Too good to be true? Why MGAs still look nervous

Sentiment around market conditions, rates and even the role of Lloyd’s is positive to bullish overall with the managing general agent (MGA) market, according to the results of a survey conducted by Intelligent Insurer in partnership with the Managing General Agents’ Association (MGAA), with capacity abundant and rates still hardening. But there are also challenges that must be addressed.

Asked first about capacity, a clear majority of respondents to the survey (55 percent)—which was answered by mixture of MGAA members and non-members and a combination of MGAs, re/insurers, service providers and brokers—said that they were confident with the stability of capacity. Just under 20 percent were neutral on the matter while some 25 percent said they were either somewhat or very concerned.

This relative confidence in the availability of capacity was backed up by responses to the next question, which illustrated the willingness of new capacity entering this space. Some 75 percent of respondents said they had seen additional interest from new sources of capacity, while only 7 percent said that interest from capacity had diminished.

Levels of confidence increased when the results are split to examine MGAs only. In this case, 64 percent said they were confident over the stability of their capacity; the same was true in terms of interest from new capacity, with some 87 percent of MGAs responding that they had seen interest from new capacity.

Some of the comments around the availability and willingness of capacity made for interesting reading. One respondent stated: “Many capacity providers remain reactive to delegated authority (DA) opportunities. There are some (but not many) who look at their DA portfolio strategically in the same way they do for direct business.

“I hope an increasing number of capacity providers will engage proactively (and in partnership) with MGAs to build a viable portfolio of DA business.”

Another added: “More and more capacity is flowing to MGAs and wholesalers as specialty programmes are conceptualised and implemented. It is impossible for main-line carriers to do this, so, at least in the US market, the growth of MGAs, managing general underwriters and programme managers has grown substantially and will even accelerate as new surplus lines carriers come into the marketplace.”

Others expressed concerns over the willingness of capacity to explore new risks.

“Capacity is very vanilla in the current marketplace and providers are all looking for the same type of business, which makes it very frustrating when trying to place higher risk books of business.”

Lloyd’s matters

Asked specifically about capacity from Lloyd’s, the survey suggested that some of the market’s reforms in recent years have now bedded in, resulting in respondents stating they were seeing more interest (28 percent), less interest (22 percent) or that interest remains the same.

There was more of a clear message sent to the market by respondents asked about Lloyd’s efforts to communicate its future vision and plans. While some 28 percent said they were bullish about the market’s future, almost 60 percent voiced some element of concern about the market’s future. Equally, asked specifically about its communication and engagement around Blueprint Two, some 60 percent said it was average or poor; only 40 percent said good or excellent.

On the responses to the Lloyd’s question from MGAs alone, overall, a higher percentage expressed concerns about the market’s future and ability to communicate versus the dataset as a whole.

Some of the frustration around the way the market operates spilled into the comments. “Lloyd’s needs to focus more on profitability and less on acquisition costs to effectively compete for the best quality business.

“Domestic carriers are offering higher commissions to attract this business and Lloyd’s syndicates are constrained by the complete focus on total acquisition costs not exceeding fixed parameters.

“This leads to only the more desperate, harder-to-place risks being offered into the market,” one respondent said.
Some of the comments on Lloyd’s covered more deep-seated issues, including the view that it should take more responsibility for the end product.

“Lloyd’s must act as a true capacity provider. The image of MGAs needs to be addressed as it is concerning in most of the markets. If Lloyd’s are giving capacity to MGAs, they need to guarantee servicing including claim settlement. Lloyd’s must take full ownership and responsibility for providing such capacity to MGAs,” said one commenter.

Market conditions

The survey asked respondents for their bird’s-eye views of market conditions and rates. Some 65 percent said they saw rates hardening to some extent, compared with less than 5 percent willing to use the word “softening”. Just over 30 percent said they saw rates flattening.

Those who observed hardening rates gave a number of reasons for this, including insurers’ rebuilding of their balance sheets post-COVID-19, and claims inflation. Many pointed to the great nuance of this answer—rates very much depend on the line of business and experience of the client, they stressed.

“Rating increases are still being sought, but at a lower threshold. This tends to change only if a risk is not performing from a claims perspective,” one said.

There was a fair bit of caution around what the market expects next: a mixture of having achieved a correction and new capacity made some sceptical on the industry’s ability to maintain rates.

“Once balance sheets are rebuilt, rates will inevitably soften and the downward spiral recommences,” one said.

Another added: “Certain lines of business are seeing softening in response to new entrants and account correction over a couple of years.” Another blamed increasing competition from US domestic insurers. “Some of our competitors in the London MGA sphere are driving rates down unnecessarily in pursuit of income to maximise their flat commission. This might be partly due to capacity negotiating flat commission rates down.”

Offsetting this good news for most respondents, the consensus was that the frequency and severity of claims is, on balance, increasing for many—36 percent to be exact. While 55 percent said they had seen little or no change, fewer than 10 percent said they had seen claims decrease.

The trends were explained by this respondent: “We’ve seen frequency of claims fall slightly, while trends in the data suggest severity increasing steadily but not rapidly, in line with longer term trends.

“We have been protected so far from some of the effects of inflation due to protections in our policy wordings, and the fact that most of our insureds’ covers were valued before the rapid inflation which we saw later in 2021. We are monitoring closely and expect to see some effects of inflation hit the severity more as this year progresses.”

A number of others pointed to the issue of inflation. “Claims frequency has not changed but inflation is now biting, particularly in the property book with cost of materials and labour increasing by between 25 and 40 percent,” one said.

Claims management

Perhaps overarching any concerns over escalating claims, the survey revealed another headache for the industry: its inconsistent approach to claims management. Although around 40 percent felt their claims management was fine or had improved recently, more than 60 percent said it needed improving. In terms of how they might do this, a smorgasbord of approaches and suggestions emerged.

These ranged from investing in technology to working more closely with carriers and brokers to embracing third party administrators (TPAs). A number of the comments reflected this final point but many also called for more accountability.

“MGAs generally need to work with small claims teams so the service can deteriorate when claims volumes increase. Where possible MGAs should consider outsourcing claims handling to specialist TPAs who are geared up to manage the volume,” one respondent said.

Another added: “MGAs need to have a claims overview process to benchmark the TPA’s performance as this directly affects the MGA’s portfolio. A fronting carrier has no skin in the game relating to portfolio behaviour, and the reinsurer is often too distant from the trending results.”

There was also resistance to the MGA solution. “If MGAs can ring-fence their claims operation from their underwriting, then I am sure they could add more value than some of the insurers and claims TPAs currently operating,” one said.
Another added: “It’s not really an MGA issue. The brokers have to up their game on all aspects of operations, particularly prompt premium payment and accurate claims info.”