MGA execs bullish but admit sector must pass Lloyd’s test first

This was the gist of discussions that took place at the annual conference of the Managing General Agents’ Association (MGAA), which took place on July 12 in London.

Despite some headwinds, the MGA sector is going strong and thriving with new startups adding to a diverse sector, panellists suggested during the event.

“If you look at the MGA space in the last five to seven years, it is a fashion statement, it is vogue. If you look at the kind of valuations on MGAs, they are very significant,” said Ash Bathia, CEO of Probitas 1492, during a panel discussion. “You hear about new MGAs that are being set up virtually every week.”

The Lloyd's test

But the MGA sector has a test to pass. Lloyd’s of London is conducting a review of underperforming syndicates that could cause “pandemonium” for MGAs and disruption in many lines of business if it results in syndicates retracting their capacity from unprofitable areas quickly, Charles Manchester, chairman of the MGAA, has told Intelligent Insurer.

Lloyd’s aims at reducing the business volume of particularly challenging classes and is talking to syndicates about potential action including asking syndicates to pull out of certain lines.

“Lloyd’s is going through a fairly robust process of remediation in the business,” Bathia said. He noted that the Lloyd’s business has grown over 30 percent over the last five years while, at the same time, the combined operating ratio has deteriorated by more than that over the period.

In 2017 Lloyd’s posted its first aggregate pre-tax loss in six years as major claims more than doubled, causing an underwriting loss of £3.4 billion. The results were mainly impacted by major losses from natural catastrophes in North America but also by a soft market in the sector. The combined ratio deteriorated to 114.0 percent in 2017 after 97.9 percent in 2016.

As part of the profitability review, a presentation identified the direct and facultative property (D&F) business at Lloyd’s as one of the worst performing classes of business in the market. It also showed that 60 percent of all Lloyd’s D&F business is done through binders and MGAs.

While the D&F market overview also included the service companies of the syndicates themselves, the removal of the syndicates’ worst performing business is likely to have a significant impact on MGAs as one third of the overall Lloyd’s business comes from delegated authority.

“At Lloyd’s we are seeing a lot of noise and action in terms of withdrawal of some capacity and some lines of business and this will probably continue for the rest of the year and probably into 2019 as well,” Bathia said.

“It’s more important than ever now that the capacity providers MGAs choose going forward are going to deliver on a long-term basis. There is clearly going to be some disruption in the market.”

Sam Bobo, managing director at Opus Underwriting, agreed with Bathia by suggesting that MGAs should be very careful when selecting the capacity providers. “There should be a communality of purpose and they should also be able share long term goals,” Bobo said. Furthermore, a diverse pool of capacity providers gives MGAs more stability.

“I would be wary of an MGA that relies on one sole capacity provider because you can find yourself in a situation where you do not have business,” Bobo noted.

For this reason, property underwriting agency inet3 has decided to broaden its capacity relationships. Inet3 chair Catherine Bell noted that there are additional benefits to having a broad set of capacity providers as their expertise varies in depending on the area.

“Even in one class of business it’s amazing how different insurers understand different elements in even one small class. You can go to one insurer who has a particular appetite for an occupied property for example but they don’t know very much about or are not very interested to touch thatched property,” Bell said.

The most interesting MGAs are the ones that are very specialised in a niche area which capacity providers can’t reach, noted Brendan McManus, CEO of PIB Insurance Brokers.

Cutting expenses

But in order to thrive, MGAs will need to reduce costs with the help of technology as the regulatory burden is set to continue rising, Bathia said.

The introduction of Solvency II, for example, is driving compliance work up as the regulation requires ever more granular data from MGAs by insurers. In addition, the introduction of the insurance distribution directive will require MGAs to provide information material to brokers and insureds if they write their own policies and set their own rates.

“We need to improve our operational efficiencies as a business,” Bathia said, suggesting that technology is part of the solution. “There will be some disruption from more technology-led MGAs,” he warned.

“If you cut your operating expenses back because you deployed technology in the right way, it can make a huge difference for the business,” Bathia. Lower operating expenses will benefit the MGA and allow it to offer more competitive products to its customers, he explained.

MGAs are also set to benefit from the introduction of alternative and new capital in the space, Bathia suggested.

ILS players operate on a lower expense basis than traditional reinsurers and are therefore expected to allow MGAs that are using them as capacity providers to operate more efficiently.

MGAs should be the ones disrupting the market, Bell said. “We are perfectly placed. We’ve got the experience. We’ve got years under our belt,” Bell noted. If MGAs embrace the new technologies they can be the innovators, the pioneers in that space, she said.

But many MGAs also need to prepare for the potential impact Brexit may have on their business as many write business from the UK to brokers based in the European Economic Area (EEA). MGAs need to make sure that their capacity provider is authorised in the EEA if they have clients in this region. Similarly, MGAs that are selling directly to insureds that are based in the EEA need to make sure that they have some sort of authorised intermediate in the chain. Some MGAs are already setting up operations in the EU to ensure that they will be able to continue to serve clients after the UK leaves the EU.

Europe offers great growth opportunities for MGAs, Bathia suggested. “If you are at Lloyd’s, penetration of European business is tiny compared with any other market,” he said. The MGAs that go in first and explore the potential, will benefit most, he noted.

“I see Brexit as a real opportunity,” Bathia said. “Once all the challenges are there, I would actually be the first one out there to see whether we can do something more meaningful in the future,” he added.