Management Incentive Plans for Insurance MGAs

Episode Summary

In this episode of “The Practice Manual,” host Robert Chaplin is joined by colleagues Sebastian Barling, George Gray and Katie Barnes to examine management incentive plans (MIPs) and managing general agents (MGAs). The group analyzes how MIPs serve as a critical tool for aligning management interests with those of financial sponsors and other investors; why the structure of an MIP must be carefully tailored to the MGA’s business model, hold period and regulatory environment; and how the interplay between growth shares, hurdle shares, vesting schedules, leaver provisions and regulatory remuneration requirements is essential to designing effective incentive arrangements.

Key Points

What are MIPs and why do they matter: MIPs are compensation programs designed for senior or select members of management that align management interests with those of investors over the medium-to-long term. They are structured so that participants only benefit from value if certain measures of success are achieved, making them a powerful tool for driving value creation, particularly in the lead-up to a liquidity event.

Benefits of MIPs: MIPs give managers skin in the game and an opportunity to share in the value of the business they are helping to build. They serve as an important recruitment and retention tool, enabling companies to offer competitive equity compensation packages. They can also be a tax-efficient way of remunerating employees.

What are MGAs and how do they make money: MGAs are agents that act on behalf of insurance carriers or Lloyd’s syndicates under binding authority agreements, carrying out functions such as underwriting, pricing, claims management and policy administration. They typically generate revenue through base commission on gross written premiums, profit commission linked to underwriting performance and fees for ancillary services such as claims handling and risk management.

Why insurers use MGAs: Insurers delegate authority to MGAs to access specialist underwriting expertise in niche or specialty lines of business, extend distribution reach into specific markets, geographies or customer segments, achieve cost efficiency by paying commission on business written rather than maintaining fixed in-house infrastructure, and gain speed to market when entering new classes of business or territories.

MIPs in the MGA context: The MGA sector has attracted significant interest from financial sponsors, and MIPs are a standard feature of sponsor-backed structures. Given that an MGA’s ability to trade depends on maintaining relationships with its carriers, a MIP that helps retain key individuals can provide carriers with confidence in continuity of the team, strengthening the binding authority relationship.

Risk management and conflicts of interest: Where MIP rewards are linked to key insurance metrics such as loss ratios, there is a risk that such metrics may not fully account for the quality of the underlying risks being written. Regulators are concerned that aggressive incentive arrangements could encourage individuals to bind risks outside appetite, relax underwriting standards or resist fair claims settlements. MIP design should be reviewed alongside the MGA’s broader conduct and risk management framework to ensure they are pulling in the same direction.

Rob Chaplin (RC): Welcome back to “The Practice Manual,” the podcast where we unpack some of the mysteries of the insurance and reinsurance world, also looking at the major trends in the sector. I’m your host, Rob Chaplin, head of the Financial Institutions Group here at Skadden, London. Today, we’re diving into management incentive plans, or MIPs, and how these can be used by managing general agents, or MGAs, in the insurance sector.

MGAs are a huge growth area in the U.K. insurance industry. Research from the U.K. Managing General Agents Association suggests that there are now more than 300 MGAs, who currently underwrite over 10% of the U.K.’s £47 billion general insurance market premiums. Delegated underwriting at Lloyd’s now involves 45% of premium income.

Against that backdrop, the question of how MGAs incentivise and retain their key people has never been more relevant, and that brings us to MIPs. Here today to talk about this exciting topic are George Gray, Katie Barnes, Sebastian Barling. Great to have you here. So, first of all, George, can you explain, please, what are MIPs?

George Gray (GG): I certainly can. Thank you, Rob. So, MIPs are fundamentally compensation programs which are designed for senior or select members of management in most cases. Sometimes they can be distributed to a wider group. But the aim of a MIP is to try and align management interests with those of the investors in the group or other shareholders over the medium-to-long-term to help keep people incentivised to drive value creation, sometimes leading up to a big liquidity event. Sometimes it can be structured slightly differently. But, they are typically structured to make sure that, crucially, the participants only benefit from value if certain measures of success are achieved. That’s where the value driver comes.

RC: So that’s really interesting, George. Katie, could you touch on the benefits of MIPs for us, please?

Katie Barnes (KB): Absolutely. Thanks, Rob. So, fundamentally, participating in a MIP gives the manager a stake in the business, gives them skin in the game. And, as George has alluded to, it gives the key personnel an opportunity to share in the business that they are helping to build.

