March 2025
Managing general agents are not new to the Hong Kong insurance market. They have been around for a very long time. Certain insurers, for example, started off operating here as insurance underwriting agencies before restructuring their legal and regulatory status to become full onshore insurers.
Over the years, however, the number of managing general agents in Hong Kong has waxed and waned in line with the rhythms of the market. During the first few years after the IA acquired the regulatory function of granting licenses to insurance agents in September 2019, there appeared to be little interest in becoming a managing general agent in the market. Applications for agency licences tended only to be from entities looking to conduct business as traditional insurance agencies. In more recent years, however, applications and enquiries indicate a resurgent interest in the managing general agency model, suggesting they are coming back into fashion.
To align with that trend, we offer some observations from the regulatory viewpoint on the managing general agency model to assist those thinking about obtaining an agency licence in order to serve as a managing general agent in Hong Kong.
Like all good regulators, we are tempted to start with a definition, but in doing so we immediately run into a problem. Neither the Insurance Ordinance (Cap. 41), nor the Codes of Conduct, nor the Guidelines issued by the IA make any reference to “managing general agent” let alone define the term.
The nearest thing we find is a reference to a “licensed insurance agency”, being a company, partnership or sole proprietor (essentially a business entity) that obtains a licence from the IA to carry on “regulated activities” in specified lines of business as agent for one or more authorized insurer(s). This would indeed be the licence that a managing general agent would have to obtain to operate in Hong Kong. Most licensed insurance agencies, however, are not managing general agents, so this provides no answer as to what a managing general agent actually is.
The vast majority of licensed insurance agencies focus solely on selling insurance policies (inviting or inducing persons to enter into contracts of insurance) on behalf of the insurers they represent and providing ancillary services related to the policies sold (e.g. arranging the insurance policy once the decision to purchase has been made and servicing enquiries from the policyholder thereafter). This would be recognized in the insurance market as the traditional insurance agency mode of doing business, a model that includes within its range both bancassurance and smaller non-bank agencies that exist to provide a platform for technical representative (agents) to sell insurance just like individual insurance agents would.
A managing general agent goes beyond the traditional agency model, by performing functions on behalf of an insurer that the insurer would otherwise be performing itself in carrying on insurance business. For example, a managing general agent may be delegated to underwrite (and bind) insurance policies on behalf of an insurer, or make decisions on claims payments on the insurer’s behalf. Essentially, then, a managing general agent stretches beyond the limits of what a traditional insurance agency would do, by moving up the insurance supply chain to perform certain core insurance functions of an insurer, without itself being an insurer.
This is perhaps not a question for a regulator to answer as it is a matter dictated by the market dynamics of supply and demand. Based on the licence applications and queries we have received, however, we would speculate that the answer may lie in both the opportunities and risks presented by the ever increasing societal adoption of technology and, more specifically, the insurance industry’s increasing attempt to wrap itself technology’s embrace.
In many ways, each of these examples offer a micro-snapshot of how the insurance market has always adapted - since the history of insurance began – to manage and address the needs of society’s evolving risk landscape.
In the same way that history offers a guide as to why managing general agents may be making a bit of a comeback in Hong Kong – and bring with them evident advantages – one can also draw lessons from history when considering the regulatory risk associated with the managing agency model.
Whenever an insurer grants underwriting authority to a managing general agent (a phenomenon still known in the market as “giving away the pen”) a separation occurs between the entity making the decision to accept the risk and underwrite a policy - the managing general agent - and the entity that actually takes on the risk of all the contractual obligations under the policy - the insurer. History tells us that where the entity making the decision on whether or not to accept a risk (in this case the managing general agent), has limited to no “skin in the game” as to how that risk actually performs (as the risk lies with the insurer), this can be a recipe for problems. The problem can become particularly acute where a large part of the agency’s revenue model comes from commission paid on each policy underwritten, thereby creating a potentially misaligned incentive that may favour volume of business over quality of business.
The de-linkage between the entity that decides to underwrite risks and the entity that ultimately carries that risk can lead to systemic problems if left unchecked and unmonitored. The 2008 financial crisis was an example of this, where the ‘originate to distribute’ model in the US banking sector saw subprime mortgages being underwritten by banks and then offloaded and transferred several times to other entities (some ultimately in the insurance sector) through securitization. In the insurance sector itself, some of us are old enough to remember the reinsurance spirals created in the market which saw this same phenomenon at play (with managing general agents being at the heart of this).
More recently – in May 2024 - AM Best’s report “Rapidly Increasing MGA Premiums Warrant Greater Oversight” indicated that it had looked at 13 insurers with solvency issues in the US property and casualty market during the period from 2000 to 2022 and found that within one year prior to the insolvency issues arising, 98.9% of the total direct premiums written were sourced through affiliated managing general agents with unaffiliated managing general agents also contributing to a number of insurer hardships over the same period1.
Given this history, a regulator that is having to make licensing decisions and carry on ongoing supervision on entities that use a managing general agency model, would be inclined to focus on the following issues:
Licensing “fit and proper” criteria
As stated, to operate in Hong Kong as a managing general agent of an authorized insurer, the candidate would need to become a licensed insurance agency. To obtain this licence, the applicant would need to demonstrate that it meets the “fit and proper” criteria2 for being a licensed insurance agency. These criteria are the same for all insurance agencies. How the criteria are applied, however, will depend on the applicant itself and the actual business model it intends to carry out.
