale distributors of insurance coverage, mainly specializing in niche areas such as daycare centers, catering, gyms and special events like festivals and concerts. MGAs deal directly with insurers, distributing their products through retail agents. Insurers often allow MGAs to underwrite for them in designated markets where they are specialists, such as long-haul trucking or jewelers block. Frequently MGAs sell hard-to place coverage serving homeowners in disaster-prone areas or first-time business owners who can't get coverage elsewhere. Most MGAs also handle claims. For example, Burns & Wilcox Ltd., one of the largest MGAs in the United States, handles both the underwriting and claims in about 75% of its accounts.

Insurers assume a paternal role in their relationships with MGAs, guiding business to them and rewarding high achievers with binding authority. In turn, MGAs act as big brothers to retail agents providing insurance for their customers who can't find coverage elsewhere. "We don't have a lot of. turnover with our agents, and we're not looking to add any more now," said Gary Tiepelman, a senior vice president of Scottsdale Insurance Co., which writes all of its annual billion-dollar business with wholesalers. "The ones we have are based on relationships that go way back," he said.

Channeling Business

MGAs enable a start-up insurer to tap into a cost-effective distribution system immediately instead of investing in underwriters and establishing branch offices. That's the strategy carmaker Volvo is using to build its insurance business more quickly. Volvo established Triumphe Casualty Co. to sell commercial truck insurance to customers who buy Volvo's trucks and heavy-duty equipment. 'The idea with Triumphe Casualty is to have a quality market for the entire trucking industry, and we're beginning the appointment process with general agents. We want to leverage their retail agent customer base to grow premium volume. It allows us a way into the market, while giving us time to underwrite the product," said Larry Weisberg, vice president of North American Insurance Operations for VFS Insurance Group, a Volvo global division that was created to distribute Triumphe's products. VFS currently has insurance licenses in 15 states, with another 15 pending. The goal is to have 40 licenses to write business through MG As within the next three years.

VFS began recruiting MGAs at the last American Association of Managing General Agents convention, meeting with about 40 MGAs from all over the United States. Weisberg said using MGAs keeps his company better focused on underwriting guidelines and the business of being a risk taker and handling claims, rather than worrying about investing in a retail agent distribution system. "For us, it's better to pay more commission to delegate more responsibility to a general agent and scale back our employee count. Premiums ebb and flow, and using MGAs we have a better fix on expense ratios," Weisberg said. In an effort to get a good start on the business, VFS required interested MGAs to provide information about the agency's principals and partners, resumes of producers, financial statements and loss runs for the other accounts they represent. But the relationship doesn't end there. Weisberg says it's important to visit and audit each MGA every two months. "You can't let the relationship dwindle to playing golf once a year. You have to make sure everyone is on the same page."

Changing Market

As a result of the insured losses incurred on Sept. 11 and the hardening property/casualty market, a lot of business is moving out of the standard market into the excess and surplus arena--creating more demand for the services of MGAs. "The amount of business we are asked to look at has doubled. New business is up 50% over last year," said Rob Giles, who is president of the AAMGA as well as president of the Midwest General Agency in Eau Claire, Wis.

The new business is coming from coverage that standard writers are walking away from, such as directors and officers, coverage for architects and engineers, large property risks, restaurants, jewelry stores and very large homes. Scottsdale's Tiepelman says the standard market is pulling out of so many markets that its MGAs are flooded with submissions. "We can't write all the business," he said. A year or two ago, MGAs wouldn't walk away from any business walking into their office; now no one is looking for a new best friend, said Michael Grimaldi, an AAMGA spokesman. "It's not a time for retail agents to establish relationships with MGAs as they are taking care of their long-established customers first," he said.

Capacity shrinks rapidly when insurers decide the risks have grown too great, as evidenced by the exodus from medical malpractice. "Whole classes are coming out of the standard marketplace, and it's our job to find homes for that business," said David Price, executive vice president and chief underwriting officer of Burns & Wilcox.

