Nimble and niche, managing general agents have carved themselves a sizeable market share. A roundtable organised by Post, in association with RSA, discussed how these strengths equip them for the future
Managing general agents should have a bright future if they continue to harness the agility and entrepreneurialism that have been their hallmarks through the years of strong growth. Their biggest challenge is to add value for insurers and customers without adding to the costs, already seen as a pressure point in the London market.
With more than 300 MGAs currently active in the UK, controlling around 10% of the £47bn general insurance market, they are a force to be reckoned with and one that insurers cannot afford to ignore. They have built up this impressive market share by exploiting niches that are not attractive to the mainstream underwriters. In future, however, they will have to add new layers of innovation, especially embracing digital solutions, if they want to maintain and develop their market share.
These challenges were explored at the roundtable, which maintained a resolutely optimistic mood when it came to assessing the prospects of the sector.
Value lies at the heart of the MGA proposition, said Charles Manchester, CEO of Manchester Underwriting Management.
“The key for a successful MGA and for the insurers supporting them is that the MGA has to add value. There is a whole spectrum of where and how MGAs might add that value, from distribution through to simply because they have got the world’s best underwriters in that particular niche. Some MGAs might add value in multiple layers.”
This brought agreement from Jacqueline McNamee, CEO of C-Quence Technologies: “It is about utilising all the resources at your disposal – distribution strategies, risk appetite and really working at where you can differentiate.
“That tends to be in the areas where the large composites aren’t playing. Spotting those niches where you can add value and where the barriers to entry might be slightly higher to stop new entrants coming in, that gives the MGA space to play in.”
Lisa Brennan, regional director at Accelerate Underwriting, felt the emphasis on MGAs being niche players was slightly misplaced: “It is not necessarily about niches. It is about having the right capacity, the right distribution and the right brokers.” Her point was echoed by the managing director of the Managing General Agents’ Association Peter Staddon: “MGAs are at the forefront of entrepreneurialism. When you put that together with distribution and underwriting, the three factors are what is needed for a successful MGA.”
Manchester was slightly sceptical about the ability of MGAs to flourish outside of profitable niches because the expense issues make it very hard to add value in the commodity classes: “You’re creating added expenses in the value chain, so that means you have either got to remove some expense or create some additional profit by being there.”
McNamee said the MGA market was a collection of niches and agreed that understanding the value chain was important: “There are a lot of players from start to finish. The MGA does add to the cost. But why can’t the efficiencies, the effect of their agility, the speed of decision-making and the effect of the entrepreneurialism around the MGA bring cost efficiencies and differentiation from the bigger carriers, thereby bringing benefits to their customers?”
The scope for MGAs to differentiate themselves from mainstream insurers was a theme that was taken up enthusiastically by others around the table.
“Insurers tend to be quite siloed. Underwriting is underwriting, finance is finance, and so on,” said Marco Del Carlo, MD of Tempo Underwriting. “When you get to MGAs, they tend to be smaller, a lot more owner-managed and have very integrated processes.
“They have the strategic agility to be able to move and respond quickly and seize market opportunities and run tighter operations.”
MGAs frequently find opportunities that insurers might miss by focusing on communities that have specific, well-defined needs and using different data, said David Woodfield, head of product and partnerships at Bought by Many. This approach means that MGAs find value that the major insurers might overlook: “What might only be a tweak for an insurer on an existing line is a niche for us.”
MGAs are evolving too so that the differentiation is starting to manifest itself in new ways, said Mark Birrell, CEO of Castel Underwriting Agencies and a director of the MGAA.
“A lot of MGAs are now more sophisticated than they have been in the past. With some I hear the term ‘virtual insurer’ knocked around. You can almost operate like an insurer but you haven’t got Solvency II, the Prudential Regulation Authority and possibly Lloyd’s governance around you as well.”
Manchester also felt the MGA scene was changing and the spectrum of types of firms was getting wider: “They are now starting to bring in alternative forms of capital. You will see the boundaries between MGAs and insurers blurring. That is already starting to happen.”
While this evolution may be going on in the background, the major insurers are busy building partnerships with MGAs, acknowledging that the sector is important and a significant part of the modern insurance market.
MGAs have unique strengths that neatly complement the underwriting expertise of insurers, said John Dawe, delegated business partnership director for RSA: “MGAs bring fresh thinking to the table. Bundle that together with the insurer’s expertise and you create a powerful partnership and a powerful proposition.”
It is, however, important that MGAs remain distinctive, said Dawe: “Insurers need to support MGAs for what they are good at and give them the space to do what they are good at and not make them look like a mini version of the composite.”
This steered the discussion towards exploring what makes a good relationship and a successful partnership.
“Communication and having trust,” was the key for Brennan. “As an insurer, you have to put your faith in the MGA as it is going to be out there selling a product that ultimately belongs to you but with more flexibility and more agility and a different way of thinking,” she added, prompting agreement from Dawe: “We’re backing them and trusting them. We want to go on the full journey with them.”
This means building for the long term, said Birrell: “It needs the mindset of long-term partnerships. We must provide insurers with really good underwriting results. Ultimately, that’s why they are there.”
Ensuring both the insurer and the MGA benefit is essential, said Steve Hedge, delegated director at RSA: “Understanding that strategic direction is absolutely critical. If you understand that you can set about helping to bring the shared vision to life, that is not a three- to six-month job, it is a three- to five-year ambition.”
