How MGAs may help insurers weather the soft market

An agile and lean managing general agent (MGA) market may help insurers respond to a soft market which makes finding profitable growth a challenging quest.

The historically low interest rate environment has attracted investors looking for yield to the insurance sector, increasing the capacity in the market and putting pressure on rates. The absence of large losses has further reduced rates and impacted underwriting profitability.

“The problem insurers have is that their operational cost ratios are so high,” said Peter Staddon, managing director of the Managing General Agents’ Association (MGAA).

“MGAs may be able to help insurers grow in a more efficient way. They can effectively be the regional footprint of an insurer without the company having to spend huge amounts of money,” Staddon says.

MGAs operate in a variety of arenas such as standard commercial products, package commercial and consumer business, using underwriting capacity from traditional insurer. They can arguably deal better in a soft market than insurers as their cost ratios are significantly lower.

“An insurance company is like a supertanker,” Staddon says. “If you want to stop a supertanker going from full speed to stop, it takes about nine miles. MGAs are more like jet skis. If the market is turning and they see an opportunity, they are able very quickly to adapt. That is their real strength,” he explains.

This agility allows MGAs to find growth opportunities in difficult market conditions and to include them in their operating strategy. Insurers are taking advantage of this quality of MGAs as providers of underwriting capacity.

“When you look at insurance capital providers and their business plans for the next three to five years, whether it is a Lloyd’s syndicate or an insurance company, an increasing number are using delegated authorities as a way of accessing potential untapped customers,” Staddon says.

Growth has different drivers in the two camps the MGA market can be divided into, namely the generalists and the specialists.The latter includes cyber insurance, insurtech solutions and digitally driven products and operations, Staddon explains.

“Players in this field may grow quite dramatically because they are innovators and disruptors, but the pool they are fishing in is comparatively small,” he says.

“The generalists operate in the standard small and medium-sized enterprises (SMEs) commercial policies field, which is an established market. They are trying to grow within this arena by providing a better conduit for the capital provider to access clients,” he explains.

This news story is just a snapshot of a longer report published on Intelligent Insurer. If you want to find out more about how MGA’s can help insurers weather the soft market and how M&A is changing the MGA landscape, please click here.

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