Delegated Authority

What is Delegated Authority?

Delegated authority is the cornerstone of the MGA and coverholder business model. It's the formal grant of power from an insurance carrier (the risk-bearing entity with regulatory licenses and capital) to an intermediary (MGA, coverholder, program administrator) allowing that intermediary to make binding underwriting decisions and/or claims settlement decisions on the carrier's behalf.

Under delegated authority, an MGA can quote, underwrite, and bind insurance policies in the carrier's name without referring each submission to the carrier for approval. The policy is legally the carrier's contract - the carrier bears the risk and pays claims. But the MGA makes the underwriting decision and controls the business flow.

Similarly, delegated claims authority allows an MGA or TPA to investigate, evaluate, negotiate, and settle claims on behalf of the carrier within defined authority limits, without referring every claim decision to the carrier.

This delegation enables carriers to access markets, distribution channels, and specialized expertise they don't have internally, while MGAs gain the ability to bind coverage immediately and earn both retail commission and MGA override commission. It's a symbiotic relationship when managed well, but requires robust controls and oversight.

How Delegated Authority Works Between Carriers and MGAs

Delegated authority relationships are formalized through binding authority agreements (also called binder agreements or facility agreements) that precisely define the scope, limits, and terms of the delegation:

Binding Authority Agreements: These comprehensive contracts specify exactly what authority is granted, what restrictions apply, how the relationship is governed, and what obligations each party has. Key provisions include: lines of business covered (commercial property, general liability, professional liability, etc.), territories where binding authority applies (specific states, regions, or nationwide), policy types and forms that can be written, effective dates and term of the authority, commission structure, and reporting requirements.

Underwriting Guidelines: The carrier provides detailed underwriting guidelines that define acceptable and unacceptable risks. Guidelines specify: eligible classes of business and industries, prohibited industries or risk characteristics, required minimum and maximum limits, acceptable policy terms and deductibles, rating rules and pricing models, underwriting authority limits by policy size and risk type, and risks that require carrier referral (large limits, unusual exposures, poor loss history).

The MGA must underwrite within these guidelines. Writing business outside guidelines is a breach of the binding authority agreement and can result in contract termination or the carrier declining to bind the policy (leaving the MGA exposed if they've already bound it to the customer).

Limits and Exclusions: Delegated authority is never unlimited. The binder agreement specifies: maximum policy limits the MGA can bind without referral (e.g., up to $2 million in general liability limits), maximum aggregate exposure in force at any time (e.g., total in-force premium cannot exceed $50 million), per-risk limits (single-location property values cannot exceed $5 million), and geographic limitations (can bind in these states but not those states, must refer California submissions to carrier).

Territory Restrictions: Binding authority is typically state-specific in the US. The carrier is licensed and authorized to write business in certain states. The binder agreement specifies which states the MGA can bind in. Writing in unauthorized states exposes both the MGA and carrier to regulatory penalties.

Benefits for Carriers and MGAs

Delegated authority creates value for both parties when executed well:

Benefits for Carriers: Delegated authority enables carriers to access distribution and markets they couldn't reach directly. An excess and surplus lines carrier without retail distribution can partner with MGAs who have agent networks and customer relationships. A carrier without specialized underwriting expertise in construction or healthcare can leverage an MGA's industry expertise. Carriers gain market presence and premium production without building internal distribution, underwriting teams, or infrastructure. They focus on risk selection at the program level (which MGAs to partner with) rather than individual submission level.

Delegated authority also provides scalability - the carrier can rapidly expand geographic reach or enter new segments through MGA partnerships much faster than building internal capabilities.

Benefits for MGAs: Binding authority is the fundamental value proposition. An MGA with binding authority can quote and bind coverage immediately, providing fast service to agents and customers. Without binding authority, they're just a wholesaler who must refer everything to carriers, losing speed and control.

Binding authority enables the MGA to control the business relationship, build renewal books that generate ongoing revenue, and earn MGA override commission in addition to retail commission. Financial rewards are significant - an MGA might earn 5-7% retail commission plus 10-15% override, totaling 15-22% of premium.

