The international private medical insurance (PMI) industry has historically been dominated by a handful of large insurers, but increasing demand for the product over the past decade has resulted in several smaller providers entering the market. These smaller players have set themselves up as managing general agents (MGAs) which use a separate insurance company to carry the risk. For brokers, understanding the difference between these two operating models is essential.
WHAT IS AN MGA?
An MGA is an organisation that manages insurance business and underwriting on behalf of an insurance carrier. Sometimes referred to as a managing general underwriter (MGU), it carries out or manages nearly all the normal functions of an insurance company but does not take part in the financial risk itself. MGAs have been established for many decades but there has been a growth in the number of them recently. Not all MGAs are the same – they differ in their capabilities and in the services the insurance carrier delegates to them.
Carl Carter, chairman of the Association of International Medical Insurance Providers and managing director of IMG Europe, says: “In some simple cases an MGU may simply hold a binding authority on a prescribed product with pre-set rates but have little flexibility. Alternatively, the authority granted to the MGU may be right up to a fully delegated binding authority such as that held by IMG. This would allow it to design products, set rates, receive premium, bind risks, administer claims and manage the whole service on behalf of the insurance company. Additionally, an MGU can in some instances represent various insurance companies thereby allowing greater flexibility in the products and classes it designs, markets and administers.”
Although the customer should see very little difference between the products offered via an MGA or by an insurer directly, there are pros and cons for both operating models. MGAs can be more flexible than some of the bigger insurers because they do not have the constraints of large organisational structures and computer systems designed for a specific product.
Jon Carpenter, managing director of Morgan Price International Healthcare, says: “We can also be flexible with regards to our underwriting partners and administration companies – if they are not providing us and our clients with what we want then we can change them – but the front end sales message remains the same. We have been trading as Morgan Price since 1999, but in that time we have had three different insurers and three different administration companies.”
This extra flexibility means that MGAs can design specialised products for local and niche markets where a one size fits all approach is not suitable. MGAs also claim that they offer a more personal service to clients by virtue of their small size.
Andrew Apps, director at ALC Health, says: “The service ethos of the small and mid-sized broker is mirrored by the MGA, where service delivery and a VIP level of customer support is a key factor of its business strategy. In short, the MGA has to provide both a quality product and high level of customer service simply in order to compete. What is interesting is that the underwriting partners of many MGAs are themselves selling international PMI but accept that the MGAs are often able to attract business that they would otherwise miss. This is particularly true in the individual and SME group markets where the larger insurers simply do not have the service capabilities to manage individual business on a personal level.”
There are, however, disadvantages to the MGA model. As MGAs are not in control of the risk taking, they are often unable to be as competitive as insurers in the large experience-rated groups. If the insurer says they need to make a certain margin, the MGA has to add all the other costs – its own margin, the administrator’s fees and brokerage – on top of that.
Ron Buchan, chief executive of Allianz Worldwide Care, says: “An MGA could service anything they like but because of the cost base – the administrator and the underwriter need to make a margin which is higher than the insurer doing the administration and underwriting themselves – they can’t. The cost of providing an administration platform for large corporates requires a significant investment and insurers have the capital to do this.”
Brokers who use MGAs need to be comfortable with the fact that they are dealing with another intermediary. Not only are they effectively giving business to another broker, but there is one more step in the process for clients.
Simon Ball, head of global benefits UK at Aon Consulting, says: “The disadvantage of an MGA is that the client doesn’t always have a direct relationship – there is an intermediary between them and the risk taker which can cause issues if there is a problem to work through.”
Brokers should discover which company is insuring the risk and explain this to their clients. The client is making the decision to go with a particular provider and if there are companies behind the scenes they will want to satisfy themselves that each one meets their requirements. The broker should consider the insurance carrier’s financial strength and check how long the MGA has been with the underwriter. If the MGA uses a different underwriter every year it could eventually run out of companies willing to support it.
Steve Nelson, international sales adviser at April Medibroker, says: “It is important to know which insurer is backing the MGA – we keep an eye on quality and financial security. There is no point quoting a plan if it can’t pay out.”
Buying international PMI from an insurer can bring more clarity to the sales process because they carry the risk themselves. Insurers also have more control: they can structure products, manage risks and determine which segments of the market to concentrate on without asking a third party.
Jonathan Earnshaw, regional director at DKV Globality, says: “One main advantage of an insurer is that everything is within your control and you are not dealing with a separate underwriter. If you are an MGA you are not in control of your own destiny because the underwriter can change its mind.”
There are also benefits to being an insurer from a compliance point of view. Sheldon Kenton, managing director, CIGNA International Expatriate Benefits, EMEA, says insurers can use their own global licensing base to secure a product in a particular country. It can see what level of compliance is needed by drawing on the knowledge from its global business and then ensure its products meet local regulations.
“If regulation and compliance increases this will probably favour the bigger players,” says Kenton. “The market is becoming increasingly complex and this is the biggest barrier to entry. The regulators locally are looking at customers’ health insurance adequacy, even at the point of entry.”
Most insurers believe they will continue to dominate the international PMI market in the future and in the large corporate sector this is probably true – few MGAs are able to compete with insurers in this space. Allianz’s Buchan says it is unlikely that new MGAs will enter the market at all because the barriers to entry are much greater than in the past.
“Now they need very sophisticated claims mechanisms, comprehensive processing systems and online facilities,” he says. “We spend a lot of money keeping our service proposition up to date. To set up a servicing operation in competition with the market requires substantial initial and ongoing capital expenditure.”
In the SME and individual segments, however, it is possible that MGAs will become more popular as demand for a more personalised service grows. These segments account for more than three quarters of the global markets and it is here that MGAs have a natural advantage through their ability to provide a more flexible approach to international PMI.
“There is no doubt that we will see more MGAs entering the global market over the coming years, particularly in the Far East where the demand for international PMI has seen and continues to see steady growth,” says ALC Health’s Apps. “As more and more governments across the world start to require foreign nationals to purchase PMI as part of residency requirements, so the demand for international PMI will increase.”