MGAs set to explore new ways to access capacity

Managing general agents (MGAs) are coming under increasing pressure and are looking at new ways to operate, including taking a share of the risk to attract new capacity.

Speaking at a webinar organised by the Managing General Agents’ Association (MGAA), Stephen Dando, head of placement for Ardonough Group, said the MGA sector was currently under pressure and was likely to remain so, especially around challenges such as remuneration and the cost of distribution.

This includes, for example, the rise in the use of broker facilities as the additional remuneration these arrangements demand creates new questions for insurance capacity providers on how its capacity is best deployed.

“We have also seen the emergence of follow capacity, particularly in the London market,” added Dando.

“This is dedicated to the following market and there is the ability to deliver costs savings. The level of capacity that is dedicated to following markets has increased and that capacity is competing with the MGAs.”

However, the biggest catalyst for change for MGAs has been the efforts within the Lloyd’s market to drive better performance via its ongoing Decile 10 review.

“This has only increased scrutiny on capacity providers within Lloyd’s as to how they are deploying capacity and the way that capacity is performing,” he explained. “This has also impacted delegated underwriting authority business.”

Pressure points

Dando warned that MGAs also face a reluctance from capacity providers due to continuing concerns over the claims performance during the Covid-19 pandemic.

He said some insurers may have concerns that they have fallen into the trap of providing capacity but not paying the necessary attention to policy wordings and, as such, they may be sitting on unexpected Covid-19 exposures.

Dando said: “The MGAs and broker facilities will have their own wordings, which may be less severe than the insurer’s. The issue is now being raised by insurers who are concerned at the potential exposures they face.

“There have been some really difficult conversations between the capacity providers, brokers and MGAs. There is a reluctance to subscribe to broker wordings going forwards.”

MGAs are also facing pressure on their commission rates, as insurers look to the performance of their capacity across all classes.

“In most of the discussions by MGAs around capacity, it quickly turns to the commercial considerations,” Dando said.

“Additionally, we are seeing providers are increasingly keen to see MGAs take a share of the risk and with it, a share of the outcome.”

Bright future ahead

However, Dando said while conditions were challenging, it was not all bad news for MGAs.

“MGAs remains a very important part of our placement strategy as a broker,” he added. “They are an important part of insurers’ distribution strategies.”

They are still seen as an attractive way to fast-track capacity to a market and the entrepreneurial nature of those who operate the MGAs is still seen as a positive, with private equity investors looking at the MGA sector as an attractive route into the insurance industry.

“In terms of our MGAs, we believe they need to remain focused on staying true to their roots and doing what they do now,” said Dando.

“As an MGA, when you are looking for capacity support, you need to clearly articulate your differentiated proposition and your [unique selling points]. The ability to provide forward modelling and the data to support those models is key.”

Capital acquisition

Dando added that MGAs needed to consider the ability to access alternative sources of capital.

Jamie Polson, general manager at Robus Risk Services, said there were a growing number of options for MGAs in financial centres such as Guernsey and Gibraltar.

This includes schemes, such a protected or incorporated cell company, but Polson said MGAs need to look at the benefits of a particular domicile – for example, taxation, solvency requirements, the statis of the market, the regulator environment and the access to both talent and support services.

Andy Matthews, managing director at Robus Risk Services, said that Gibraltar was already seeing an uptick in MGAs who were looking to use the centre to create new operations.

“We have seen MGAs that have their capacity withdrawn at short notice. It has created the requirement to source more capacity and they are turning to Gibraltar as an option.”

He added that currently around 25% of UK motor business was underwritten from Gibraltar and while it has lost access to the European Union post-Brexit, it was still a “single market” with the UK and its risks.

“Gibraltar is very much open for business and is happy to be a home for MGAs who are looking for new ways to access capacity,” added Matthews.