It’s a really important recruitment and retention tool. So, by offering a really competitive package in relation to their equity compensation, it kind of puts the company at a really competitive place in the market and allows them to attract the best talent long-term.

It can also be a really tax-efficient way of incentivising and remunerating employees. So, if we would look to get shares in the hands of the manager up front, ordinarily, they would pay market value on those shares on acquisition or income tax on that value. And in theory, provided certain conditions are met, any growth in the value of those shares in the U.K. is then subject to capital gains tax. Conversely, if we were to give them cash, let’s say by way of salary or by cash bonus at the end of a year, that amount is subject to income tax and additionally, employee and employer National Insurance contributions. In the U.K., you’re looking at a difference of about 24% versus 45% plus NICs. So there’s a difference there, and that inherently reflects the risk profile of the type of compensation that we’re giving them. There is obviously more risk in an investor acquiring shares, the value of which can fluctuate, versus them receiving a cash payment they are contractually entitled to every month, for example.

RC: Katie, that’s really super insightful. Can you take us through some common structures which you use for MIP transactions?

KB: Yeah, absolutely. So, like I said, ordinarily, we aim to get the shares in the hands of the employees up front on day one, ideally to minimise the value of those shares on day one in the hope that the value increases. That’s in comparison to something like a long-term incentive plan, or an LTIP, where the employee might be granted an option over shares or a conditional share award. And in those instances, the shares aren’t actually delivered for a number of months, if not years down the line. So if we go back to the more traditional MIP, getting shares in the hands of the employee, then the common sorts of structures we look at are growth shares or hurdle shares, and the kind of umbrella term that we use for that is sweet equity, especially in the private equity context.

RC: So that’s a beautiful segue to George. George, growth shares, hurdle shares, what are they? How do they work?

GG: I will say for those listening that colloquially — hurdle, growth, MIP — these terms can all be used a little bit interchangeably. So while someone might be talking to you about a growth share, we’ll set out here what we typically see as growth and a hurdle really, but just for people to remember, they can be used a bit interchangeably. So, it’s important to look at the actual form of what’s being issued. Economically, that will drive really what it is.

So, growth shares are a share class which allow the participants to benefit from value growth in the company above a certain predetermined threshold or base. That’s normally set at the time of the acquisition. The base value is typically set at or around the market value of the company at the time that the shares are issued. That means that management are only able to benefit in the growth of those shares and the growth of the company beyond that kind of day-one value. The metric for growth can differ pretty radically, but it’s often calibrated by reference to EBITDA, as at the time of the liquidity event, potentially with a multiple formula attaching to that. Now, where growth shares can be quite useful is you can apply that on a group-wide basis. Everyone benefits in the uplift of value from a group perspective, or you can use these as a tool to drive divisional performance. And we see these structured quite carefully sometimes and cleverly in a way that allows new divisions to be incentivised for their growth. The shares will link that growth to a multiple at exit, and it will essentially end up providing a fixed-value award. Now, that fixed-value award may be really appetizing for the managers that are receiving it.

It’s also good for the overall group structure because it doesn’t lead through to a significant increase in value, and therefore taking up the overall proceeds available on the exit in the same way as it might do if it was linked to group performance. So, you can effectively cap those awards carefully, division by division, to make sure that everyone is benefiting in the right way. So, unlike growth shares, which, as I’ve said, are geared towards specific financial performance of the group or a division, hurdle shares are a class of shares that only deliver value to recipients once a certain hurdle has been received or achieved. Now, what am I talking about when I’m talking about a hurdle?

That hurdle is typically expressed as a multiple of invested capital from the shareholders that have strip equity or kind of normal ordinary shares, and that might be linked to a specific investor’s returns, e.g., a financial sponsor if they’re invested in the structure, or it may be linked to the broader shareholder base. Now, we also see internal rate of return as another metric used, or we see them in a combination. So you have to hit a certain IRR. You have to hit a certain cash on cash multiple. Now, it’s very important to make sure that you are thinking through the steps of that carefully. Are you looking at money in on day one? Is it taking into account money that’s invested over the lifetime of the investment? All of these can have quite a big impact on the overall return profile at the end of the investment or its first liquidity event.

So, once the hurdle is met, management shares participate in value above the hurdle level, often at an enhanced rate or by reference to a mechanism. You can do these in different tranches, for example. So, let’s say someone’s hit two times, some of the shares kick in and you participate in a certain percentage of overall share proceeds, three times again, four times again, with different IRRs, sometimes also applying in tandem. The ultimate plan here is to make sure that if everyone’s done well as a result of the investment, i.e., made two times, three times their money, the management should participate in that. And, if they’ve really knocked it out of the park, they can participate even further with incremental returns. So it’s a really, really good tool to drive everyone towards the same objective and future benefits on a liquidity event.