Compliance Requirements

With delegated authority comes significant compliance obligations. The MGA must demonstrate they're operating within guidelines and authorities:

Adherence to Guidelines: Every policy written must comply with underwriting guidelines. The MGA must maintain systems and processes ensuring submissions are evaluated against guideline criteria, risks outside guidelines are identified and referred to the carrier, and pricing follows carrier rating models and rules.

Regular Reporting: Most binder agreements require monthly or quarterly bordereaux reporting showing all policies written, all claims activity, premium and loss development, and compliance with aggregate limits and exposure caps. Delayed or inaccurate bordereaux create carrier concern and risk authority suspension.

Audit Rights and Examinations: Carriers typically reserve the right to audit MGA operations annually or more frequently. These audits examine underwriting files to verify guideline compliance, claims files to verify settlement authority compliance, financial records to reconcile premium and commission, systems and controls to assess operational quality, and bordereaux accuracy by sampling policies and claims.

MGAs must be "audit-ready" - able to quickly produce complete files, demonstrate decisions were within guidelines, and reconcile all financial transactions.

Audit Trail Needs

Demonstrating compliance requires comprehensive audit trails proving decisions were appropriate and within authority:

Proving Guideline Compliance: For any policy, the MGA must be able to show: the submission details (application, supplemental information, loss history), the underwriting analysis (how the risk was evaluated, what information was considered), the guideline compliance check (how the risk met eligibility criteria, why any exceptions were appropriate), the pricing calculation (how premium was determined according to carrier rating rules), and the approval authority (who approved the policy, confirming they had authority to bind this type and size of risk).

Without documented evidence of this evaluation and compliance, the carrier may question whether guidelines were followed or worse, refuse to bind the policy.

Documenting Claims Decisions: For delegated claims authority, the MGA must document: investigation activities (what was reviewed, who was contacted, what evidence was gathered), coverage analysis (what policy provisions apply, why the claim is covered or denied), reserve decisions (how reserves were calculated, why reserves were adjusted), settlement authority (claims settled within authority limits, larger settlements approved by carrier), and subrogation and recovery actions taken.

Carrier Audit Readiness: When the carrier requests files for audit, the MGA must quickly produce complete documentation. This requires organized file systems with all underwriting documents, communications, underwriting worksheets and analysis, policy forms and endorsements, rating calculations, and approval records stored systematically and retrievable instantly. Paper-based or scattered digital files make audits painful. Modern document management and workflow systems create audit-ready files automatically.

Risks and Controls

Delegated authority creates risks for both carriers and MGAs that must be actively managed:

Carrier Risks: The carrier bears ultimate risk for business written by the MGA. If the MGA writes poor quality business outside guidelines, the carrier pays the losses. If the MGA makes excessive claims payments outside settlement authority, the carrier still bears the cost but may seek reimbursement from the MGA. Carrier controls include: detailed guidelines with clear rules, aggregate limits capping total exposure, regular bordereaux review and analysis, periodic audits of underwriting and claims files, and authority suspension or termination for guideline violations.

MGA Risks: The MGA risks losing binding authority if compliance lapses occur or results deteriorate. Loss of authority destroys the business model - without ability to bind, the MGA becomes just another broker. MGA controls include: robust underwriting procedures ensuring guideline compliance, documented training on guidelines and authorities, management oversight of underwriting decisions, quality assurance sampling of bound policies, and systematic bordereaux preparation and submission processes.

Technology Requirements for Delegated Authority

Modern delegated authority operations require technology infrastructure supporting compliance and efficiency:

Business rules engines that encode underwriting guidelines and automatically flag violations, workflow systems that route risks requiring referral to carriers, document management that maintains complete audit-ready files, bordereaux automation that generates accurate reports on schedule, and audit trail systems that create immutable records of all decisions and approvals.

MGAs operating with spreadsheets and manual processes struggle to scale, maintain compliance, and satisfy carrier audit requirements. Investment in purpose-built delegated authority technology is foundational to sustainable MGA operations and carrier confidence.