Two MGA Business Models that Create the Need for a Specialized Compensation System
Within the insurance industry, without a doubt the most arduous and complex commission and compensation process is the one faced by managing general agencies (MGAs). The factors that make the money flows complex in the Excess and Surplus lines business as well as the traditional MGA business are the variety of plans that are in place, the number of participants in a transaction, and the types of billing arrangements that are negotiated, especially when MGAs operate on behalf of the carrier or as Program Manager.
MGA Acting on Behalf of the Carrier
Many MGAs operate as a “broker’s broker,” offering specific types of coverage (some admitted, some non-admitted) and act on behalf of the carrier and the carriers behind the risk. In these types of cases, the billing can be done by the MGA directly to the insured, or to the retail or selling agent or broker. In these cases, the MGA often uses an accounting package that is not designed for the business, which works, but with a lot of manual workaround, spreadsheets, and other ingenious methods to generate a bill, follow-up with collection, and so on. One advantage of this type of transaction is that the MGA somewhat controls the process as they are acting as a carrier and have control of the quote, rate, issue, and underwriting process. Nevertheless, the accuracy of the commission end of the transaction is often less than timely, and unreliable.
MGA as Program Manager
Because many MGAs operate as Program Managers, the financial aspect of the program involves primary insurers, reinsurers, and other partners as well as retail agents and brokers. With this many fingers in the pie, all receiving some amount of the premium dollar, the timeliness and accuracy of the commission and “bonus” process is difficult to achieve. With changes in the overall P&C market, more specialty programs now include contingent commissions as a part of the overall arrangement. The amount of information from claims systems, accounting, and actuarial (or product managers) that must be used in order to calculate the contingency or profit share creates problems. While claims loss ratios might be relatively easy to obtain, most programs are structured to minimize large losses, catastrophic losses, and incurred but not reported (IBNR) to create a degree of fairness in the plan. The net result of these “smoothing” techniques is that the loss ratio used to determine the contingent commission for the MGA isn’t the one that would be reported on the carrier’s financials.
A Specialized Commission Accounting Package is Needed
While the fairness aspect of the plan is important, the real issue faced by MGAs is the lack of a system that can take all of these disparate inputs, values, and calculations, and accurately display them and enable the MGA and related partners to understand the overall commission picture. VUE Software’s suite of solutions for MGA commission accounting is unique in this regard. The package is comprised of modules for commission modeling, payment reconciliation, cash forecasting, and agent and broker management, and is built to handle intricacies such as contingent commissions and represent complex commission sharing of the many different ‘fingers in the pie’ of a transaction.
While no system can completely eradicate the effort required for MGAs to accurately manage their commission and compensation process, a specialized system that handles the various complexities goes a long way in cleaning things up.