RC: So, used thoughtfully, an incredibly effective tool for driving the performance of a division of an entire group.

So, Katie, other MIP structures?

KB: Yeah, sure. So it probably is worth mentioning not everything has to be wholly share-based, and we do sometimes operate cash-based plans, albeit linked to the underlying shares. So we call these a phantom plan or sometimes a shadow equity plan, and it involves usually giving the manager a unit. That unit will then track the economic rights and the value of a real share, but ultimately pay out in cash rather than in the delivery of shares. And in that instance, you’re paying income tax and Social Security contributions on that cash value.

RC: So, thank you, Katie. Thank you, George. MIPs are clearly an incredibly useful tool. We should take a little bit of a step back now. Seb, what’s an MGA?

Sebastian Barling (SB): Thank you, Rob. So at a high level, an MGA is actually very simple. It is just an agent that acts on behalf of an insurance carrier or a Lloyd’s syndicate.

They tend to operate under a contractual arrangement, called a binding authority agreement, pursuant to which the insurance carrier permits the MGA to act on its behalf when it comes to distributing, selling, and servicing various insurance contracts. One of the main functions MGAs carry out as agent is to underwrite specific insurance policies on behalf of the insurer. MGAs can also determine the pricing and premiums charged to policyholders on underwritten policies, and they use their specific expertise to analyse information on the nature of the business. And they can do more than that. So, they can also be responsible for carrying out administrative duties, acting as a liaison between insurers and policyholders, and actually assist insurers by managing claims and overseeing the investigation and claims adjustment process.

Ultimately, the specific scope of the authority of an MGA will be detailed in the binding authority agreement, so it may well vary between agreement and agreement. And at Lloyd’s, the binding authority agreement may be for a term of up to three years. What they don’t do, most importantly, is take any risk onto their own balance sheet.

RC: So, Seb, fantastic introduction to what they do. That naturally begs the next question, George, how do they make money?

GG: So Rob, that will obviously vary MGA to MGA to some extent, but if we’re going to look big picture at just how does an MGA as a concept make money, it’s typically generated through three different means. So, the first way they typically generate money is through base commission, and base commission is a percentage of the gross written premium on each policy that the MGA writes or places on behalf of an insurer. Second would be profit commission, and that would be a share of the underwriting profit that is generated by the book of business that the MGA has written.

This incentivises the MGA to write profitable business, as poor loss experience will reduce or eliminate the profit commission. The third is fees for services. So, some MGAs, they will charge separate fees for services such as claims handling, policy administration, or risk management.

RC: Great summary. So, let’s say I’m an insurance company. Why on earth should I use an MGA rather than just doing this all myself?

GG: So once I’ve set this out for you, you will see this is a match made in heaven.

So, first of all, you have access to specialist expertise. And this is really interestingly something that has been partially driving all of that great volume that we’ve been seeing in the MGA market. So, MGAs will focus typically on niche or specialist lines of business — really interesting stuff, stuff that they know very, very well. They’ll have deep underwriting expertise in those areas or sometimes that area. And an insurer might not have that expertise in-house. They might really want to access it, but an MGA provides a nice avenue to getting that experience. By delegating their authority to that MGA, it allows the insurer to access the underlying market and experience without having to build it internally.

The second is distribution reach. So MGAs can give insurers access to specific markets, specific geographies, or specific customer segments that they would not otherwise be able to reach themselves. So, an MGA with a really good net of established broker relationships or a very strong regional presence, they can originate business that the insurer just wouldn’t be able to do so through its own network, even if its network is incredibly broad. So, it offers new distribution channels for the insurer.

Third is cost efficiency. So rather than maintaining a large in-house function to pursue a specific line of business, trying to have underwriting teams across multiple regions and business lines, territories — most insurers or many insurers will still do that. But, if they delegate their authority to MGAs, paying commission on business written rather than being fixed with having fixed employment costs and infrastructure costs, it allows quite a nice cost outcome for them, again, to access those markets without all the underlying operational stresses. That can act as an incredibly cost-efficient way to expand into a new market, particularly for lines of business where volume may be uncertain. So again, this is part of the reason for large MGA activity. A lot of MGAs have quite specialist, specialty lines which they focus on, which an insurer may want to try out. An MGA is a very good way of doing that.

