Nexus Group's Colin Thompson on the evolution of MGAs

The litmus test for any MGA is its ability to underwrite a profitable book of business and deliver low combined ratios to its risk carriers. Driven by the model combining underwriting expertise, distribution capability and efficient running via embracing technology, MGAs are growing in importance and number.

Operating without the regulatory restrictions and capital requirements of the traditional underwriter, the MGA can be more flexible and opportunistic. Considering the economic and political outlook for 2017, this should stand the MGA in good stead.

Despite Theresa May's speech on the 17 January outlining her priorities ahead of Brexit negotiations and intentions to pull the UK out of the single market, uncertainty surrounds how this will manifest itself. The precise nature of the "bold and ambitious free trade agreement" and corresponding passporting rights to the single market and the degree of transitional implementation remain complete unknowns. European policy holders are believed to account for around 5% of Lloyd's revenue.

With justifiable fears of US protectionism in the wake of Donald Trump's inauguration, the rise of disruptive technology within the insurance industry and potentially far-reaching French and German elections on the horizon during 2017, the turbulence of 2016 seems destined to continue.

In relative terms, compared with the traditional underwriter, the MGA's general attributes and low-cost basis should enable it to be more adaptable to negative developments offering innovative solutions while grasping opportunities as they arise. This can already be seen through regular influxes of new MGAs arriving on the scene, increased MGA mergers and acquisitions activity, innovative products and new distribution channels.

Where next for the UK MGA?
The UK MGA is stepping away from its past as a mono-line niche product underwriter to becoming a multi-product, multi-class ‘virtual' insurance company. This includes providing the entire infrastructure you would associate with an insurance company, for example, claims handling, providing actuarial services, premium collection and issuing policy documents.

The only difference is the MGA's balance sheet and that it doesn't carry the underlying risk - both of which offer advantages as discussed above.

A likely next area of MGA evolution is in the M&A space with the sector currently ripe for consolidation. This also feeds into increased size and here the US MGA model provides the yardstick. There are several mammoth US MGAs underwriting over $1bn in premium, while the largest MGA in the UK, Dual, underwrites over $900m. Increased capacity puts the MGA in a stronger negotiating position while also providing economies of scale.

Another likely direction for the MGA to evolve into is by also sourcing reinsurance solutions for their own portfolios that their underwriting partners ultimately then purchase. This would mean the MGA has greater control over the coverage that the reinsurers offer and, therefore, arguably greater consistency going forward.

Finally, MGAs need to embrace insurtech to ensure they have an efficient platform and model in order to remain forward looking and relevant. Incorporating big data and automating processes where possible will be key.

The MGA of the future may well be a combination of the above. A 'virtual' insurance company, underwriting at greater capacity, offering a wider product range while embracing technological advancements to remain cost efficient and competitive.