View from the Top: An illusion of choice

The start of 2012 has seen further high-profile weather events but little sign of the elusive price rises that are long overdue. In the past, the largest loss-year on record would have led to a marked increase in rates at the next renewal. The underwriting cycle would start to revolve, and brokers and underwriters would be anticipating years of plenty to make good the prolonged period of famine. 

We were told, at the start of 2012, that it would take a $100bn (£63.5bn) loss to turn the market. As if to test the validity of that argument, the higher powers have conveniently delivered such a result for 2011 but there is still no sign of a real market turn.

Rates in some speciality reinsurance lines may have increased but, in the UK, insurers are continuing their war of attrition as they try to bleed each other to death. UK premiums are no longer in freefall, but there is little to suggest they will start to rise soon. 

2012 will no doubt bring a bout of consolidation. As Royal Bank of Scotland sells its insurance subsidiaries and acquirers pick over the carcass of Groupama, consolidation is what the larger carriers want - it allows them to make a loss on their technical underwriting but still post a profit, prolonging the soft market further.

Who will be the big losers in this process? MGAs, which have contracted to guarantee insurers an underwriting profit whilst bearing all the major costs. Unless they have ultra-efficient systems MGAs haven't much chance until the market turns. They are simply fighting the war by proxy, without their resources forcing rates to stay low while giving brokers and insureds an illusion of choice. 

Will insurers care if their MGAs go bust? It is unlikely. They will take over the business for next to nothing. It won't improve underwriting results, but that won't worry insurers – today, running a successful insurer has little to do with making a technical underwriting profit.