Once again, the cycle of MGA popularity is growing, writes Robert Wildbore of Ed’s reinsurance division.
We have seen it many times over the years; underwriters launch MGAs, providing a platform for their expertise and service without all the costs and oversight inherent in insurers and reinsurers. After gaining traction and growing successful portfolios, the options to capitalise their ventures to transform them into risk carriers in their own right, sell to an insurer or continue to grow profit are all attractive. That model remains robust, so the current trend of new MGA formations is likely to continue. However, it is beginning to look a little different.
MGAs are a success story for carriers. For example, in South Africa the model is tried, tested, and well established. ‘Underwriting managing agents’ write both mainstream and specialist risks, supported by local carriers, and are highly influential in the placement of their own reinsurance. Often carriers and MGAs establish longstanding relationships until the carrier looks to buy the agent, perhaps to secure the business or expand in to new territories or specialisms.
Lloyd’s, with its global licences and expertise in specific distribution platforms, has long been the darling of MGA underwriters seeking capacity. The route to coverholder status is well-trodden and relatively straightforward. However, two areas of strain are emerging. First is the current line-of-business scrutiny that Lloyd’s centrally is placing over underwriters. Looking in ever greater detail at each new MGA’s proposition, its track record, and its ability to get off the ground, Lloyd’s underwriters are increasingly wary. Consequently, it has become more difficult for a start-up MGA to secure Lloyd’s backing of late. The second emerging strain is the cost to the carrier at a time of high scrutiny on costs in Lime Street. Paying an overriding commission to an MGA adds a demonstrable layer of cost.
Despite this, MGAs are increasingly attractive to carriers. Without doubt more – on a global level – are investigating the possibilities of increasing their support of MGAs, as part of their development of a more holistic distribution strategy. Major international carriers are developing their capability to expand their delegated business as part of a multi-faceted distribution play, and are securing the expertise they need to do so. Others are looking at the MGA space anew.
ILS and hedge fund capacity have also recognised the potential of MGA distribution. Carriers both established and new, backed by traditional or alternative capital, are looking afresh at how they can grow through what, for them, is a relatively new distribution channel. These trends must not be ignored. The future may look dramatically different from the present, where Lloyd’s dominates capacity provision for many international MGAs. We may see MGA underwriting platforms intermediated by brokers’ technology to link retail risk to risk capital – whether from funds or traditional carriers with sidecar-type vehicles.
By efficiently and seamlessly linking the underwriters and carriers, and exploiting the direct technological transfer of funds and data, several links could be removed from the value chain, to save considerable costs. Progressive carriers are already embracing this possibility, alongside visionary brokers and MGAs. It is another step in the continuing cycle of MGA popularity, one which could benefit our industry at every level.