Overview
Louisiana recently amended its statutes regulating managing general agents (MGAs). Certain of the amendments conform Louisiana law to the National Association of Insurance Commissioners MGA Model Act (NAIC Model) adopted in nearly all US states or are mere technical changes. However, a few changes expand Louisiana law beyond the NAIC Model, most notably in imposing new financial reporting obligations and other requirements on MGAs and their insurer partners. These amendments go into effect on August 1, 2024.
Background, including recent press coverage, for the Louisiana legislation (aka House Bill 672) suggests the measure relates to a recent series of insolvencies among Louisiana-domiciled insurers that rely upon affiliated MGAs as a business model. However, the amendments fall within the scope of existing law and thus have wider applicability. MGAs, managing general underwriters (MGUs), program administrators, re/insurers and investors should be aware of these changes in Louisiana and be mindful of the potential for increased regulatory, commercial and rating agency scrutiny as the MGA sector continues to grow.
In Depth
CURRENT LOUISIANA LAW
Like the NAIC Model, Louisiana’s existing MGA statutes require a license to “act in the capacity of an MGA” (i) “with respect to risks located in [Louisiana] for an insurer licensed in [Louisiana]” or (ii) “representing an insurer domiciled in [Louisiana].” La. R.S. 22:1623(A). To “act in the capacity of an MGA in [Louisiana]” a person must be licensed as a property and casualty producer and be appointed as a producer for the applicable insurer(s) and register as an MGA and pay a fee in Louisiana. La. R.S. 22:1623. (See Application for New or Renewal MGA Registration, revised December 2022.)
Essentially tracking the NAIC Model, Louisiana defines an MGA as:
[A]ny person who manages all or part of the insurance business of an insurer … and acts as an agent for such insurer whether known as a managing general agent, manager, or similar term, who, with or without the authority, either separately or together with affiliates, produces, directly or indirectly, and underwrites an amount of gross direct written premium equal to or more than five percent of the policyholder surplus as reported in the last annual statement of the insurer in any one quarter or year together with one or more of the following:
(i) Adjusts or pays claims in excess of an amount determined by the commissioner.
(ii) Negotiates reinsurance on behalf of the insurer.
La. R.S. 22:1622(4)(a).
“Insurer” is defined as “any person duly licensed in this state as an insurer ….” Id. at 22:1622(3). In Directive 127 (revised and reissued on August 31, 2020) the Louisiana Department of Insurance (LDI) Commissioner determined the claims paying authority trigger in La. R.S. 22:1622(4)(a)(i) above is $10,000.
An insurer using an MGA to write “more than five percent of its policyholder surplus” currently must “provide financial data by an independent examiner concerning that insurer’s book of business which is in question and is handled by that MGA upon request, and the insurer shall have on file an independent financial examination, in a form acceptable to the commissioner, of each MGA with which it has done business.” La. R.S. 22:1625(A).
Current law also provides that “[a]n MGA may be examined as if it were the insurer.” La. R.S. 22:1626.
Current law also requires an MGA to “reimburse the insurer or the rehabilitator or liquidator of the insurer for any losses incurred by the insurer caused by a violation of [the MGA law] committed by the MGA.” Id. at 22:1627(A)(3). This is arguably broader than the NAIC Model, which expressly authorizes the Commissioner or receiver to maintain a civil action for recovery of damages. NAIC Model Section 7B.
HOUSE BILL 672
In addition to incorporating certain NAIC Model provisions not presently included in existing law, House Bill 672 imposes expansive obligations on MGAs and insurers that transact in this fashion.
Quarterly Reports
An MGA must submit quarterly an “account report” to each insurer with whom the MGA has a contract and include in the report, as applicable, a statement of various items, including written, earned and unearned premiums; losses and loss adjustment expenses; an outline of other expenses on a prescribed form; and management fees. La. R.S. 22:1628(A). These should be standard terms in any MGA agreement in our experience, though the timing/requirement of reporting may vary by agreement.
Adverse Development Regulatory Notices
An MGA must notify the LDI within 30 days of various events (or submit a single annual report “if the MGA routinely operates above the [below established] limits”):
- A balance owed to an insurer of $1 million or 10% of the insurer’s policyholder surplus exceeds 90 days
- Balances due for more than 60 days from a property and casualty agent/MGA exceed $500,000
- Claims authority is withdrawn
- A loss fund account is greater than $100,000 more than the amount needed to pay losses and loss adjustment expenses expected to be paid on the insurer’s behalf within the next 60 days
- The MGA agreement is terminated.
Audited Financials
In addition to the current requirement to provide to the LDI Commissioner, upon request, financial data by an independent examiner concerning the MGA business at issue, an insurer using an MGA will now be required to have on file an independent audited financial report of each MGA (similar to the NAIC Model, which requires such a report for the two most recent fiscal years showing the MGA’s positive net worth), which also must be submitted to the Commissioner upon request. Such report must include the opinion of an independent certified public accountant regarding the recent annual financial position of the MGA and certain financial information. La. R.S. 22:1625(A).
MGA Examinations
The new law expressly authorizes the Commissioner to examine, and charge the MGA to examine, the MGA’s financial condition. La. R.S. 22:1626(B), (C).
Ban on Persons Involved in a Prior Insurer Insolvency
Louisiana will generally prohibit a person from acting as an MGA if they managed a Louisiana-licensed insurer within two years before the insurer became insolvent. La. R.S. 22:1623(E).
BACKDROP FOR HOUSE BILL 672
Press reports regarding House Bill 672 suggest the measure responds to recent insolvencies among Louisiana-domiciled insurers, which some observers and stakeholders attributed (at least in part) to such insurers’ relationships with affiliated MGAs. These insurers primarily focused on property catastrophe risks, including risks previously insured by the state’s residual market. However, the Louisiana legislation imposes heightened scrutiny beyond the NAIC Model on all MGA relationships regardless of affiliation. Thus, if the press reports are accurate, at least certain portions of House Bill 672 are arguably excessive.
Although not cited by legislators, LDI or the press, the Louisiana legislation is on trend with increased industry coverage and reporting on the sustained growth, performance and investor interest in the MGA sector (See, e.g., “MGA Valuations and M&A Activity Not a ‘Bubble’” and an AM Best report entitled “Rapidly Increasing MGA Premiums Warrant Greater Oversight.”) The AM Best report’s “Principal Takeaways” include:
Rapid insurance growth may point to increasing risk if lax underwriting or weaker product design drives the growth….
A.M. Best expects insurers to perform appropriate due diligence to prevent insurer insolvencies from MGA relationships.
Increasing ownership of DUAEs by private equity companies mandates greater scrutiny.
CONCLUSION
House Bill 672 is an example of the type of heightened regulatory scrutiny of MGA relationships that can follow adverse – and even positive – market developments.
By all accounts, the expansion of the MGA/program administrator sector continues to rapidly evolve. The increased focus of de facto regulators such as AM Best, attributed in some instances to apparent/perceived gaps in oversight by insurers who may have “given away the pen” and in other instances to truly rogue MGA operations, only heightens state insurance regulators’ possible sense of urgency to play catch-up. With the nature of regulatory momentum invariably flowing the only way it typically can operate, the prospect of reactive and remedial (and potentially overly prescriptive) legislation and regulations remains no more than an insolvency or rogue MGA away.