Years ago, Scottsdale answered the challenge to finding a home for daycare-center coverage after the spate of lawsuits alleging child abuse made this coverage scarce. Tiepelman said Scottsdale put together a day-care-center program with a sublimit and added defense coverage. "It was one of the first big stands we took," Tiepelman said.

MGAs also can be the first to offer exotic new coverages. Giles recalls when employment-practices liability coverage was the domain of MGAs; now, it's a standard offering for commercial property/casualty agents.

Mining Information

The MGA distribution channel is effective for excess and surplus lines insurance because of the close relationships developed between wholesalers and their agents. Another factor that makes the relationship work is that E&S lines are not subject to state rate filings, so MGAs are an efficient way to distribute products nationally. "If we had filings that had to be adhered to, it would be more difficult to do business. The way it's set up lends itself nicely to wholesale distribution," said Tiepelman.

But to be effective, MGAs must develop specialty expertise. For example, Burns & Wilcox--one of the largest private MGAs--did $450 million in premium volume in 2001, in part by developing specialty niche insurance including covering jewelry stores. Price says that with specialty lines such as jewelers block, it is vital to understand the exposures. In the case of jewelers block, a good MGA writer knows that jewelers carry a lot of their inventory in their pockets, ship goods all over the nation and are exposed to pilferage during transit.

Markel Southwest Underwriters Inc. and its carrier Evanston Insurance Co., an E&S writer that writes all of its business through MGAs, also rely on their agents' detailed knowledge of their markets. "They know the lay of the land, where the hazards are in their part of the country. When it comes to wind coverage, they know not to write any coverage unless it's 10 miles from the coast," said Dave McDermid, senior vice president of Markel Southwest Underwriters Inc.

In addition to difficult risks, E&S also includes clients who have little loss experience on which to base underwriting, Tiepelman said. Businesses such as strip shopping centers or mom-and-pop restaurants get coverage through E&S for a few years, build a loss profile and move into the standard market. "There's a low retention ratio in our business for that reason," he said.

Relationship Building

Some life insurers, such as Guardian, also build their distribution system around MGAs. Guardian, which sells life, disability and retirement investment products, uses a network of 103 MGAs nationwide, with about 70% located in the East and the remaining 30% on the West Coast. Anthony T. Mazzei Sr., a vice president and associate profit center officer with Guardian, likens its distribution system of MGAs to the varied expertise found in other professional firms, such as physicians and attorneys. "The general public doesn't go to a heart surgeon when they have a gland problem, and law firms employ attorneys with various areas of expertise," Mazzei said. The MGAs Guardian works with attract agents who specialize in areas such as retirement planning or employee benefits and who want to be part of a team. Guardian believes this specialist-teambuilding strategy dovetails with its holistic marketing approach.

One MGA that is affiliated with Guardian is Corporate Financial Services of Philadelphia. With $5 million to $6 million in annual commissions, it is among the top 10% of Guardian's performers. Corporate Financial targets high-net-worth individuals. To attract more retail agents, the agency sponsors programs that offer continuing education credits to agents in the Philadelphia area who specialize in pension plans. "We offer cookies and credits and talk to them about writing for Guardian," the agency's president and chairman, Sid Friedman, said. Once the agents are signed up, Friedman provides them with expertise and mentoring.

Another example of the mechanics of the ongoing relationship between insurer and MGA is the daily contact Scottsdale maintains, discussing the finer points of a contract's underwriting, particularly the newer risks. Even though Scottsdale passes on the underwriting and binding authority to most of its MGAs, the insurer still performs audits to ensure everything is in order. Scottsdale also doesn't extend claims-handling authority to any of its agents. "We make sure they didn't miss anything such as a notation during an inspection that a banister is loose or a trip-and-fall hazard was noted. We make sure the underwriter followed up on it and that nothing falls through the cracks," Tiepelman said. Scottsdale also hosts an annual underwriting seminar at its headquarters for its MGAs every year and invites the MGA upper management out West every August to rub elbows and get the story of how business is really doing.