Reprinted with permission from the June 3, 2022, issue of New York Law Journal. © 2022 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
What is a managing general agent? This question is one we are often asked by our producer-clients—typically after we advise them to remove the term “managing general agent” from their agreements with insurers. While we can spend time diving into the uses, history and evolution of managing general agents (often referred to as MGAs), this article will instead focus on what, exactly, it means to be an MGA.
General factors. The determinative factors for whether an individual or entity is an MGA can be broken down as follows:
1. Any individual or entity who manages all or part of an insurer’s business (including the limited management of a division, department or underwriting office of the insurer); and
2. Acts as an agent for such insurer, by performing the following three functions, either in its individual capacity or together with affiliates, regardless of the agent’s title (i.e., whether referred to as “agent,” “MGA,” etc.) and regardless of whether the MGA has authority from the insurer to perform these functions:
a. Produces gross direct written premium equal to or more than 5% of the policyholder surplus of the insurer (as reported in the last annual statement of the insurer in any one quarter or year); and
b. Underwrites gross direct written premium equal to or more than 5% of the policyholder surplus of the insurer (as reported in the last annual statement of the insurer in any one quarter or year); and
i. Adjusts or pays claims in excess of $10,000 per claim; or
ii. Negotiates reinsurance on behalf of the insurer.
See generally NAIC Managing General Agents Act, MDL 225.
Put simply—although it is not always all this simple—an MGA is an agent that manages an insurer’s business, produces and underwrites a certain amount of the insurer’s business, and either adjusts/pays a certain amount of the insurer’s claims or negotiates reinsurance on the insurer’s behalf.
State-specific nuances. As with any insurance-related topic, the foregoing summary is a generalization, derived from the National Association of Insurance Commissioners’ (NAIC) Managing General Agents Act (the Model Act) (id., § 2(D)); however, the thresholds and requirements established under the Model Act can vary across each adopting jurisdiction (in this case, all 50 states, the District of Columbia and the Virgin Islands).
For example, the definition of MGA under California law seems to indicate that simply negotiating reinsurance, on its own, could be enough for an individual or entity to be considered an MGA. See Cal. Ins. Code §769.81(c). In contrast, Texas law defines an MGA entirely differently, and perhaps more literally, than the Model Act, focusing only on whether the individual or entity has supervisory responsibility for the local agency and field operations of an insurer, and the ability to accept or process policies produced and sold by other agents. See 28 Tex. Admin. Code §19.1202(3). However, the New York regulation surprisingly tracks the definition of MGA set forth by the Model Act much more closely, without material deviation. See N.Y. Comp. Codes R. & Regs. tit. 11, §33.2 (which modifies the claims adjusting and payment threshold from the $10,000 threshold set forth in the Model Act to $25,000).
Exemptions. Of course, the Model Act provides various exemptions from being considered an MGA for certain individuals and entities who otherwise would qualify. Those exemptions are summarized as follows:
As most MGAs are typically entities rather than individuals (given the high underwriting and production volume that would ordinarily exceed the capabilities of any one person), states like New York have done away with the first exemption, replacing it instead with the third exemption. See N.Y. Comp. Codes R. & Regs. tit. 11, §33.4(a) (which generalizes the holding company act exemption to exempt any affiliate, regardless of the services they perform for the insurance company). This move, in part, was likely due to the meteoric rise in the creation and use of captive agencies over the years, and gives a little more breathing room for such agencies and affiliated insurers who keep their underwriting and claims handling in-house and at-cost.
So, let’s say that you’ve determined you meet the statutory requirements for being an MGA in at least one state; what does that actually mean from a practical perspective? (MGAs must hold their license in the jurisdiction where the risk is located and/or where the insurer is domiciled (see NAIC Managing General Agents Act, MDL 225, §3).)
Licensing. With respect to licensing, requirements can also vary across states. Typically, the MGA will be required to hold an additional license—separate from its producer license—and may even be required to obtain additional licenses for each individual performing MGA functions. In other states, including New York, there is no separate license-type (e.g., an MGA is licensed by virtue of its producer license), and any additional registration obligations fall mostly on the insurer (i.e., to make sure proper MGA-specific appointments are made and forms are completed and filed). See Dept. of Financial Services, Managing General Agent Appointment and Termination; OGC Opinion, Dec. 18, 2002.
Obligations. Perhaps the greatest burden of being an MGA is not actually in the additional licensing requirements that may or may not have to be completed, but in the stepped-up regulatory scrutiny and reporting and contractual obligations that comes along with it.
To that end, the Model Act states, “[t]he acts of the MGA are considered to be the acts of the insurer on whose behalf it is acting … [a]n MGA may be examined as if it were the insurer.” See NAIC Managing General Agents Act, MDL 225, §6. To be clear, that quote makes up the entirety of Section 6 of the Model Act—a not-so-thinly-veiled threat from regulators that MGAs should take their roles very seriously. As those of us who have assisted producers through insurer-level regulatory examinations can attest, these examinations are not well-suited for your typical producer.
Additionally, while most reporting obligations fall on an insurer rather than the MGA (id. at §5), the Model Act is rife with burdensome obligations that must be contained in any contract governing the MGA’s services (id. at §4).
There are certainly many advantages to being an MGA, covered ad nauseam by other articles. To name just one, MGAs can provide an attractive option for insurers exploring a new or niche market, allowing those insurers to enter such market without making the typical expenditures required to do so. Inherently, this creates a lucrative position for any MGA with the capabilities to permit the insurer entrance into such market (i.e., by having experience underwriting certain products, etc.).
In light of the above, however, unless an agent actually performs the functions that satisfy a state’s MGA directives, there is no world in which such agent—who only produces business—would want to be considered an MGA. As such, we always advise these clients to remove the terms “managing general agent” or “MGA” from their contracts with insurers. While using that term alone appears to have no bearing on whether an individual or entity is, in fact, an MGA (see NAIC Managing General Agents Act, MDL 225, §2(D)(2) Drafting Note (“Individuals or agents calling themselves ‘managing general agents’ may not necessarily fall under the provisions of this Act … [i]n other words, if the individual or agent does not perform the activities set forth in Paragraphs (1) and (2) then, for purposes of the Act, the individual is not an MGA”)), why even give the indication that you might be providing services only an MGA provides? Even if minimal, doing so creates unnecessary regulatory scrutiny and risk. For example, if a regulator reviews an improperly titled agreement during an insurer’s examination, the regulator may inquire into the producer’s functions and licensing status. Additionally, improper use of the terms could create ambiguity about the services provided under the contract with the insurer, where no ambiguity about such services should actually exist.
Given the array of modifications made by implementing jurisdictions to the Model Act, the advice we give our producer-clients is to ask the following question: “do I underwrite insurance, adjust or pay claims, negotiate reinsurance or even simply manage elements of an unaffiliated insurer’s business?” If the answer to that question is “yes,” you should be consulting the managing general agent statute in each state in which you are a licensed producer—or (shameless plug) consult those like us familiar with such statutes. If the answer is “no,” pass “Go,” do not collect $200, and for the love of avoiding enhanced regulatory scrutiny—stop calling yourself an MGA!