More MGAs and program administrators are buying policy administration systems than ever before. But there a host of unknowns that may come as a surprise to novice buyers. This article discusses four key considerations that MGAs should factor into any system purchase. Armed with the facts, you’ll make a smarter purchase decision and gain more value from your new system.
One system may not be all you need
It is not uncommon to see multiple policy admin systems in use at a single MGA. Many MGAs write varying types of insurance (e.g., admitted vs. non-admitted) using differing distribution strategies (e.g., programs vs. wholesale), and these various business models often require different capabilities in a system. This is particularly true with policy administration, where product complexity and underwriting authority may vary widely, even among the same staff.
The notion of a single system that can answer all business challenges is growing less likely. And this is especially true for MGAs that operate like insurance companies. Beware the vendor that paints a one-size-fits-all vision.
You own the data, now give it to me
One major reason MGAs buy enterprise-class policy admin solutions is to have more direct access to actuarial type data. This level of detailed data allows MGAs greater insight into underwriting, performance, and compliance metrics. However, data ownership comes with a trade-off. Many constituents outside the organization will want this same data, and MGAs that own their systems will need to consider the integration and reporting required. On average, we see about a dozen endpoints for policy-level data during a typical MGA implementation.
MGAs may also underestimate the expense of sending data to other entities such as claims and carrier partners. For example, all bordereaux are not created equal, so the technical prowess and additional expense to deliver these feeds can be overwhelming. Smart buyers will spend extra time understanding the consumers of their data. They should also work with their carrier partners to ensure adequate funding to support the feeds required initially and over time.
What's this going to cost me?
MGAs, like many others in the value chain, operate on revenue sharing through commissions on premiums written. Policy administration systems should be viewed as an operating expense funded through these commissions. So, the expense relative to premiums should conform to industry norms. These best practices aren’t always readily apparent to first-time buyers as few industry consultancies serve the program space and even fewer focus on the economics of MGAs.
Most mid-size P&C insurance companies expect to spend 4.5 percent of gross written premiums on IT-related expenses.1 And program administrators will spend about 8 percent of gross revenues on underwriting, issuance, and agency management platforms and supporting systems.2 Because policy administration solutions are “core” systems supporting technically complex processes, they often take up a large portion of overall IT expenses. So, those seeking to purchase these systems should expect to pay between 0.5 and 1.25 percent of written premiums for a quality solution, depending on the features and functions required.
That said, MGAs should seek vendors that understand the MGA business model is different from that of a carrier and requires pricing and service that fit the MGA’s economics. They should also partner with carriers that compensate appropriately for the complexities of insurance processing systems, initially and over time.
And there’s one last financial consideration. Many MGAs budget for the initial project, but often fail to consider the impact of future changes outside their control. For example, an ordinary change in rates, rules, or forms for a product filed in multiple states can be technologically challenging. And a carrier's product development staff may not contemplate the downstream impact on the budget of their MGA partners. The MGA and carrier need to maintain an ongoing dialogue to ensure there’s adequate accounting for all costs beyond the initial project.
It takes time to do these things
MGAs may not understand the typical implementation timeline for a policy admin solution. Often MGAs seeking to acquire a policy administration system are under a tight time constraint. They may be changing markets or approaching renewals. These compressed timelines often conflict with traditional software development lifecycles.
When it comes to software projects, the adage is you can pick two of three: time, scope, or budget. If the time constraint is already set, the choice is down to scope or budget. This can be consternating for MGA leaders who want to control budget but find that scope is driven by carrier partners that make final product decisions. Conversely, an MGA may want to quote an effective date, only to find their required functionalities cannot be delivered in time.
There is another approach that can help reconcile the conflict between scope and time constraints. It’s an agile approach to the implementation process that prioritizes the most pressing operational imperatives, like quoting new business. This is counter to the traditional waterfall approach and enables a project to track with the MGA’s timeline of quote - bind - issue. Seeking a vendor who can deliver core software under these unique constraints is key to a successful project.
If you are an MGA considering a policy admin system, it is possible to balance time, cost, and scope. Just make sure you go into the project with eyes wide open, aware of the total cost picture and the demands others will place on you as the owner of the data. And find a vendor that can adapt the implementation to fit the time constraints of the MGA business model.
1 Insurer IT Budgets and Projects 2020. Novarica. September 30, 2019.
2 The TMPAA State of Program Business Study 2019. Target Markets Program Administrators Association. October 2019.
Rob Reed began his career in the insurance industry in 1997. Starting as an Underwriter Trainee at Prudential, Rob went on to become an agency interface specialist at CGU Insurance Limited and OneBeacon Insurance companies. With his deep domain expertise, Rob joined Instec as a Sales Executive in 2001, and has since helped dozens of insurers solve challenging operational issues with tailored solutions. As Vice President of Sales, Rob serves as a key partner, guiding prospective clients through the sales engagement and initial implementation processes.