Meridian Binding - Doubling a Segment Through an MGA With No Loss Data
Your company writes $480M of gross written premium. Light manufacturing (NAICS 332) is 6% of the book, running a 94% combined ratio. Leadership has approved doubling the segment to 12% within 18 months and expects a new MGA, Meridian Binding, to deliver $55M of it. Meridian projects 1,400 policies with an average premium of $39,000, a 22% commission, and binding authority to $250,000 per policy. Its submission offers no loss data from the two carriers it previously represented, calling the information 'proprietary.'
The casualty treaty provides $10M of per-risk capacity and a $30M clash limit for any one event; $9M of clash is already consumed by the existing manufacturing book. Reinsurance underwriting requires 24 months of loss data before approving a program of this size. The segment expense ratio is 29%, and the combined ratio target is 96%. Field leadership has already told Meridian to expect a June 1 launch.
1. Test the plan against the economics: what loss ratio does a 96% combined ratio require, and is that achievable at a 22% commission?
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The arithmetic. The segment's 29% expense ratio is a blended figure built on a largely direct/broker book with lower acquisition cost. For MGA business, commission alone is 22%. If non-commission operating expense is about 12% of premium (systems, underwriting, audit, premium tax is separate), total expense on this program is roughly 34%.
At a 96% combined ratio, permissible loss and LAE = 96 − 34 = 62%. That is the budget.
Why it is tight.
- 1,400 policies at $39,000 average means each policy carries up to $250,000 of limit. A single $250,000 claim consumes 6.4 policies of premium. Small manufacturing severity is fat-tailed: a press fire, a products injury, a machine-guard amputation.
- With no loss data, the standard error on the loss ratio is enormous. A book that is truly 55% can produce a 75% year in the first 12 months without anything being wrong with the underwriting.
- A 62% loss ratio budget for a first-year MGA book with no track record is not a target; it is a hope.
Verdict: the plan only works if commission drops or average account size rises. Recommend a profit-share commission - 19% base with a 3-point swing against a three-year loss ratio at or below 60% - which cuts the expense ratio to 31% and buys a 65% loss budget. Alternatively, raise the minimum premium so the average is $55,000 and fixed costs spread. As submitted, a 12% segment share is achievable; a 96% combined ratio is not.
2. What does the treaty actually allow, and what would you require before Meridian receives binding authority?
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Per-risk is not the constraint; clash is. A $250,000 binding authority sits comfortably under the $10M per-risk capacity. The problem is the $30M clash limit, of which $9M is already consumed, leaving $21M of capacity for any one event touching Meridian's book.
Why that is dangerous here. 1,400 NAICS 332 risks do not distribute evenly - they cluster in industrial corridors, multi-tenant parks, and shared-contractor relationships. A single fire in one park could attach four or five Meridian insureds; a regional convective-storm event could attach dozens. Without geocoded exposures, I cannot say whether this program adds $5M or $50M to a single event. The treaty's hours clause and event definition also matter: if Meridian's manuscript forms define occurrence differently, the treaty may not respond as assumed.
Requirements before binding authority:
- A geocoded projected book - ZIP, occupancy, TIV, limits, and construction - not a policy count.
- A modeled net clash loss at 1-in-100 and 1-in-250, run against the treaty and adjusted for the $9M already used.
- A hard aggregation cap: no more than $5M of aggregate limit written within any one-mile radius during the first 12 months, reviewed quarterly.
- Confirmation that Meridian's policies use the company's occurrence and event definitions, or a treaty endorsement addressing the difference.
- Written reinsurance sign-off on the 24-month data requirement - either satisfied, or waived with a documented rate load and monitoring plan.
3. Design the rollout guardrails and the monitoring package you would attach to the June 1 launch.
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Phase gate, not a launch. Approve $15M in the first 12 months, not $55M, with a quarterly review that either releases the next $15M or suspends new business.
Authority. Reduce Meridian's binding authority to $100,000 per policy, with a mandatory referral list regardless of premium: wood frame or heavy timber, powder coating or other hot work, more than 50% subcontracted labor, any prior cancellation or non-renewal, any location with TIV above $5M, and any risk with an unresolved OSHA citation.
Data. Monthly policy-level bordereau - class code, TIV, limits, geocode, effective date - plus loss runs at 6, 12, and 24 months. Require the two prior carriers' experience as a condition of launch; if it is genuinely proprietary, obtain a broker-of-record letter or apply a 10% rate load until earned data exists.
Economics. Commission at 19% base with a profit-share swing, so the program carries its own expense. Rate adequacy reviewed against manual on a 10% sample of bound policies each quarter.
Audit. Review a 10% random sample of underwriting files quarterly, scoring documentation, classification accuracy, and referral compliance. Publish the score to the MGA.
Written exit criteria. Loss ratio above 65% at 24 months, clash aggregation above $15M, or two consecutive failed audits triggers automatic suspension of new and renewal binding. Put this in the MGA agreement, not in a memo - if the goal is to double the segment, the guardrails are what make the growth survivable.