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Business Resilience

Spotlight on…MGAs

The MGA movement has been losing momentum - but digitalisation will put it back on track, making the model an essential tool for managing data flow and measuring underwriting performance

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After a seemingly inexorable rise in popularity, the insurance market might have reached “peak MGA”. According to a survey of 62 MGAs and 64 carriers published in October by London law firm Clyde & Co, 88% of carriers and 83% of MGAs believe that setting up a new MGA will be harder this year.

Meanwhile, existing players feel secure, with 64% of carriers and 66% of MGAs expecting the number of relationships to hold steady or increase in 2020, even in a hardening market. Over half (51%) of carriers told Clyde that the impact on capital availability will be positive or neutral post Covid-19.

Strained relations

Brian Kirwan, head of structured solutions at broker McGill and Partners says that MGAs are an excellent way to access niche and profitable business, without significant investment on the part of the capital provider to recruit people and create infrastructure – which, in turn, bring additional long-term costs.

Moreover, MGAs are often specialists in servicing a particular area of commerce, bringing insurer capital and expertise together.

But the behaviour of a few (often London market underwriter led-) MGAs has adversely impacted the perception of all MGAs, Kirwan believes.

“These MGAs have been significant poor performers and drawn the focus of insurance companies who have been critical of both their performance and commission structures. This critical commentary has not been levelled at the specific MGAs that are guilty, but at all MGAs.”

Kirwan says that hard market conditions have caused insurance carriers to focus more on internal underwriting and to jettison third party underwriting, regardless of whether the business was profitable

“The facts remain, that in the current market there is a plethora of MGAs that can add significant value to carriers, including expertise, new distribution and by reducing costs in the value chain.”

Tim James, CEO of Ensurance, the niche construction and engineering MGA and Lloyd’s coverholder, is philosophical: “Change is the only constant in life, as 2020 has clearly demonstrated to us all. Drivers continue to flex from both a capacity and MGA perspective, whether it’s appetite, strategic direction or profitability.

“Capacity will always be interested in supporting an MGA that is well-run and clearly focused on the long-term underwriting results for its portfolios. At the same time MGAs need to ensure potential and existing capacity appreciates the entrepreneurial spirit that is embedded within the majority of MGAs, as this is what drives the establishment and continuation of managing agents.”

Focus on profitability

Commenting on how the operating environment might evolve, Enrico Bertagna, head of MGA Network, Commercial Insurance, at Zurich Insurance Co, says that while some consolidation between small and mid-size MGAs will happen, overall numbers will be balanced by start-up activity.

“There is, however, increased scrutiny of relationships by insurers, with a strong focus on profitability. MGAs that are unable to deliver underwriting profits will struggle to find capacity and some insurers who have been ineffective in managing portfolio performance will be under pressure from their management/investors to pull out of the market.”

The Lloyd’s market has been fertile ground for MGAs over recent years but growth has slowed over the past twelve months with a more selective risk approach and the recent Lloyd’s performance review causing a reduction in the number of active Lloyd’s MGAs, according to Mike Keating, CEO of the Managing General Agents’ Association (MGAA).

“Sub-standard underwriting performance leading to significant contraction of capacity would certainly destabilise the MGA model, however the importance of delivering value and underwriting profit to capacity providers is embedded across most MGAs,” Keating says. “The market will travel through its cycles of capacity contraction and expansion, but the consistently performing MGAs will always thrive and prosper.”

Underwriting profitability will be the key pillar in sustaining the evolution and growth of the MGA segment, he says. “This will need to be demonstrated in new start-up business plans as well as established entities. A relentless approach to capture risk data and utilise data enrichment tools to inform risk selection and pricing will be an integral and critical component of MGAs now and in the future. The ability to operate at low costs through use of technology will also become paramount.”

Digital future beckons

Zurich’s Bertagna agrees that on top of robust underwriting, digitalisation will play a big role in sustaining relationships.

“MGAs will need to be able to understand and present their portfolios with the support of quality data rather than assumptions,” he says. “My vision is that, in the not too distant future, insurers will be able to interface with MGAs and treat them as extensions of their own underwriting platforms, both from an oversight and a regulatory perspective. The level of digitalisation of an MGA will be a critical factor in our decision on whether to do business with that MGA.”

Ensurance’s James concurs: “Due to their smaller size, an MGA business can often bring new technologies to the table relatively quickly; these can assist in data capture and management and ensure the MGA and capacity provider share a powerful management information suite to assist with managing the underwriting performance of each product line. Technology can also help in providing brokers with access to a more efficient quoting process. This in turn helps brokers provide better services to their clients.”

Digitalisation is no longer an option, says Ian Lloyd, managing director of London-based MGA iprism.

“E-trade, online portals and instant quote and bind solutions are the present not the future, MGAs that do not embrace these solutions will not stay the course as the industry evolves around them. The dual impact of the Coronavirus and Brexit will have forced many MGAs to evolve and finally embrace the radical change needed to remain relevant.”

Reinsurers warm to MGAs

But Andrew Matson, head of Portfolio Solutions at McGill and Partners, reckons that the traditional MGA/carrier model will have to evolve its business model as well, and that will mean sourcing and accessing capital from beyond primary carriers.

“At McGill and Partners we have seen success in utilising reinsurers and alternative markets to support MGA business. Reinsurers need distribution and modellable business which is something MGAs tend to target within their niches.

“This is in turn dilutive and accretive to a reinsurer’s traditional business model, allowing them flexibility to grow,” he says. “Whilst insurers perceive the infrastructure of MGAs as being a conflict to their own and therefore an impact to their margin, reinsurers see this as an essential tool to transacting insurance in this way.”

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