What insurance pros should know about MGA regulation

The insurance marketplace is seeing an increase in the use and popularity of managing general agents, or MGAs, also known as managing general underwriters (MGUs).

MGAs write business through comprehensive “programs” under which the MGA is responsible for underwriting and administration, in addition to placing the business with the carrier. Growth in premiums written through program business exceeded that of the total property & casualty market by 32% in 2016, a trend that has continued since then into 2019, according to Conning.

MGAs (also known colloquially as program managers) and the use of programs allow for specialized, often sector-specific, insurance underwriting expertise in a carrier’s portfolio of risks. In so doing, they allow insurance carriers to deploy capital and premium-writing capacity on a customized basis. With expertise in particular sectors, MGAs perform the critical underwriting, pricing and administrative functions needed for profitable results in writing insurance to specialized businesses such as transportation, shipping, mining, retail vendors, construction, agriculture and numerous others. MGAs earn variable commissions based on business profitability, giving them “skin in the game,” and often offer claims handling and reinsurance placement in their suite of services.

A brief review of the National Association of Insurance Commissioners model act on MGAs highlights features and activities of these market participants that may have relevance for regulators. Most states have adopted some version of the NAIC model or an analogous statute or regulation. The discussion below of certain key features of the NAIC model is not a substitute for a description of any state’s particular law.

Defining MGA

The model law defines “managing general agent” as any person that:

• Manages all or part of an insurer’s business; and
• Acts as an agent for such insurer that, either separately or together with affiliates, produces and underwrites, in any one quarter or year, an amount of gross direct written premium at least equal to 5% of the most recent year-end’s policyholder surplus.

An MGA also adjusts or pays claims in excess of $10,000 per claim or negotiates reinsurance on behalf of the insurer.

The NAIC observes in a drafting note: “Individuals or agents calling themselves ‘managing general agents’ may not necessarily fall under the provisions of this Act. In other words, if the individual or agent does not perform the activities set forth in [the definition of MGA], for purposes of the Act, the individual is not an MGA.”

A program manager that neither handles claims nor brokers reinsurance does not fall under the MGA definition and thus would not be regulated as an MGA.

Licensing

The model law requires a person to be licensed as an insurance producer in the adopting state if either the underlying risk is located, and the insurer is licensed in the state, or the insurer is domiciled in the state and risks are located outside the state. That is, an MGA can be required to be licensed as a producer in a state where it has no presence and conducts no activity, as long as the insurer for which it is writing premium is domiciled in the state.

Most states do not provide for a distinct “MGA license” but rather impose a producer licensing requirement on agents or brokers meeting the statutory threshold. However, at least one state, Oregon, requires that a person may not act as an MGA unless the person has a producer’s license that is “indorsed to authorize the person” to so act. Other states may have similar idiosyncratic licensing requirements.

Minimum contractual provisions

An MGA must have a written contract with the insurer for which it acts. An insurer engaging a program manager, where the program manager might not immediately fall under the MGA definition in a given state, may nonetheless want to make sure that the contract with that program manager contain these provisions so that amendments will not be necessary if and when the manager trips the thresholds.

According to the NAIC model law, an MGA agreement must have at least the following provisions:

