Who Created the First U.S. MGA?

Readers of a book about the history of the insurance industry—or more specifically, about Crum & Forster’s place in the last 200-plus years—will find out that C&F executives were responsible for two key innovations.

According to Marc Adee, author of “The Once and Future C&F,” and CEO of C&F, when the surplus of the first insurance company in the group, North River, was impaired by a fire in 1908, John Forster sold the Crum & Forster building and leased it back, using the proceeds to recapitalize North River. Adee believes this may have been the first sale-leaseback.

He also attributes the invention of the runoff company to Jay Brown, who was the architect of a restructuring of C&F (Talegen Holdings) in the early 1990s.

Related article: Cigar Butts and Toxic Sludge: The Rebirth of a P/C Insurer

But when Adee describes how Forster and Frederick Crum took advantage of some “protectionist regulation” in New York in the late 19th Century to form “an agency with the purpose of managing the affairs of insurance companies in New York,” he does not attribute the invention of the managing general agency concept to Crum or Forster. (The regulation required out-of-state insurance companies to have physical operations in New York state.)

Was it the first?

“If that wasn’t the first one, it had to be pretty close to it,” Adee told me in an interview, still not willing to award an unofficial patent on the idea to the duo.

“It turns out that that was a little bit of a thing back then… I’m pretty sure if you look at CV Starr in that period, they had a similar operation,” he said, also noting that convoluted relationships between insurance company North River and MGA Crum & Forster made the model seem “more extreme than an MGA.”

Personally, I am still obsessed with the question of the origin of the MGA model.

Did Cornelius Vander Starr invent it? Were Frederick Crum and John Forster the innovators?

According to The Starr Foundation website, Starr established American Asiatic Underwriters in 1919—the first American-owned insurance agency in Shanghai. While “underwriters” is in the title, it’s not at all clear that AAU was set up to “produce, underwrite and process the insurance business of companies under its management in the most efficient and economical manner possible.” Adee’s book says that was the stated goal of C&F, which was opened for business to represent Allemannia Fire of Pittsburgh years earlier—in 1896.

Pressing on to answer my questions, I turned to ChatGPT only to be disappointed by the 800-word research paper it spit out. Referencing sources like Triple-I (Background on: Buying Insurance | III) and Agency Equity (A History of Insurance Agencies: How it All Started – AgencyEquity), the AI-generated research paper offered information about the first “insurance agency” and about New York and Connecticut insurers writing business through “insurance agents” in other states to achieve the benefits of geographic diversification.

Were they MGAs?

The research is inconclusive.

“Identifying a single ‘first’ MGA is difficult, as the model emerged gradually during the late 1800s,” the ChatGPT research concludes, at one point offering a Wikipedia entry that discusses the expansion of New York City companies to the western United States where they didn’t have local offices.

“These locally-empowered agencies were the precursors to modern MGAs, providing on-the-spot underwriting, policy issuance, and service in distant territories,” ChatGPT says, rephrasing the Wikipedia discussion.

That’s not quite what Adee’s book describes—a New York-based MGA writing New York City risks (falling outside of North River’s appetite) for insurance companies in other states.

And where did Wikipedia get this information, anyway?

“In summary, the first managing general agencies in U.S. P/C insurance arose in the late 19th century as insurers expanded beyond their home territories. While no single company can be definitively crowned the absolute ‘first’ MGA, the era’s earliest MGAs evolved from the general agents who had broad authority to act for carriers. Sources consistently point to the 1880s–1900s as the period when the MGA concept took shape,” ChatGPT concludes in its summary statement (which oddly mentions the 1880s here for the first time in the report with no source reference.)

Hmmm. Not 1896 when Crum and Forster started their MGA?

“They didn’t call it that,” Adee noted when I told him about my failed research project.

“I don’t know what you want to call it, but it was certainly a creative structure,” he said, referring to a section in the book indicating that neither Crum nor Forster ever fully broke their ties with North River.

Fascinated by their courage, Adee noted that they started brainstorming the “MGA” in the days of an economic depression (Financial Panic of 1893).

“Why would they leave their cushy insurance jobs during a depression to form this company? And maybe they didn’t,” he said, pointing to executive titles that the two partners (and several others) held at both companies.

“There were two annual reports,” one for Crum & Forster, the manager of other insurance companies, and one for North River. “Assuming they could dial their commission up or down as they saw fit,” the MGA report might say, “Your company has had another successful year of growing revenue and profits.” The carrier report: “Better luck next year,” Adee said, paraphrasing the highlights from his memory.

“That bifurcation of management and the capital did exactly what you think it would do,” he said, also referring to a 1940s lecture by value investor Ben Graham, who questioned the analysis of North River investors who didn’t investigate the profitability of the arrangement for the carrier.

Adee included excerpts of Graham’s remarks in his book, “The Once and Future C&F.

Before or after you read the book, let’s get back to the question of my headline: Who created the first U.S. MGA?

Reach out to me on LinkedIn or at ssclafane@carriermanagement.com if you can weigh in with answers.

Featured image: AI-generated (ChatGPT)