Collaborative Efforts in the Insurance Industry: Navigating MGA Partnerships

This weekend, I had the pleasure of having a brainstorm session with our partners from Perfect Circle. We partnered a few years ago as strategic move to increase our negotiation leverage with insurance providers. This alliance has been great as we secured top direct MGA contracts with top providers.

The Challenges with MGAs

MGA partnerships are always a bit strange, as we are competitors, but large enough in our own markets that we don't view each other as enemies. In the end we are selling the same providers, and are trying to elevate up our similar service. Our agency has a generally lax attitude with other mga's and we have made some crucial partnerships over the years, and many of our agents activey work with multiple MGA's.

This being said, a pressing issue in the broker-client model is the tendency for MGA's restrict collaboration among agents under other hierarchies. These constraints can be so severe, that some MGAs legally bind their sub-agents, preventing them from exploring other opportunities with threat of lawsuit.

It's essential to note the contrast in practices in the US, as brokerages rarely impose restrictions on their sub-agents. US agencies even allow agents to have multiple appointments with individual insurance providers. The US business environment is much different than Latin America however, where predatory contracts are the norm.

This restrictive environment causes unhealthy competition among brokers. They often resort to disparaging other insurers to gain an edge over other agents. Our agency has always chosen the high road by refraining from such tactics, earning trust and respect in the process of brokers in our market. However the majority of the broker network remains fragmented, largely due to the antagonistic atmosphere in our ecosystem.

Exploring Solutions

To address these challenges, we discussed several potential strategies to navigate this problem.

Solution 1: SaaS Model for Brokers

As previously highlighted in one of my blog posts, we're mulling over the idea of offering our platform to other MGAs and brokers as a SaaS product. This approach would provide agents with a way to sidestep restrictive MGA contracts and still generate revenue for our partners. Our current pricing model for agents involves a monthly fee per insurer connector. We're also contemplating a bulk pricing model for MGAs to onboard multiple agents with a revenue share.

To ensure trust and transparency, we're keen on establishing a holding company to manage commissions and referral payments as a custody.

This approach isn't without challenges. There's a possibility of brokers replicating our model, thereby diluting our competitive edge. Moreover, the profit margins are comparatively smaller.

Solution 2: Mergers and Acquisitions Strategy

Aanother strategy that we've consider is the adoption of a Mergers and Acquisitions (M&A) approach targeting agents within the market.

To provide context, one of our MGA partners recently executed an equity transaction, selling 50% of their stake to a prominent US-based brokerage. This brokerage, has the intent to infuse capital into our market purchasing agent portfolios using funds from a large US bank. In the US, this strategy proved benficial for them, resulting in the accumulation of over a billion dollars in premiums managed across their MGA network. Insurance portfolios make consistent, predictable revenues making this model enticing to banks due to its predictable and stable returns, often recovering the initial investment within a few years.

Given the current dynamics of our IPMI market — where numerous brokers are nearing retirement or are disillusioned by the industry's challenges, such as escalating premiums and service complexities — this M&A strategy appears promising.

I envision our Saas platform playing a helpful role in this approach. Agents could access a free trial, acquainting themselves with automated client management features and other tools. Then a standout functionality would be a valuation tool, enabling agents to input their insurer credentials and swiftly obtain an estimated buyout valuation of their portfolios. We could then opt to purchase these portfolios outright. Alternatively, a model I've been leaning towards involves acquiring specific percentages of agents' commission contracts. This approach ensures that we manage client support while agents continue to handle client onboarding. This model has its merits, notably in ensuring sustained portfolio growth and mitigating risks associated with brokers transferring portfolios post-settlements.

A critical facet to be addressed in this strategy is the overarching MGA structures. If agents accept buyouts, it's essential to assess the MGA hierarchies they operate under. While insurance providers might be indifferent about our position within these structures, our preference would lean towards integrating these clients into our hierarchy to optimize our commission potential. A significant challenge here is the potential industry upheaval if our M&A strategy gains traction. To navigate this, we'd have to present highly attractive offers to these MGAs or contemplate external incentives, such as revenue-sharing on new cases via our blockchain, as alluded to in Solution 1.

Solution 3: Establishing a Holding Company for Niche Agencies

One of the last strategies discussed was the establishment of a holding company for future niche agencies. In the context of a competitive MGA landscape, achieving optimal support for brokers becomes significantly streamlined with scale. For instance, a dedicated support team comprising 10 individuals can comfortably cater to the needs of 30-100 agents. Consequently, many MGAs leverage this scalability in their marketing, often emphasizing their robust support mechanisms, such as assisting with claims. However, this level of support, while valuable, is not particularly challenging to attain at scale, leading to a lack of differentiation among MGAs.

Our agency's approach diverges here. We extend beyond the conventional by offering both development and marketing support to our agents. A notable aspect of our strategy is the allocation of a majority of our leads to our broker network. This is a step not all MGAs are willing to take, primarily because it can slash profit margins by up to 90%, especially when leads are diverted away from their in-house sales teams. Recognizing the advantages we bring to the table, some of our MGA partners have proposed a collaborative venture: the creation of specialized agencies targeting specific market segments. In this arrangement, while our team would oversee development and marketing, our partners would manage support and sales. The equity distribution for these agencies would be an equitable 50/50, with the objective of fostering self-reliant sales platforms that both parties actively support.

This proposition is interesting to me for breaking into new markets. A significant number of our partners operate offshore, allowing these structures to act as safeguards, mitigating potential liabilities for our company and offering substantial tax benefits. It provides a way to craft niche agencies in markets our partners are masters of, ensuring enhanced client experiences. Moreover, the bulk of our involvement is front-loaded, centered around brand creation and marketing scale-up.

On the flip side, it is possible that if we start diversifying our efforts, it might detract from our primary agencies, and there's an inherent risk of competition between agencies.  I do feel being stagnant however, is a much more serious risk as the world is bracing for some serious AI and technology changes.

Charting the Way Forward

Our partners are eager to finalize a strategy, and we're equally committed to putting our discussion into actionable plans. We are going to start by offering dynamic quoting and application tools for our MGA partners using solution 1, and we are meeting CFO next week to see if we can create a more serious strategy using solution 2 and 3. We've also scheduled a follow-up meetings in December to dive deeper into these discussions.

The insurance industry's landscape is undeniably challenging, but with collaboration and innovation, there's a promising path forward if we can all work together.