'MGAs are the future of the surety and bond sector'

The future looks bright for the surety sector, and particularly for managing general agents (MGAs). Profitability remains strong in the sector. With new entrants and existing businesses competing for a growing pool of business, the line is in rude health.

However, a clear trend in recent years is that we have seen a shift in the proportion of surety and bond cover provided by risk carrying insurers in the sector versus MGAs. For example, in 2017, roughly 90% of the surety and bond market in Belgium was provided by insurers. Now, the division is about 20% insurer, 80% MGA. Profitability is king, and the most efficient businesses, often innovative MGAs, are winning the battle.

It is vital all the interests are aligned between reinsurers, carriers and MGAs to secure long-term relationships. MGAs need to participate in risk-sharing by transforming their renumeration models to include a profit commission and thus incentivise MGAs that are both innovative and provide effective underwriting capabilities for their capacity providers. And technology is essential to meet these, often varied, stakeholder needs.

Aligning MGAs with capacity

The biggest issue for many MGAs today is finding capacity. To find capacity you need accurate data. To find accurate data, you need the latest technological solutions that provide comfort and transparency to risk carriers. Capacity providers are taking a bet on an MGA; by ensuring full data transparency, MGAs can provide the certainty and reassurance that enable capital providers to invest.

Product innovation is also crucial. The only way to grow is to develop new products that match the needs of insureds: brokers are also a vital help in this process. Traditionally, the surety market has imported bond models from the US; this is no longer the case. Recent structures have shifted increasingly in favour of European bond models. It is my firm belief that innovation means a continued move towards the European market and its structures.

With regards to underwriting and pricing, MGAs should work better, not cheaper, and be well-placed to compete with the banks for business. As an MGA, it is difficult to compete with a large surety insurer from an underwriting perspective, as they will have hundreds of people analysing company data, assisted by technology.

Aligning the capacity to MGAs

However, surety insurers are also slow in taking binding decisions. From a broking side, we have experienced wait times of up to four weeks in Belgium and up to three in Luxembourg. Surety insurers lack the flexibility of an MGA, and the credit insurance department can block decisions issuing bonds. This is where the MGA has a big role to play in growing more business.

Insurers (and MGAs) must ask for more. The traditional underwriting model is based on the balance sheet. If the balance sheet is not good, a bond would simply not be issued. This needs to change. We need to ask for different collaterals to bring more innovation and flexibility. Currently a bank can use collateral to secure lending, whereas an insurer cannot. Collateralised loans would offer a solution that is viable and secure for customers and insurers. This would provide scope for MGAs to offer better products and offerings.

The Open Banking revolution

Historically, banks were far ahead with access to real-time banking data. Now, the financial services revolution that is Open Banking allows us as insurers to get that real-time data to make the right decisions. We can use real-time financial data directly from banks across Europe and beyond to mitigate risks associated with outdated information. It allows us to instantly verify the sources of income directly from the transaction history, while controlling the companies’ liability at the same time.

Open Banking also improves the accuracy of credit scoring calculation by designing a quicker and more reliable credit assessment model including account details. We can also determine limits based on your customers spending habits and take credit decisions easily and quickly.

Finally, it modernises the outdated, inefficient and costly due-diligence processes with instant bank connectivity, verifies customers’ identity instantaneously and cuts expenses by fast-tracking the client onboarding process.

Customer requirements are also changing. Traditional surety models saw offers of €3m to €10m facilities. However, it is becoming more common for customers to seek bonds for one project, rather than a large facility.

New relationship

We need to move away from the traditional relationship structure between underwriters and customers. This should, instead, be managed by the sales team. There needs to be an ethical wall between underwriting and sales. Sales should work on customer satisfaction and collect this data independently from the underwriters, who should look objectively at this along with all other information. MGAs are well placed to make this separation.

MGAs must think first technology, then customer experience, then product. Technology informs and enhances the customer experience and product. APIs allow us to offer products with more flexibility, simplicity, personalisation and with a better underwriting performance. This is due to advanced data, analytics, and reporting capabilities. APIs are, or will be, the MGA’s best friend in the near future.

No software can meet all of your needs. APIs are a technology that connect two systems together and trigger actions, so by using APIs, you can connect any app to your software. This allows you to automate everything, gain flexibility and make almost anything possible.

I do not think the desire for human interaction will fade any time soon – customers want to speak to a person. However, the use of APIs allows our people to focus on the customer and products we offer, rather than time-consuming admin and countless unnecessary processing steps. Compared with a traditional surety insurer, the future MGA’s integrated model is more advanced and efficient, and thus will deliver better value to the entire value chain.

Alessandro Rizzo is CEO and CUO at EuroCaution