Increases in mergers and acquisitions have resulted in the consolidation of broker and managing general agent (MGA) portfolios. But if not done properly, these transactions can spell operational and financial risks for those involved, says Elaine Collier, senior auditor at Pro Global.
Challenges that arise from M&A may include fragmented premium management, which can “obscure financial irregularities” or diverged operational structures that make it harder to “detect or mitigate risks,” Collier wrote in a blog post for Pro Global.
That requires brokers and MGAs to take specific risk management measures to address challenges that arise from consolidation.
“Over the past few years, [there’s been an] increase in mergers and acquisitions amongst brokerages and MGAs — you name it, [it’s] been going on,” Collier tells Canadian Underwriter.
Historically, she says, retail brokers were not “interested at all in MGAs acting also as brokers.” Now, however, some take on a dual role, she says. “There are pure MGAs, and there are also MGAs who also act as brokers.”
Whether it’s broker consolidation, MGA consolidation, or dual role consolidation, the transacting entities must align their strategies to ensure a successful integration.
“Some M&A is done where everybody’s going to be basically singing from the same song sheet — all the processes, technology, will be the same after such-and-such period of time,” says Collier. “Other ones will be handled on the basis that each former partner retains their own risk appetite, systems and whatnot…So what you would [expect] going in is one [external] audit, actually becomes two, three or four audits, as the compliance is different, the accounting, the staffing, and the management are different.
“You could end up with five different financial controllers, for example…to keep track of all of this premium accounting, and it becomes quite a challenge,” she says.
When consolidating two or more brokers or MGAs, it takes time to make clear how business will be processed and how premiums will be settled. Leaders of consolidating companies might work with independent auditors to review internal procedures and risk controls. This can help reduce the risk of non-compliance that often arises during M&A.
The integration of corporate cultures is also tricky, especially if the two merging companies have vastly different organizational approaches or decision-making processes. Failing to align on culture could lead to employee upset.
I don’t think the integration of corporate culture is necessarily well addressed in some of these M&A activities,” says Collier. “You may be glomming together a couple of MGAs who, last week, were really big competitors with each other…so that’s one of the big challenges I see in M&A activity.”
Companies should consider conducting a risk hazard analysis to avoid bumps in the road during the transaction and integration. In this process, the companies would identify and assess their risks, then implement changes accordingly, either during the transaction or upon integration.
“Some [hazards] will be ones that aren’t going to sink the ship so to speak, and other ones are going to be ones that might be a nagging concern but can be dealt with, or the decision can be taken not to deal with them with no serious negative effects,” she says.
Feature image by iStock.com/weiyi zhu
