MGAs under threat as insurers set to crackdown
Covid-19 and BI wordings row likely to see a flight to quality, specialist providers while vanilla offerings set to struggle.
Insurers are going to tighten up how they work with managing general agents in the wake of the Covid-19 business interruption cover dispute.
The coronavirus is also likely to increase market hardening, another area that will give insurers pause for thought with regards to how they trade with MGAs, according to experts.
Charles Manchester CEO of Manchester Underwriting Management told Insurance Age: “It’s a harder market now and policy wordings get narrower in harder markets. Insurers stand behind MGAs so they need to know what they’re signing up to.”
Another expert who did not wish to be named questioned the value of some MGAs.
He commented: “I think worthy of mention is also MGAs. There’s been a plethora and it is such a big market that has expanded so fast.
“You wonder don’t you, how long insurers are going to be giving away their capacity and their brand, particularly when they feel that perhaps some of the wordings that they’ve given out there haven’t been studiously given out.”
C-Quence is a commercial MGA launched by former AIG boss, Jacqueline McNamee.
She remarked that insurers will need greater confidence when delegating underwriting authority going forward.
“MGAs may need to demonstrate even more robust risk selection and underwriting capability than they have in the past together with other differentiators, that assure profitable and sustainable growth,” she commented.
McNamee added: “The challenges go beyond the specific wording design, exposure application and pricing issues, together with customer expectations and their understanding of BI cover.
“The global and market impact of the Covid-19 pandemic begs a bigger question – is the decades’ old model still fit for purpose or is a radical re-think required?”
According to some experts the writing was on the wall before the outbreak of coronavirus.
MGAM founder and CEO, Jason Anthony explained: “The day of reckoning was upon MGAs pre Covid. Covid has accelerated insurers being even more selective of their underwriting and distribution partners. MGA’s will need to forge true partnerships with their insurer panels in order to gain their trust and confidence.”
Wordings have come under the microscope as part of the Financial Conduct Authority business interruption cover test case.
Manchester commented: “I think that insurers will be more likely to look closely at MGA wordings, particularly where the MGA has drafted the wording. It’s crucial the capacity providers and MGAs engage at an early point on any matter where there may be coverage disputes, especially in public – the message and how it’s given is important.”
Anthony agreed wordings will come under greater scrutiny and agents without depth of understanding will struggle.
He detailed: “We will see a review of policy wordings. Wordings are the policy of insurers, negotiated on behalf of clients by brokers with the insurer. Ultimately insurers have control of the wording; the wording is the product of the insurer.
“One of MGAM’s first hires was an experienced wordings manager. This was strategic as we want to work with carriers in order to have input in the wording. If the MGA doesn’t bring that experience and depth of knowledge, they will find it hard to have input. Ultimately, the policy does not get to market without it being agreed by the insurer.”
However, McNamee said the work needed to go beyond simply tightening up wordings.
She countered: “Wouldn’t it be typical for the Industry to simply tighten wordings and hope that is the way out? In fact there are a range of methods and tools that can and should be used to improve portfolio performance.
“Arguably the most important of these is the concerted use of structured data to support a more targeted and segmented range of product solutions, based on risk profiles, that are designed to meet the needs of individual customers or customer groups rather than the age old approach of one size fits all.”
The market was already hardening ahead of coronavirus hitting and it is predicted that MGAs without clear specialisms could be set to struggle.
The unnamed expert noted: “I’m not writing MGAs off by any means, but it was always quite a bizarre thing to me, and I have run MGAs, that insurers would give their brand away especially in the more vanilla areas such as commoditised commercial products. If MGAs have any future, and I believe some do, it is surely only in the area of specific specialisms.
“To give their brand and their wording away is something that will want acute reflection by some of these insurers. And I think naturally a consequence will be that a number, and maybe a significant number, of those MGAs will struggle.”
Some of the more generalist MGAs are already beginning to sweat.
Anthony commented: “I think they already are [struggling]. If you don’t add value either in distribution, expense improvement, data process and management, underwriting capability then what is your purpose?”
Manchester did not go that far but did point out that agents that don’t offer value will find themselves losing out.
He explained: “MGAs that don’t add value will always struggle in the long run, regardless of Covid-19. How they add value varies widely, from distribution through underwriting insight, but it needn’t be a specialism alone.”
Quality not quantity
He added: “My instinct is that there may be fewer but better MGAs as insurers will set the bar higher. But time will tell – Covid-19 doesn’t affect every line of business but, it does affect every insurer in one way or another.
“We just don’t know – there will be lines affected unexpectedly, an economic crisis and a market that was hardening anyway – how this will play out for brokers, insurers and MGAs is impossible to predict.”
However, McNamee said it wasn’t about specialists versus generalists, instead differentiation is key.
She explained: “They need to be able to differentiate themselves. That’s what will make them attractive to capacity providers.”
She pointed out that MGAs can become true market leaders in a number of ways including:
- developing technology that delivers a step-change in the “quote to bind” processes, including the clever use of data from multiple source, as well as automation
- providing new solutions to emerging risks
- offering access to valued distribution.
The MGA landscape has developed in recent years with an increasing number coming on to the scene with increasing power.
This has partly been driven by consolidator action.
The expert explained: “It was not common practice for insurers to give away wordings to MGAs initially but has become increasingly so, especially to those larger brokers and consolidators as it allowed the brokers to control service, product, sometimes claims and ultimately it meant earning larger percentages of the total premium.
“Therefore, particularly in the area of acquisitions, it allowed acquirers to leverage even higher incomes from the businesses they bought when they were reconstituted post sale.”
The pullback is likely to hit brokers, especially larger ones, in a range of areas including products, service, claims and even earnings.
“I would hope brokers will have access to insurers and MGAs who provide the best value and have the confidence of insurers for the long term,” Anthony commented.
He added: “We are a cyclical market and have entered a hard market. Premiums are increasing. What’s important is we stay focused on the aspects of our industry which we have failed to address in the previous soft market.
“High expenses, inadequate and antiquated systems, poor customer outcomes. It’s all too easy to forget what needs addressing in our industry when the market hardens and profits improve.”
McNamee said brokers will always find opportunity detailing: “Challenges always present new opportunities.
“Perhaps and hopefully there will be a wider embrace and desire to trade and transact digitally and support the modernisation of insurance offerings, which can provide tangible benefits.”
They could include better products, greater efficiency, better underwriting and more efficient ways of operating.
Meanwhile, the unnamed expert warned of wide-ranging impacts.
He suggested: “The effect to larger brokers could be significant. Service, unique products, even in commercial, claims settlement and earnings could all be impacted.
“To the smaller brokers it would have less effect unless those speciality lines, where many brokers access through a wholesale arrangement and where MGA’s have real resonance disappear.”
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools.
Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions – https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email firstname.lastname@example.org