Unpredictable times creating challenges and opportunities for MGAs

For managing general agents (MGAs), things are looking up. Law firm Clyde & Co’s survey of September 2021 found that MGA confidence—at a low in 2020 amid the COVID-19 pandemic—had bounced back, with two-thirds of businesses expecting to expand carrier partnerships in 2022.

According to Michael Keating (pictured, left), chief executive officer of the Managing General Agents’ Association, the UK representative group with over 170 MGAs as members, that optimism hasn’t proved misplaced. The sector, he says, is “buoyant”.

To discuss the role and prospects of MGAs with Intelligent Insurer, Keating was joined by a couple of recent entrants to the market: John McNally (pictured, bottom right), president of Palisade Insurance Partners, a global managing general underwriter (MGU), which launched in April; and Philippe Gouraud (pictured, top right), chief executive officer of Rising Edge.

According to Keating, “the mood music” is that the hard market continues in most lines, and that’s proved largely positive for MGAs, despite the problems it can bring with capacity.

“As is always the case in a hard market, capacity has been challenging, particularly for those MGAs whose portfolios have been marginal. If insurers are getting a tailwind with rate increases, they quite rightly have less tolerance for marginal performance.”

While some of his members have changed capacity providers, however, none has lost capacity, Keating said.

“Overall, the membership remains extremely buoyant.”

Of course, some are more buoyant than others, and much depends on the line. McNally, for instance, notes that the rep & warranty insurance and tax insurance saw a boom in 2021 as a result of the pandemic backlog of M&A deals flooding the market.

“There was $5.9 trillion of deal value, almost 50 percent more globally than any previous year, so it was an extremely successful year for those insurers doing rep & warranty insurance and tax insurance,” he said. There were also new MGA entrants, with numbers increasing to about 20 in Europe and the US.

“From the profitability perspective for the MGAs, 2021 was a great year.”

Even now, opportunities remain. Palisade is focusing on contingent legal risk. While the courts practically shut down during the pandemic creating a large backlog of cases, the legal niche didn’t see the same influx of new providers.

“We looked at it, and there were maybe 30 capacity providers in the market for rep & warranty insurance, 15 for tax insurance, and only a couple totally focused on contingent legal,” explained McNally.

Even in lines where rates are reducing, it’s not necessarily bad news, according to Gouraud.

“We need to distinguish between rate change versus rate adequacy,” he said. For example, airlines renewing their D&O programmes presented a very uncertain and volatile risk for D&O writers. Today, with the situation with COVID-19 more normalised, that risk is more manageable.

“The rates are reducing, but the exposure has reduced as well, so from a risk-adjusted basis, there is no reduction, and it might even be an improvement,” Gouraud said.

More broadly, the sector is keen to put the pandemic behind it, said Keating.

“Our members haven’t forgotten the pandemic, but they don’t want to keep referencing back to it. Instead, they want to look forward because, after 24 months of it, the pandemic shouldn’t now be an excuse for not running our businesses properly.”

Tougher times ahead?

Nevertheless, there are challenges. For a start, while the uncertainty over COVID-19 may have subsided, there are plenty of others sources of volatility—not least the war in Ukraine. “That is already leading to adjustments in certain lines of business and may percolate through the entire industry,” Gouraud warned.

“The market today is a bit in flux, going from one problem to another, so it’s quite dynamic.”

In many cases, this is merely exacerbating existing trends such as inflation. It has been made worse by the war in Ukraine, but predates it. That will ultimately affect not just liabilities but also insurers’ assets, Gouraud noted.

“When interest rates are start rising to manage inflation, the valuation of some bond portfolios will be affected,” he said.

There have already been some rating impacts as well, he added, meaning assets are no longer eligible for solvency calculation purposes.

“We can look at each underwriting class and what’s happening in all the niche markets in terms of rate and so on, but there are wider forces at play that will be hard to ignore in the coming months,” said Gouraud.

There’s also, of course, regulation, which MGAs need to keep an eye on—especially in the UK, according to Keating, with the new consumer duty rules due this summer and stronger requirements on oversight of appointed representatives.

“These areas will affect MGAs, and they need to be ready and prepared to address whatever comes out of those reviews,” said Keating.

In facing these challenges MGAs have several advantages. These include their innovation and nimbleness, but also their success in the past couple of years. While the pandemic challenged everyone, it also proved MGAs’ worth, added Keating.

“They’ve been excellent in capitalising some of the service issues which the major insurers are continuing to face post-pandemic. MGAs throughout the pandemic and beyond have continued to deliver an excellent level of service, and that loyalty from their brokers has remained,” he said. That bodes well for the future.

As Keating said: “The MGA community is in a good place.”