A managing general agent (MGA) or managing general underwriter (MGU) is a specialized type of insurance agent that is vested with one or more core functions normally performed internally by an insurer carrier, such as product design, underwriting, binding coverage and handling claims. An MGA is often granted underwriting and/or claims handling authority by an insurer.

Advantages:

• Flexibility to build a customized insurance program, without taking on the significant regulatory hurdles of owning a US insurance company.
• Ability to control program intake (via binding authority) and program claims (via claims authority).
• Ability to share in the program's profits via receipt of commissions from the insurance carrier.
• Ability to access specialized insurance expertise and resources of established insurance carriers.

Disadvantages:

• A contractual relationship will need to be established with a third-party insurance carrier whose “paper” will be used to issue policies under the program.
• Finding an insurance carrier that is willing to support the program may be relatively challenging, depending on the program type.
• The insurance carrier will keep a portion of the program's profits as its fee for acting as the insurer under the program.
• While the MGA/MGU is not required to be licensed as an insurance company, other licensing requirements under state insurance laws may apply.

Key Considerations:

Licensing

An MGA may be required to obtain licenses in the United States under the insurance laws of some or all of the states where it will conduct its business. Licensing requirements and exemptions differ from state to state. We recommend that a careful review be undertaken of the scope of the MGA's activities and the types of compensation that the MGA will receive in order to determine which licensing requirements, if any, will apply to the MGA.

For example, licenses may be required in some states if the MGA will do any of the following:

• Sell or market insurance products to, or solicit applications for insurance from, customers;
• Advise on the benefits, terms and conditions of insurance products or negotiate such benefits, terms and conditions with insurance companies or applicants for insurance;
• Settle or adjust claims;
• Bind insurance coverage;
• Acting as a surplus lines broker in procuring insurance coverage from insurers;
• Receive compensation in the form of commissions (i.e., based on a percentage of premium); or
• Negotiate or bind reinsurance agreements for ceding insurers or reinsurers.
  
  * This list of potentially licensable activities is not exhaustive. Licensing requirements and exemptions differ from state to state.

Fronting Carrier

An MGA will need to establish a contractual relationship with a fronting carrier that will issue the policies sold through the MGA. This relationship will be critical to the MGA's operations, and, as a result, the fronting carrier will need to be vetted and selected with care.

Examples of criteria for selecting a fronting carrier include the following:

• The experience of the fronting carrier with the products that the MGA would want the carrier to front;
• State licensing status and existing product/rate/form filing status by state for the products that the MGA would want the carrier to front, so the MGA can evaluate whether the fronting carrier matches up to the MGA's desired states/roll-out plans;
• Operational and administrative services that the carrier can provide, and the associated costs;
• The commission/fee structure and pricing; and
• The fronting carrier's reinsurance requirements, if any.

Third-Party Services

Although the fronting carrier may be able to provide certain policy administration services, it is common for start-up MGA operations to rely on outside third-party service providers to initially (or permanently) handle certain aspects of their operations, such as marketing, claims handling and adjustment, administrative support services, customer service operations and system and information technology services. An MGA should vet any third-party service providers it intends to use and carefully review commercial agreements with such service providers.