Sustaining MGA success when the market softens
To sustain momentum, it is vital for MGAs to prepare for worsening market conditions by addressing issues that did not seem necessary to confront when rates were rising
We are at the beginning of the end of a hard market and London market managing general agents would do well to prepare for the next insurance winter
We have been enjoying hard market conditions for well over three years now.
The change was hugely welcome after years of soft-market misery and, alongside the underwriting remediation by Lloyd’s chief executive, John Neal, it has facilitated a wider turnaround that has led to bumper results and prompted AM Best’s recent upgrade of the London market outlook to positive from stable.
Managing general agents (MGAs), in some cases, saw capacity curtailed during Neal’s remediation but the sector has since enjoyed increased fee income, with a consistent flow of top underwriting talent to coverholder start-ups underscoring its appeal. Clyde & Co’s 2023 MGA survey points to continued healthy carrier demand for new MGA partnerships.
But to sustain momentum, it is vital for MGAs to prepare for worsening market conditions, and that means addressing outstanding issues that did not seem necessary to confront when rates and, therefore, fee income, were rising.
Risk awareness
For some MGAs, these include an inadequate understanding of the book they are writing, of individual risks within that book and of risk-adjusted rate change. They also include insufficient early warning capabilities such as escalation triggers.
Many MGAs suffer from low-quality, unconnected data pools, collated through outdated legacy systems. Capacity providers, meanwhile, regularly complain that the data they receive from their MGAs are partial, patchy, and impossible or impractical to integrate. Most MGAs are small and have, historically, lacked access to resources that could help them rectify these deficiencies. Most have no in-house actuarial teams, so depend on broker networks and fronting carriers for actuarial insights.
It is easy to see how this situation can lead to highly unsatisfactory portfolio management, particularly since brokers usually give underwriters data for the previous three years only. Imagine that an insured has experienced a major loss and the insurer asks it to invest in a risk management department to get cover.
Over the next three years, the insured incurs no losses and, deeming the risk management department unnecessary, removes it to cut costs. When its broker approaches a new underwriter for insurance, the underwriter, seeing only the recent three years of loss-free data, may be unable to accurately assess the company’s risk. To counter this, had the new underwriter built an early warning system, it would have triggered a flag to ask the broker for additional information, thereby exposing the significant previous loss.
In terms of technology, it is important to acknowledge that some MGAs were early adopters and have made tech and data capabilities a key selling point. However, many more need to dramatically improve data collection, break down unconnected silos of information and ensure the data flow from MGAs to carriers is more reliable. Currently, the vast amount of information flowing through the distribution chain is often gathered inefficiently and requires frequent re-keying, leading to hold-ups and mistakes.
Data granularity
The data provided to capacity providers may also lack granularity. In the case of a property binder, for example, fundamental information about the location, type and age of the buildings may well be missing. It is also common for carriers to remain in the dark about buildings’ usage, which would obviously significantly change the risk profile.
Without this key information, accurate pricing and appropriate coverage limits are nigh-on impossible, and actuarial processes become extremely challenging. The ability to provide carriers with a detailed view of the risks being underwritten is no longer a “nice to have”.
The good news is that the rapid advancement and democratisation of technology, data and data analytics give MGAs an unprecedented chance to understand and refine their existing portfolios and spot new opportunities. These developments also allow them to strengthen their relationship with carriers, to whom they have a duty of care.
Those carriers need reassurance that MGA partners are on top of their books, are bringing in good quality business, and can thrive through all market cycles. Personal relationships may have sustained certain partnerships in the hard market but, as the rate outlook deteriorates, capacity providers will be viewing arrangements more critically. Some MGAs will disappear.
Substantial progress has already been made and MGAs are already, increasingly, using technology and data as essential tools for differentiation. Their capability to collect not only client data but also submission metrics, bordereaux reports, and portfolio monitoring for exposures and claims demonstrates the sophistication that both carrier and clients desire. This will eventually be demanded as standard.
The soft market is coming. Ahead of time it is vital that MGAs understand their portfolios and share information and insight with capacity providers. Strategic foresight and a focus on value creation now is crucial to meet challenges and seize the opportunities of that inevitable change in the market cycle.
Sunnie Luthra is managing director of Leadenhall Analytics