Speed to market is the final category. If a carrier wants to enter a new class of business quickly or a new territory, they can appoint an MGA with existing expertise and infrastructure in order to do that speedily. That can be — in almost all cases, it is —significantly faster than the insurer trying to set up from scratch. So, when you look at it through that lens, there are a lot of compelling reasons for an insurer to seek lots of relationships with MGAs.

RC: So, access to specialist expertise, distribution reach, cost efficiency, speed to market. Correct. Okay. So that’s why they get used. Seb, how are they regulated, MGAs, in the U.K.?

SB: I think the short answer is they’re regulated in a pretty complicated fashion with various different layers around it. So, generally, we would expect an MGA to have various insurance distribution permissions to undertake its activities, such as dealing as agent or arranging deals in insurance, and that will require authorization from the FCA. In addition, if a particular MGA is also acting on behalf of a Lloyd’s syndicate, there’s an additional activity that we’ll require from the PRA. So already you’ve got two regulators there, the FCA and PRA. And finally, for acting in the Lloyd’s market, you’re also going to need permission from Lloyd’s to undertake those activities as well. So you have effectively a de facto third regulator coming on board too. So, I think it’s fair to say that they are not lightly regulated organizations, particularly where there is that Lloyd’s overlay.

So, what does it mean to be regulated by all these different organizations? Well, actually, it means quite a lot. So, first of all, there’s going to be conduct of business requirements they’re going to have to comply with. There’s going to be a need to maintain a good system of governance. You’re going to have to have directors approved by the regulators. You’re going to have to look at principles of conduct and fundamental rules imposed by the regulators. You’re also going to have in place, most importantly, rules around remuneration, and how those work in the right way to incentivise the right behaviour within people within the organization. These are just some of the FCA and PRA requirements. Additionally, where an MGA operates as a coverholder in the Lloyd’s market, they must sign a coverholder undertaking, confirming their commitment to follow Lloyd’s standards, compliance protocols and requirements around operational integrity.

RC: So let’s stitch these topics together now. So, George, why may MIPs be relevant to MGAs?

GG: So, the MGA sector has attracted significant interest from financial sponsors over the last few years, and MIPs are a standard feature of pretty much any financial sponsor structure. They help align management’s interests with the sponsor’s return objectives and also help the sponsor ensure that the management are growing the business over the lifetime of the investment. It also acts as a great retention tool for individual managers.

Given an MGA’s ability to trade depends on maintaining relationships with its carriers, a MIP that helps retain key individuals — as I said, it’s a good retention tool — can provide carriers with confidence, particularly with a new external capital provider coming into the structure, that there will be continuity of the team. In turn, that helps strengthen the binding authority.

RC: It’s interesting, isn’t it? And again, this topic which we talk about so often in our podcasts, the importance of people in an insurance business, that an MGA, where really it’s all about relationships with the brokers on the one hand, with the carriers on the other, it’s the people that keep all of this glued together, and hence the importance of having a MIP to keep that glue in place.

Well, that’s a lovely lead-in then, Katie, to our next question, which is are there any particular considerations in relation to MIPs in the MGA context?

KB: Yes. Thanks, Rob. That’s a great question. So, performance metrics used for MIPs will, of course, be tailored to the specific business of that MGA and its operations. And one of the real strengths of a MIP is its flexibility. So we can design them in a way to cater for short-term or longer-term returns, depending on the objectives of the MGA and its investors.

Now, I won’t delve into them in too much detail for the purposes of this discussion because, strictly speaking, they’re not MIPs. But if we’re looking at the short term, something like a cash bonus, whether that’s paid annually or biannually, can deliver earlier realisation of value to the manager than would otherwise be the case in another type of MIP structure.

It’s also really common to see deferred cash bonus plans. And what happens there is we give the manager a cash bonus, and there is an obligation on them to defer a portion of that cash bonus into shares. Those shares are then restricted over a certain period of time and subject to, for example, continued employment, and thereafter clawback conditions. And that kind of bridges the gap quite nicely between the shorter-term and the longer-term objectives.

Going back to the classic MIP structures that George touched on earlier in terms of growth shares or hurdle shares, these allow for stronger management commitment to longer-term MGA goals and ultimately tie the ultimate economic benefit of a future liquidity event or exit to what that manager receives. They’re particularly effective where the MGA is backed by a sponsor with a defined investment horizon, because we can ensure that the management incentive is ultimately tied to the same period that the sponsor hopes to see a return over. And those return objectives, as George has already spoken about, can often be something like return of capital invested or IRR, internal rate of return.

