Reduced capital availability, rising rates and more disciplined underwriting are seen as a return to reality in the wider insurance and reinsurance market. But the collective belt tightening is proving to be a little uncomfortable for some in the managing general agency (MGA) sector, based on discussion at a recent webinar hosted by the London-based Managing General Agents Association (MGAA).
The MGA market grew rapidly in the UK and across Europe during the soft market as insurers fought ferociously for new business via all possible distribution means.
As leading insurance law firm Clyde & Co discovered in its survey of the MGA market late last year, Proceeding With Caution, carriers and MGAs agree, however, that there will be more competition for capacity as well as a flight to quality in this rapidly hardening market.
More than three quarters of survey participants agreed that setting up a new MGA will be harder this year.
In addition to the recent Lloyd’s market reforms focused on improving profitability, cost reduction and enhanced underwriting discipline, Covid-19 has added to the pressure being placed on the MGA business model. Carriers have become more selective and are more performance-oriented.
It was against this somewhat sobering backdrop that the MGAA hosted a webinar with Willis Re executives to examine what the future now holds for its members and how they can differentiate themselves.
Ben Nicholls, managing director and head of Willis Re Alternative Distribution Operations (ADO), outlined how the hard market sentiment had spread from Lloyd’s as a result of its ‘Decile 10’ purge in 2018. After posting big losses in 2017 and again in 2018, Lloyd’s mandated syndicates to identify the worst-performing 10% of their business. Once problems were identified, plans for improvement had to be submitted by syndicates, or the underperforming business lines were automatically placed into runoff.
“Following many years of very flat renewals and rate decreases, Lloyd’s and the wider market has changed. The requirements for underwriting have tightened and the requests are immediate,” said Mr Nicholls.
He added that it’s clear that carriers are reducing capacity and hiking rates – putting the squeeze on MGAs: “In the UK and internationally… we have seen some rate increases as high as 400% year on year. Commissions are coming under pressure globally. After Lloyd’s Decile 10, many MGAs globally received bad news, with carriers coming off their placements or saying: you have to reduce commissions so we can find more margin.”
The market will continue to harden, Mr Nicholls predicted, despite the appearance of new challenger carriers. “New capital is coming into the market – which is great – but the majority of the [incumbent] market is static and [insurers] don’t have growth plans,” he added.
In this restrained atmosphere, Mr Nicholls said that underwriting data has taken on new and stronger currency in MGA/carrier relationships: “MGAs that have their data in order will see the most straightforward renewals, where they are producing profitable margin. For others, where their relationship has been warm and fuzzy, the renewals are not going through like they used to,” he said.
“We’re working on a number of big MGA renewals – some with new capacity. The first thing they ask for is an enormous dataset. It is critical to the future of this space and a long-term partnership: You have to be able to deliver this sort of capability,” he added.
Despite the evident challenges, MGAs that optimise their analytics capability can expect to tap into stable capacity and develop. Certainly, Willis is bullish on the future of the MGA sector and intends to grow its involvement in the space, Mr Nicholls said.
Willis Re’s ADO team works with MGAs, bringing its analytics and actuarial resources to bear on improving portfolios and advising on portfolio consolidation where necessary. “Willis intends to grow its MGA footprint more,” Mr Nicholls said. “But we are relatively selective in that we really want to work with people who are investing in these capabilities. In terms of carrier relationships, there is an increasingly international feel to capacity that is interested in supporting MGAs that have great data.”
Willis Re encourages its MGA clients to present to its markets on a quarterly basis, providing performance trends and analysis on their business to avoid surprising carriers at annual renewal negotiations with bad news. “The process brings MGAs closer to their carrier and cements long-term relationships,” Mr Nicholls said.
As a market veteran, Mr Nicholls believes there is clear evidence of the boundaries between insurance, reinsurance and ‘alt capital’ blurring. “It’s all capital and any MGA that is serious about improving margin and attracting partners should be very aware of what is happening in the global marketplace,” he said.
Mr Nicholls added that carriers beyond Lloyd’s – in Europe, the US and Asia – have capital to offer insurance MGAs based in the UK. Reinsurers especially, which are accustomed to writing portfolios of business, see the tightening in their primary carrier base and recognise opportunity for growth in the MGA sector.
It’s a trend that points to increasingly data-driven MGAs becoming more like virtual insurance companies.