Take the experience and skillset element of the “fit and proper” criteria as an example. Being “fit and proper” to sell insurance using a traditional agency model requires a different type of knowledge, as compared with being “fit and proper” to assess and underwrite insurance policies as a managing general agent.
Guideline 14 on Outsourcing
There is also a second aspect of the insurance regulatory framework that would likely apply to managing general agents (albeit it would not apply to agencies using the traditional agency model). That is Guideline on Outsourcing (“GL14”) issued by the IA. In GL 14, “outsourcing” refers to an arrangement under which the service provider undertakes to perform a service (including a business activity, function or process) which would otherwise be undertaken by the authorized insurer itself. This is exactly what is happening when an insurer delegates underwriting (or claims) authority to a managing general agent to bind insurance policies (or settle claims) on its behalf.
GL 14 would require the authorized insurer, when outsourcing to a managing general agent to:
If the outsourcing to the managing general agent is a “material outsourcing” (as defined in GL 14) from the insurer’s perspective, then prior notification of the arrangement to the IA would also need to be provided. Even if it is not a “material outsourcing”, however, as part of the application for the insurance agency licence, there may be aspects of the outsourcing arrangement that would be relevant to the IA’s consideration in the context of assessing the fitness and properness of the candidate.
Putting this all together, we highlight certain main aspects the IA would focus on when considering an applicant for an insurance agency licence who is seeking to run a managing general agency business model.
Specific knowledge, skill and experience of the proposed responsible officer
Every licensed insurance agency must appoint a responsible officer who must be fit and proper to discharge the functions of that role. Those functions focus on establishing and maintaining proper controls and procedures for securing compliance by the agency with the conduct requirements in section 90 of the Insurance Ordinance regarding the manner in which the agency will carry on regulated activities. In the case of a managing general agent, its regulated activities would extend to the functions it is performing on behalf of the insurer, for example assessing and binding risks through underwriting of insurance policies, or settling claims. A particular focus of the IA’s licensing assessment, therefore, would be on the demonstrated track record and experience of the responsible officer candidate in carrying on these functions. If the function is underwriting, we may look at the candidate’s experience and track record of underwriting business and implementing underwriting controls and processes in the relevant lines of business for which the licence is being sought. The question to address would be: Does the proposed responsible officer possess knowledge, skill and experience commensurate with the nature and scale of business that the managing general agent will be performing?
Contract with the principal insurer granting the authority
The IA would likely ask to see the contract under which the proposed candidate agency is being delegated authority to act on behalf of the principal insurer(s). This would provide us with context for the arrangement which would form an important part of considering the adequacy of the controls on regulated activities the agency will have in place. The greater level of authority granted, the tighter the accompanying controls we would expect to see, whereas more restricted levels of authority would serve, in themselves, as controls. So the type of matters we would look at (from a control perspective) where the agency is to be delegated underwriting authority, would include the following:
Controls, processes and ongoing monitoring
There are two aspects to this. The IA would want to see that the level of controls and processes the agency has in place on the function delegated to it by the insurer are commensurate with the authority delegated. The greater the authority delegated (both in terms of amount and the degree of judgement it leaves the agency), the more comprehensive the agency’s controls would need to be. The other aspect of this would be the controls which the insurer has on the agency, which the insurer would have to establish according to GL14 (in terms of regularity of reporting, audits and reviews and ongoing assessments of the business written through the agency).
Taking account of this, there are two broad tips we would offer applicants to achieve a smooth ride through the licensing process.
Firstly, a high degree of cooperation between the candidate agency and principal insurer in the licensing process will certainly assist. For example, the more satisfied the IA is of the due diligence, controls, processes and ongoing monitoring that the insurer has undertaken and put in place (with documentation from the insurer demonstrating this), the more comfort this would provide in examining the adequacy of the agency’s own controls and processes (a key aspect of its fitness and properness).
Secondly, the IA is not averse to looking to best practices from other jurisdictions on controlling and addressing regulatory risk. In this respect, syndicates at Lloyd’s of London have a long track record of utilizing delegated authority coverholder models for writing business through third parties, including third party agencies appointed as their agent. An applicant for an agency licence in Hong Kong, seeking to operate a managing general agency model (and its principal insurer) could assist its application by benchmarking its controls, processes and monitoring with the standards for delegated underwriting (for example) required by Lloyd’s.
The matters above are not exclusive and it remains the case that an applicant for an agency licence, seeking to run a managing general agent model, would need to meet all requirements for that licence. Further, once licensed, the agency will be subject to the same requirements as all licensed insurance agencies (including the restrictions on the number of principals for which it can accept appointment).
We hope, however, that the above gives some indication of the IA’s expectations and offers useful insight to help smooth the way for the welcoming of candidates seeking to become managing general agents in the Hong Kong market.
Notes:
1 AM Best – Best’s Market Segment Report – “Rapidly Increasing MGA Premiums Warrant Greater Oversight” – May 22 2024.
2 As illustrated in the Guideline on “Fit and Proper” Criteria for Licensed Insurance Intermediaries under the Insurance Ordinance (Cap. 41) issued by the IA.