In practice, what this means is that the manager’s investment and incentive doesn’t crystallise until the investor’s return also crystallises. So it’s, again, it’s about aligning those interests of both parties, and it keeps management firmly focused on building a business with a strong exit.

RC: Thank you, Katie. So thinking about timing, does the expected hold period, George, affect the way in which the MIP is designed?

GG: It absolutely does, and the way that I would think about it is, first of all, it’s very important to make sure that you’re modelling that financial return profile over the lifetime of the investment. You need to think carefully about what strip equity or real value equity on day one have key managers rolled in, what MIP are they getting, what MIP are others getting, what do the blended returns across their different instruments look like at the point of liquidity in a few years’ time? Does that do the right job for incentivising them today? And will an incoming investor be happy with the level of incentivisation that they’re seeing or the level of proceeds that they’re realizing on the transaction later? Does that cause a problem for the exit process? Some of that thinking process will be driven by what is the investment horizon for this particular transaction or investment from a financial sponsor. If you’re looking at a near-to-medium-term sale, which many financial sponsors are, then it can be quite appropriate to put in place a more customary management incentive plan, which looks at equity linked upside at specific horizons. Maybe it might kick in on a refi or the ultimate exit. Either way, you’re anticipating that the investor is going to make a certain return at a defined point in time.

Now, where you have a longer hold period or there’s just uncertainty over the hold period, and for many of the organisations that we deal with, that’s a regular feature of their transactions. If you’re dealing with sovereign wealth or a direct pension investor, for example, they may be looking for a much longer returns profile or just be happy to sit in a structure for a longer period of time. That isn’t completely uncommon for many of the intermediary targets that we deal with, and where that is a feature of the investment, which can often be quite attractive for certain management teams, it might be important to look at something a little bit different. And what do I mean there? I’m talking about a different form of LTIP, long-term incentive plan, that isn’t necessarily options-based. Sometimes they’re called artificial sunset plans. What that does is it allows the structure to pay out periodically, often in cash, by reference to performance over a longer period. Effectively, you’re still delivering people with shares. Not always, but you can still deliver people with shares. But you can recalibrate how the value gets into their hand by allowing for certain put or call arrangements which allow their shares to be acquired at specified hurdles over the lifetime of an investment. That may be funded by cash on balance sheet. It might be funded by further investment by an investor. It could be funded by way of a refinancing. You can keep it relatively flexible.

Another thing that we see in these situations are share shops. This is going to be more appropriate for a larger business, but where you have a lot of employees in the equity structure all holding shares or other forms of securities, you can introduce these interim moments where the employees are able to trade in shares between themselves or the investors that are sitting behind or controlling the investment. Again, it’s just another form of giving access to liquidity over the lifetime of the investment. So, the chosen structure should consider factors such as likely route to liquidity, expected timing of value realisation, the need to balance motivation, retention, and also alignment with other shareholders. The choice between the two, either we go more traditional MIP or do we need to go down a long-term incentive plan-type route, or indeed a hybrid of both, that’ll depend on the investor’s liquidity plans and the expected hold period.

RC: That’s really interesting. Thank you, George. So, we’ve considered the structure. Katie, how do vesting and lever provisions fit into this structure?

KB: Thanks, Rob. I’m very glad you asked because those are two very important provisions from our perspective. So, if you think about a vesting schedule, these need to be designed, going back to what I spoke about earlier, to ensure that management participation remains aligned with the anticipated liquidity event and that timeline. And that just ensures that the shares essentially only cease to become forfeitable on certain circumstances or on an exit, whether that’s an IPO or a sale. Conversely, if there is no near-term liquidity event expected, then we can work and use something just like time-based vesting instead, and that goes back to the flexibility of the MIPs. We can choose how we structure that.

Leaver provisions also really important. We’ve spoken already about the retention tool, and that’s where these come in. The key distinction is between good leavers and bad leavers, and we sometimes even see intermediate leavers in the drafting.

GG: Or even very bad leavers.

KB: Incredibly bad leavers. Yeah.

So where a manager holding sweet equity leaves an MGA, we typically require them to sell those shares back to the company on their departure. If you are a good leaver, so let’s say you’ve retired, you become ill, you die. In those circumstances, you would typically expect to see a good leaver transfer those shares at full market value on that date. Conversely, if you’re a bad leaver, you’d only really expect to get nominal value or perhaps the value that you invested at the beginning on the acquisition of those shares. So the difference is in the value that you get depending on your reason for departure. And it’s really important in the drafting that both the circumstances in which you leave are drafted well, but also the applicable valuation methodology that applies on those transfer mechanics is also well-drafted.

