Why Many Mid-Sized Insurers Create More Value Without an Insurance Licence

For many regional and national insurers, holding an insurance licence is still perceived as a symbol of strength, credibility and strategic control. It represents independence in a highly regulated industry and is often deeply embedded in organisational identity.

Yet for a large share of insurers below roughly EUR 500 million in gross written premium, that licence has quietly shifted from being a strategic asset to a structural constraint. Not because it cannot be run compliantly, but because it absorbs capital, management attention and organisational energy without delivering proportional value.

This is no longer a philosophical debate. It is a board-level question about capital efficiency, focus and long-term value creation.

The Structural Distinction

An insurance licence allows an entity to assume underwriting risk and hold regulated solvency capital on its balance sheet. In return, it gains full balance-sheet control and direct regulatory authorisation.

An MGA (Managing General Agent) operates the commercial and operational insurance value chain ( distribution, underwriting, product design and claims oversight )  without holding underwriting risk or solvency capital. Risk and capital sit with a licensed carrier under delegated authority.

The difference is not operational visibility. It is balance-sheet ownership.

The economic reality of mid-sized insurance carriers

For most regional and national insurers, profitability is not the issue, economic value creation is.

Across markets, insurers at sub-scale tend to generate modest profits over the cycle. Internally, this is often interpreted as evidence of a healthy and sustainable business. However, when those profits are assessed against the capital required to support the balance sheet, a different picture emerges.

Solvency requirements typically bind a substantial share of annual premium volume as shareholder or member equity. That capital has an opportunity cost: it could be invested elsewhere at market returns. When the return generated by the insurance business consistently falls below that cost of capital, value is destroyed in economic terms even if the company remains profitable on paper.

This distinction matters. Accounting profit rewards stability; economic profit rewards efficient capital allocation. At sub-scale, the insurance carrier model is structurally capital-intensive, while growth and pricing power remain constrained by geography, distribution reach and product scope.

Crucially, this is not a cyclical problem. Even in favourable underwriting years, many mid-sized carriers struggle to close the gap between return on equity and cost of capital. The underlying driver is structural: the fixed cost of running a licensed carrier does not scale down proportionally with premium volume.

Boards therefore often find themselves stewarding businesses that are stable and respected but economically inefficient.

Where mid-sized insurers actually differentiate

Very few insurers at regional or national scale outperform across the entire insurance value chain. What successful mid-sized insurers do excel at is typically far more focused.

Common sources of differentiation include:

• mastery of a specific distribution channel,

• strong regional or niche brands,

• fast product development and time-to-market,

• efficient, trusted claims handling,

• or superior use of data and analytics in underwriting and pricing.

  
  

These capabilities define market success. They drive customer trust, distributor loyalty and operational leverage. Importantly, none of them require an insurance licence.

By contrast, the functions that do require a licence such as reinsurance purchasing, investment management, reserving, regulatory reporting, risk management and internal audit are rarely areas where smaller carriers outperform. They are essential for compliance, but they do not create competitive advantage.

A useful litmus test for boards is simple: which capabilities would customers or distribution partners genuinely miss if the licence disappeared? In most cases, the answer lies firmly in product, service and relationships, not in balance-sheet ownership.

The hidden cost of running an insurance licence

The true cost of holding an insurance licence extends far beyond visible operating expenses.

Licence ownership introduces a set of mandatory but non-differentiating functions. Financially, these consume capital and specialist resources. Organisationally, they absorb disproportionate senior management attention. Strategically, they slow decision-making and constrain flexibility.

Outsourcing does not eliminate this burden. While external providers may execute specific tasks, accountability remains with the carrier. Boards must still oversee, challenge and approve. Smaller insurers are typically mid-tier clients to these providers, limiting pricing power and access to best-in-class expertise.

This creates a structural asymmetry. Large carriers amortise these costs over vast premium volumes. Smaller insurers carry them almost in full.

The most underestimated cost, however, is attention. Regulatory and solvency discussions dominate agendas, crowding out time spent on market-facing initiatives. Over time, this erodes competitive momentum, not through failure, but through inertia.

Carrier vs MGA: Structural Differences

For boards evaluating structural options, the distinction is economic rather than operational:

• Capital intensity: A licensed carrier must hold solvency capital proportional to premium volume. An MGA operates as a capital-light business.

• Risk ownership: The carrier assumes underwriting and balance-sheet risk. The MGA operates under delegated authority.

• Regulatory burden: Carriers are subject to full prudential supervision. MGAs are regulated as intermediaries.

• Growth constraints: Carrier growth requires incremental capital. MGA growth primarily requires distribution and underwriting capacity.

