Insurance 101: MGA, MGU, Captives and Shells

Gilad described this conversation as a class on the industry’s structure. Emilio Figueroa is a property and casualty veteran of nearly three decades who has built multiple insurance programs across verticals, with experience in company formation, policy creation, actuarial analysis, and captive and reinsurance contract negotiation. He is a speaker on insurtech and risk topics across North America and Europe.

About Emilio Figueroa

Emilio Figueroa is Chief Insurance Officer at Foresight, a workers’ compensation MGU. His career has touched every link of the insurance chain: a large brokerage in San Diego licensed in 16 states, an MGA in California, a premium finance company in Utah, and alternative risk transfer including a risk retention group, an 831(b) captive, a segregated cell captive, a standalone captive domiciled in DC, and two reinsurance companies in Bermuda.

What Foresight Does

Foresight, in Emilio’s view, is a true insurtech: it starts with standalone foundational technology, in this case a risk management platform that has existed for about six years and has thousands of clients, and wraps an insurance program around it. It sells commercial workers’ comp in eight states (California, Nevada, Arizona, New Mexico, Texas, Louisiana, Oklahoma and Arkansas), with plans to add general liability, commercial auto, property and excess.

Choosing the Next State

To pick a state, Foresight looks at the demographics, the size of business by vertical (construction, for example), and the competitive and regulatory landscape. Florida, Emilio said, is aggressive: PEOs write business on price, and he wouldn’t write too much workers’ comp there, though there’s money to be made, so he’d look at neighbors like Georgia first. Foresight’s minimum premium is $25,000, and it targets larger accounts, up to quarter-million-dollar ones, so it’s middle market, underwriting each account diligently with loss control. Companies that go with PEOs are usually price-driven and don’t have a risk-mitigation culture, which is hard to change.

The Ladder: Program Administrator to Carrier

Emilio laid out the terms:

• MGA: a managing general agent, usually a distribution platform.
• MGU: a managing general underwriter has underwriting authority and also handles claims through a TPA, doing nearly everything a carrier does without the paper.
• Program administrator: many insurtechs, he said, are a technology wrapper around a program. If the data entered online is passed to the carrier’s underwriting platform, which produces the price, they’re administering the program, not underwriting it.
• Carrier: requires paper, a certificate of authority from admitted or non-admitted states, and the financial wherewithal for large reserves, which, in his example, means perhaps $150 million to $200 million of premium before it’s worth it.

Whether to climb the ladder depends on distribution, premium, how much control you want, and whose paper you have, since a partner that invests in or created you may keep you tied. Starting as a program administrator helps build a book, and then you look for paper.

Shell or Start From Scratch

Foresight would keep the MGU as a distribution platform and buy a shell company, a dormant licensed insurer that large insurers hold in numbers, then write under it with reserves and the right reinsurance partners. Gilad cited the cost of creating an insurer from scratch (about $100,000 in legal fees and $80,000 to $100,000 in licensing). Emilio said building takes nine to 12 months, usually 12, and gets you one state’s domicile before applying elsewhere, while buying a shell licensed in five states takes about four months to close and approve, and you can write business in five states within about six months.

Captives and Fronting

The insurance chain, Emilio said, has five links: broker, MGA/MGU, premium financing, carrier and reinsurance. Instead of owning an insurance company, you can own a captive, a baby insurance company. You still need a carrier’s paper, a fronting company, which charges typically three to six points (five is standard now, and long relationships can bring it down to three or four).

On capacity: an MGA gets capacity assigned by the carrier, say $20 million to $30 million for the year; an MGU with more trust might get $40 million to $50 million; a captive might take a 50 percent quota share and cede the rest to reinsurers, which requires reserves reviewed by the captive’s domicile regulator. Emilio likes DC as a domicile, noted that most US states have captive domiciles and that Delaware is where most go, and explained why Bermuda and the Caymans were popular before the tax changes: offshore funds could stay tax-free if not repatriated.

He once had two reinsurers in Bermuda, later combined and redomiciled in the Caymans: one with a partner (60/40), one wholly his own, with segregated cells for liability and workers’ comp, so he could take a 20 percent quota share on one and 60 percent on the other.

Reinsurers Vet the Team

Reinsurers’ agreements are with the carrier, but they vet your program, guidelines and team, since they want whoever runs the program to have experience. Emilio’s concern is that many insurtechs lack insurance people, and by the time they hire an underwriter, it’s too late. Founders should first prove their idea has traction, then bring in advisors or mentors with insurance experience, and he noted that many retirees would love to join the new wave.

Behavioral Risk Management

In the third-quarter edition of Willis Towers Watson’s insurtech briefing by Andrew Johnston, Foresight was named among interesting companies to watch. Its platform uses behavioral economics: front-line workers log observations, hazards, inspections, tailgate meetings and OSHA reporting digitally, which Foresight uses to grade engagement and give risk scores at both granular and company level. Emilio said an external study of a large job site of two to three million man-hours that adopted the technology before its second building saw claim frequency fall by 57 percent. He doesn’t claim everyone will get that, but even moving the needle one percent is worth it.

300 Data Points

For underwriting, Foresight takes the business name, address and tax ID and pulls over 300 data points, including filed permits over the past 24 months or more across cities and states. A plumber filing an electrical permit raises a flag. It also pulls NCCI and other data and compares everything to the application, then correlates the data points with engagement from its platform for risk scoring. On average, he said, commercial underwriters gather 25 to 40 data points from a submission and perhaps 40 to 50 more by searching, so about 80, while Foresight gets close to four times that.

As an MGU, Emilio said, you can set your own data collection, unlike a program administrator limited to the legacy carrier’s data points. Regulators begin to limit you when you use individual data rather than corporate data: if you use credit scores, you must apply them without discrimination and not combine them with geography. Always consult legal.

Advice: Misbehaving, Best’s Review and Staying Informed

Emilio recommended Misbehaving, a behavioral economics book, and said he reads insurance publications like Best’s Review, Business Insurance and Insurance Insider to keep a pulse on the global industry, along with aggregators such as Coverager, preferring several sources to one. He also described a recent introduction to an old-school Southern California MGA of 20 to 30 years that wanted to learn how to become more technological, and said legacy companies don’t have to become insurtechs but should use the vendors and data partners available.

Key Takeaways

• Program administrator, MGA, MGU and carrier are distinct rungs: MGUs underwrite and handle claims, while carriers hold paper and reserves.
• Buying a shell licensed in five states can have a company writing in about six months, versus nine to 12 months to build an insurer with one state.
• A captive still needs a fronting carrier, typically for three to six points of premium.
• Reinsurers vet the team behind a program, so insurtechs should bring in insurance experience early.
• Foresight reports a 57 percent reduction in claim frequency at one job site after adopting its behavioral platform.
• MGUs can automate data collection far beyond what legacy underwriters gather, but regulators limit use of individual-level data.