RC: So thanks, Katie. Next question is for Seb. Seb, what are the regulatory requirements or the regulatory considerations which apply to MIPs and MGAs?

SB: Sure. So, we mentioned earlier that there were layers of regulation that apply to MGAs, and that also covers remuneration. The most relevant set of rules here will be the PRA’s remuneration rules, and they have decided to apply the Solvency II rules as applicable to insurers, also to MGAs.

What do these rules require? Well, these require that an MGA puts in place a remuneration policy, and this must promote the sound and effective risk management of the organisation, and it must not encourage excessive risk-taking. In addition, there are a lot more granular requirements that are applicable to what we call material risk takers, effectively senior individuals who have the ability to impact a firm’s risk profile. For MRTs, these additional rules require various things. This includes that a ratio between fixed and variable compensation is put in place, in particular, that someone can’t be paid entirely out of variable compensation. There needs to be enough fixed there to ensure that they can do their job properly. There also needs to be a deferral. So a payment of a substantial portion of the variable compensation must be deferred by at least three years and potentially longer based upon the risk profile of the firm. And they also require the application of malice and clawback, i.e., the ability to take back some of that variable compensation if performance or conduct is not appropriate.

Finally, they have rules around how an individual’s performance must be factored into the variable compensation aspect. That includes looking at both how the individual performs, the business unit, and the firm or group as a whole, and this can’t just be focused on financials. There’s also a need to focus on non-financial performance. So, for example, adherence with compliance obligations and being a good actor within the organisation.

Now, it’s fair to say that when applying these rules, MGAs have a bit more flexibility than insurers. They tend to be categorised as a lower risk profile by the regulators. They can flex some, but not all of these rules. So, for example, when looking at the amount of compensation that needs to be deferred, they may be able to defer less than insurers may be able to.

Obviously, the points above will only be relevant to those MGAs authorized by the PRA. So, those operating in the non-Lloyd’s section of the market will have more flexibility around how they structure these arrangements, but the overarching principles will still remain the same.

So, what in particular does this mean for MIPs? Well, these will generally be considered variable remuneration and will need to be included in the assessment of an individual’s remuneration arrangements as a whole. Where individuals are subject to various different incentive schemes, these need to be considered in the round to ensure the overall package that an individual is receiving in any given year meets the relevant requirements. And this could, for example, impact how quickly MIP schemes can vest and the criteria for determining the size of any allocation to individuals. The remuneration rules and how they can be configured are one of the more complicated areas that we see, and this is why we spend a lot of our time talking to clients about it.

RC: So Seb, that’s really interesting. What are your thoughts on risk management and conflicts of interest?

SB: So, this goes to the heart of what the remuneration rules are trying to do. Where the financial rewards available to management under an MGA’s MIP may be linked to key insurance metrics, such as loss ratios, there’s always a risk that such metrics may not fully account for the quality of the underlying risks being written. The central concern from a regulatory perspective, especially when the MGA is part of a private equity-backed group, is that aggressive incentive arrangements could encourage individuals to bind risks that fall outside of risk appetite, or they may want to relax underwriting standards to meet targets, or potentially resist fair claim settlements in order to make their numbers look better. All of this could cause potential harm to policyholders and to the capacity providers whose capital is being deployed. The FCA and the PRA expect MGAs to identify and manage any conflicts through a combination of governance measures, including robust governance and compliance monitoring, the monitoring of outcomes, and to ensure the focus on customer outcomes is upheld.

In practice, this means that MIP design should not be considered in isolation. The incentive structures put in place should be reviewed alongside the MGA’s broader conduct and risk management framework to ensure the two are pulling in the same direction. The message from the regulators is always there is no one-size-fits-all approach, and these schemes need to be aligned to the actual risks that firms face.

RC: Well, that’s great. Thanks, team. That brings us to the end of today’s episode. My thanks to Seb, to Katie and to George for your valuable insights today.

What comes through clearly in this discussion is that regulatory considerations and anticipated exit time horizon should be carefully factored into the design of any MIP for an MGA business.

We’ve considered thought and structuring. MIPs can be a powerful tool for aligning management with investors, incentivising sustainable growth, and reinforcing underwriting discipline.
Thanks for joining us today. I do hope you enjoyed today’s episode, and please join us next time.

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