  
  

The strategic question is therefore not whether the business changes, but whether capital ownership creates sufficient return to justify its cost.

The strategic alternative: the MGA model

Seen in this light, the MGA is not a retreat from insurance, but a structural refactoring of the value chain.

Transitioning from a carrier to an MGA primarily changes where risk and capital sit, not how the business operates day to day. The central step is removing insurance risk from the balance sheet, typically by transferring the in-force portfolio to a licensed carrier or selling the carrier entity after separating staff into a new MGA structure.

Once liabilities, reserves and associated assets move off the balance sheet, solvency capital is no longer required. The licence can be returned, and the organisation continues as a capital-light operating business.

Operationally, far less changes than many executives expect. Core activities remain:

• managing distribution and sales relationships,

• developing products, pricing and underwriting guidelines,

• administering policies and customers,

• handling claims,

• running IT platforms and people operations.

  
  

What disappears are the carrier-only functions that do not define market success.

Governance and control do not vanish. Strong binder agreements, service-level agreements and audit rights allow MGAs to retain meaningful influence over underwriting discipline and claims quality without bearing solvency risk.

Brands remain unchanged. Brokers and partners interact with the same teams. Customers rarely notice any difference. The transformation is structural, not visible.

Economics after giving back the licence

Perhaps the most counterintuitive outcome of a carrier-to-MGA transition is that ongoing profitability often remains broadly similar.

Post-transition, revenue shifts from premium income to commissions. Sales commissions typically mirror existing distribution economics. In addition, the MGA earns administration and underwriting commissions for operating the portfolio on behalf of the risk carrier.

From the carrier partner’s perspective, this structure is economically rational. The carrier already maintains reinsurance, investment, reserving and regulatory functions. Absorbing additional premium volume via an MGA does not materially increase fixed costs and can improve utilisation of existing capabilities.

As a result, commission structures can support stable operating profits for the MGA while the carrier benefits from scale, diversification and growth.

The decisive difference lies in capital efficiency. Solvency capital previously locked to the balance sheet is released. For shareholders, this can represent decades of dividend capacity realised upfront. For mutuals, it enables meaningful policyholder benefits once all obligations are removed.

Growth also becomes structurally cheaper. Additional premium no longer requires incremental capital. Entering new lines of business or expanding geographically becomes a commercial decision rather than a regulatory funding exercise.

Strategic focus as a compounding advantage

Beyond the immediate financial effects, the shift has long-term strategic consequences.

Boards of licensed insurers spend a significant share of their time on regulation and capital management. Removing the licence does not eliminate regulation entirely, but it substantially reduces its scope and intensity. Management attention shifts back to the market.

Over time, this focus compounds. Organisations become faster, more opportunistic and more aligned with customer and distributor needs, precisely the areas where mid-sized insurers can win.

Valuation implications

Market perception reflects this difference.

Licensed insurance carriers are typically valued based on capital intensity, solvency and underwriting outcomes. MGAs, by contrast, are capital-light operating businesses and are often valued on earnings multiples that reflect flexibility and scalability.

Even where absolute profits remain similar, the enterprise value of an MGA can exceed that of the former carrier. In such cases, licence ownership acts as a valuation drag rather than a premium.

Why most insurers do not make the transition

If the rationale is compelling, why do so few insurers act?

Four factors recur.

First, there is limited external pressure. Many regional insurers are mutuals or privately held, with patient owners and emotional attachment to the institution.

Second, there is a knowledge gap. The mechanics and economics of transforming a carrier into an MGA are not widely understood, and few advisors actively promote the option.

Third, identity and ego matter. For some executives, being associated with a licensed carrier still carries perceived status, even if daily responsibilities remain unchanged.

Finally, the process requires effort. Portfolio transfers, regulatory negotiations and partner selection take time and specialist expertise. This is a strategic transformation, not a tactical adjustment.

When keeping the insurance licence makes sense

There are clear exceptions.

Carriers that consistently earn well above their cost of capital are likely creating genuine value through licence ownership. In such cases, transferring those economics to an MGA structure is difficult and often unattractive.

Highly international insurers with multiple licences also face complexity that may outweigh the benefits of such a transformation.

The decision is therefore not universal but it is far broader than many boards assume.

A board-level question worth asking

For most regional and national insurers, the insurance licence is not a strategic asset in itself. It is a tool and tools should be judged by the value they create relative to their cost.

The relevant question is no longer whether an insurer can operate as a carrier, but whether this is the best use of its capital, talent and management attention.

For many, the honest answer will be uncomfortable and strategically liberating.

Giving back the licence is not a retreat from insurance. In many cases, it is a deliberate refocusing on what truly creates value.