McNamee said MGAs understand the importance of building a well-balanced partnership: “It is about respecting the responsibility the insurer has given us and the power it has delegated.”
Insurers partner with MGAs for a variety of reasons, said Jonathan Matthews, chief operating officer at Eaton Gate.
“Some will back an MGA because they have access to a market that they aren’t in. Some will back an MGA because they are in a market where they want to grow their market share. MGAs can flourish in both types of relationship. They can have their own processes, controls and governance. They can use their agility and expertise to tap into a market’s distribution networks, which then feeds carriers business that sits within their risk appetite.
“They can also satisfy brokers and carriers by having access to a panel of carriers that offers a broader array of choice than a single carrier. It is then up to the MGA to make a proposal as to how governance would work and demonstrate they can implement proper underwriting controls.”
The need for insurers to balance their trust of an MGA with their own need to ensure responsible – and ultimately profitable – underwriting is a source of potential friction, warned Del Carlo.
“There can be a rub between underwriting and the controls an insurer wants. There is always a rub between MGA and carrier in terms of how they work together because there is an overlap between them and because there are different views of the market and risk appetites.”
Avoiding conflict and potential duplication was seen round the table as being another key contributor to the thorny issue of managing costs.
“There is definitely an opportunity to avoid duplicating costs by not repeating underwriting controls. If there is an effective long-term partnership, streamlined controls can provide value back to the MGA and its customers,” said Matthews.
Insurers have a part to play here, said Dawe, by ensuring they do not try to micromanage MGAs: “Our underwriting philosophy is not to have case underwriters doing it off the side of their desks. It is about picking the right partners and maintaining oversight of them to make sure they do what they said they would do.”
The discussion returned to differentiation and the role technology could play in further enhancing the MGA proposition and setting it apart from that of the major insurers.
Del Carlo contrasted the challenges around technology when he first started in the insurance industry with the position today. Twenty years ago, the insurance sector was well behind the pace of adoption in other sectors and everything was massively expensive and took a long time to implement. That has changed and MGAs should benefit.
“The cost of technology has really dropped and the people who are waiting to adopt the new technology are typically the innovator and the MGAs. They can do that quickly because the cost and risk are low.”
Struggling to move on
Birrell felt insurers were still struggling to move on from their obsession with having to have different systems from their competitors: “The reason insurers have lagged behind is a mindset issue. There is a mindset that says everyone has to do it a completely different way to everyone else.” This approach, he argued, was redundant in the age of cloud computing and left MGAs in a position to exploit technology-led solutions.
Insurers acknowledge this as one of the advantages MGAs have, said Hedge: “It comes from focus. It differentiates an MGA from an insurer. It is that ability to focus on one thing and execute it really well and not be encumbered by legacy.”
This ability to embrace technology would also attract new thinking into the industry, said Chris Butcher, CEO of Ambant Underwriting Services: “I am most excited by the young entrepreneurs. They don’t always come from the insurance industry but they see a way of changing things. The new businesses of the digital age, such as Airbnb, need a different type of response from the insurance industry.” This was a sentiment immediately echoed by Woodfield: “Emerging needs come from new types of business. As they are digitally based, they need a digital solution.”
There was a feeling that MGAs are well-positioned to attract new talent as they should be more fleet-footed and open to new ideas than the large established insurers. This is something MGAs have to exploit, said Staddon.
“We need to get the young blood in. They think differently and technology is second nature to them. We must also talk to them about the products they want to buy and not the products we want to sell to them.”
McNamee pointed out data can bring many opportunities: “The power of data and the new tech tools has massive potential. Unleashing that power with data analytics will change things very quickly.”
If technology, data and the ability to attract younger talent into the sector are seen as some of the advantages MGAs have over insurers, coping with rising costs of compliance and regulation is a burden they share. In the case of MGAs, this could create pressures to get bigger, potentially sparking a wave of consolidation.
“In order to be economically viable, you have to be larger than in the past. The entry levels are much higher now,” said Del Carlo, who immediately knew where the blame lay – regulation.
“Every year, there have been a whole range of new things introduced, whether it is the Insurance Act 2015, the General Data Protection Regulation, the Fair and Accurate Credit Transactions Act, conduct risks, the Insurance Distribution Directive – the list goes on. All of these things add costs to business and what that means is that the economies of scale needed to have a successful MGA have gone up, up and up.”
This, he argued, will drive consolidation.
Butcher disagreed: “I don’t see it. The cost point is correct and we all buy into the whole issue around laying in new regulations. But we have 30 MGAs on our platform and they are all distinctively capitalised businesses and there isn’t much talk of consolidation among them.”
Another driver potentially boosting merger and acquisition activity among MGAs could come from insurers, said Manchester: “There is a minimum critical mass for insurers because they have to manage their own risks and have to oversee MGAs more tightly than they did in the past. They also have to watch their aggregation.”
That said, Manchester did not believe much would change in a sector that has always seen players come and go.
“There has always been consolidation because the life cycle of an MGA is that it starts as an entrepreneurial start-up and it builds up the business but there must always be an exit. That might be to another MGA, to a broker or an insurer but there is always going to be an exit. By their nature, MGAs are not going to be around for ever.”
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