• The insurer may terminate the contract for cause upon written notice to the MGA. The insurer may suspend the MGA’s underwriting authority during the pendency of any dispute regarding the cause for termination.
• The MGA must render accounts and remit all funds due to the insurer at least monthly.
• All funds collected for the insurer’s account must be held by the MGA in a fiduciary capacity in an FDIC-insured institution. The MGA may retain no more than three months estimated claims payments and allocated loss adjustment expenses. (It is worth noting here that, even in the case of non-MGA producers, many states impose similar requirements regarding a producer’s handling and remittance of premiums.)
• The MGA must maintain separate records of business written by the MGA, to which the insurer and the state insurance commissioner must have access.
• The contract may not be assignable in whole or part by the MGA.
• The carrier must be able to cancel or non-renew any policy. The scope of an MGA’s underwriting discretion, and the insurer’s retention of ultimate underwriting authority, are often sensitive topics in program management discussions. According to the model law, the MGA is required to observe appropriate underwriting guidelines, including:
  • The maximum annual premium volume;
  • The basis of the rates to be charged;
  • The types of risks which may be written;
  • Maximum limits of liability;
  • Applicable exclusions;
  • Territorial limitations;
  • Policy cancellation provisions; and
  • The maximum policy period.”
• The MGA must obtain and maintain a surety bond for the protection of the insurer, in an amount at least equal to $100,000 or 10% of the prior year’s total annual written premium produced by the MGA nationwide, with a $500,000 maximum.
• The insurer may require the MGA to maintain an errors and omissions (E&O) insurance policy.
• If the contract permits the MGA to settle claims on behalf of the insurer:
• All claims must be reported to the insurer in a timely manner.
• A copy of the claim file must be sent to the insurer at its request or as soon as it becomes known that the claim:
• Has the potential to exceed an minimum threshold amount determined by the state insurance commissioner or the insurer;
• Involves a coverage dispute;
• May exceed the MGA’s claims settlement authority;
• Is open for more than six months; or
• Is closed by payment of an amount set by the insurance commissioner or the insurer.
• All claim files must be the joint property of the insurer and MGA.
• Any settlement authority granted to the MGA may be terminated either for cause upon the insurer’s written notice to the MGA or upon the termination of the contract. The insurer may suspend the MGA’s settlement authority during the pendency of any dispute regarding the cause for termination.
• In the case of electronic claims files, the contract must address the timely transmission of such data.
• In using advertising material pertaining to the business issued by an insurer, the MGA may use only material that has been approved by the insurer.
• If the contract provides for the MGA to participate in interim profits, and the MGA has the authority to determine the amount of the interim profits by establishing loss reserves or controlling claim payments or otherwise, interim profits will may be paid to the MGA until one year after they are earned for property insurance business and five years after they are earned on casualty business and, in either case, not until the profits have been verified.
• The MGA may not
• Bind reinsurance or retrocessions on behalf of the insurer, except that the MGA may bind facultative reinsurance contracts if the contract with the insurer contains reinsurance underwriting guidelines including, for both reinsurance assumed and ceded, a list of reinsurers with which such automatic agreements are in effect, the coverages and amounts or percentages that may be reinsured and commission schedules;
• Commit the insurer to participate in insurance or reinsurance syndicates;
• Appoint any producer without assuring that the producer is lawfully licensed to transact the type of insurance for which he is appointed;
• Without prior approval of the insurer, pay or commit the insurer to pay a claim over a specified amount, net of reinsurance, which may not exceed 1% of the insurer’s last year-end surplus;
• Collect any payment from a reinsurer or commit the insurer to any claim settlement with a reinsurer, without prior approval of the insurer. If prior approval is given, a report must be promptly forwarded to the insurer;
• Permit its sub-producer to serve on the insurer’s board of directors (except where the insurer and MGA are affiliated, and thus covered by provisions of insurance law governing holding company groups);
• Jointly employ an individual who is employed with the insurer; or
• Appoint a sub-MGA.

Duties of insurers

According to the model law, the insurer is required to have on file an independent audited annual financial statement or reports for the two most recent fiscal years (or, if the MGA has been in existence less than two years, monthly financials certified by an officer) that “prove that the MGA has a positive net worth.”

If an MGA establishes loss reserves, the insurer must annually obtain the opinion of an actuary attesting to the adequacy of loss reserves established for losses incurred and outstanding on business produced by the MGA. The insurer must periodically (at least semi-annually) conduct an on-site review of the underwriting and claims processing operations of the MGA. Binding authority for all reinsurance contracts or participation in insurance or reinsurance syndicates must rest with an officer of the insurer, who shall not be affiliated with the MGA.

Within 30 days of entering into or terminating a contract with an MGA, the insurer must provide written notification to the state insurance commissioner, together with a statement of duties which the MGA is expected to perform on behalf of the insurer, the lines of insurance for which the MGA is to be authorized to act and any other information the commissioner may request. An insurer must review its books and records each quarter to determine if any producer has become an MGA. If the insurer determines that a producer has become an MGA, the insurer must promptly notify the producer and the insurance commissioner of such determination. The insurer and the producer/MGA will have 30 days to fully comply with the statute.

An insurer may not appoint to its board of directors an officer, director, employee, sub-producer or controlling shareholder of its MGAs (except where the insurer and MGA are affiliated, and thus covered by provisions of insurance law governing holding company groups).

Examination and enforcement authority

According to the model law, an MGA’s acts are considered to be the acts of the insurer on whose behalf it is acting, and an MGA may be examined as if it were the insurer. If the commissioner determines that the MGA or any other person has not materially complied with the statute, or any regulation or order promulgated thereunder, after notice and opportunity to be heard, the commissioner may order:

• For each separate violation, a penalty not exceeding a specified amount;
• Revocation or suspension of the producer’s license; and
• If it was found that because of such material non-compliance, the insurer has suffered any loss or damage, the commissioner may commence a civil action on behalf of the insurer, its policyholders and creditors for recovery of compensatory damages ‘or other appropriate relief.”

If the insurer is in rehabilitation or liquidation proceedings, and the receiver determines that the MGA or any other person has not materially complied with MGA laws, and the insurer suffered any loss or damage therefrom, the receiver may maintain a civil action for recovery of damages or other appropriate sanctions for the benefit of the insurer. The statute specifies that the provisions do not limit the applicability of other penalties that may be available under the insurance law.

Attorney Dan Rabinowitz (drabinowitz@kramerlevin.com) is head of the insurance practice at Kramer Levin Naftalis & Frankel LLP in New York.

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