Blog: MGAs and the shift in the insurance industry distribution ecosystem

growth-explosion

The number of delegated underwriting authority enterprises has grown rapidly over the past 10 years. David Blades, associate director of industry research and analytics at AM Best, explains why this is and what this means for the market.

Handing over the underwriting pen is not new to insurance carriers. Insurers and reinsurers have long delegated underwriting authority to managing general agents, managing general underwriters and similar entities as a means of growing premiums and product offerings.

In the last 10 years, however, there has been a noticeable shift in the landscape of delegated underwriting authority enterprises. Their importance within the insurance industry distribution ecosystem has grown considerably.

AM Best uses DUAE as a blanket term for these organisations, the Lloyd’s market refers to entities with delegated authority as coverholders, while in Australia they are commonly known as underwriting agencies. These specialised distribution partners are empowered to underwrite, price or bind coverage, as well as settle claims, on behalf of their carrier partners.

The rising prominence of DUAEs can be seen both in their growing number and in the premium attributable to them. In the US, premium revenue generated through DUAEs has approximately doubled in the last decade. Additionally, the number of MGAs rose to 688 in 2019, compared with 577 in 2017. Those figures are strictly based on National Association of Insurance Commissioners disclosures, so the actual number of MGAs may be even larger.

Recognising the increasing use of DUAEs and how their decisions could financially impact their insurance partners, AM Best recently released a draft methodology for the Best’s Performance Assessment for Delegated Underwriting Authority Enterprises. The intent of the Performance Assessment is to provide transparency to the market and inform the industry of a DUAE’s relative ability to perform services on behalf of its insurance partners. The methodology is open for public comment until 3 May.

Given the competitive challenges of the last several years, insurers have worked to stimulate premium growth by acquiring quality books of business and expanding their portfolio offerings by enhancing their distribution network. As a result, premium growth opportunities in the US and the UK have been plentiful for DUAEs.

Though the UK still has a high presence of broker-driven business, DUAEs have gained a greater share of the market as the number of brokers has steadily reduced due to merger and acquisition activity and specialist underwriters have moved into the MGA model. In the UK, DUAEs now account for a staggering 10%, or £5bn, of property/casualty business.

AM Best estimates DUAEs generated more than $44bn (£32bn) in direct premiums written in the US in 2019. That figure is based on data gleaned from annual financial statements filed by AM Best-rated property/casualty insurance companies, so it does not encompass 100% of the business produced by these enterprises. The total DPW, therefore, is likely higher.

One of the key reasons behind this growth is that insurance carriers have struggled to grow organically. DUAEs offer carriers access to new risk classes, new lines of coverage, and access to new geographic areas. This brings diversification to the carrier’s portfolio.

DUAEs also provide carriers with instant infrastructure, including risk management and governance structures, along with underwriting and pricing acumen. Because building such capabilities from scratch requires a significant investment, DUAEs provide a cost effective way for (re)insurers to access niche or emerging risks. DUAEs can, therefore, supply carriers with profitable business for a fraction of the expense and investment required to establish the necessary expertise in-house.

Expertise is perhaps the most critical service DUAEs provide, particularly specialised underwriting talent. Specialisation has helped DUAEs protect and preserve their books of business. Insurers tend to be open to extending underwriting authority to a DUAE when it has capable distribution, sizable premiums in certain niches, proven underwriting expertise in writing different classes, and a technology platform that supports the entire insurance process.

The most successful DUAEs have been built on a foundation of strong, long-standing customer relationships and robust frameworks for managing account information and monitoring performance. Technology and innovation also play a role in success.

DUAEs have proven their ability to blend traditional underwriting practices with innovative solutions, which has added to their value proposition. They also are using technology to enhance operational efficiencies, further their effectiveness and boost productivity.

They frequently leverage the power of telematics, smart devices, artificial intelligence, the Internet of Things, and blockchain to optimize their risk assessment and fine tune their pricing. Their use of technology allows them to be more agile. For instance, DUAEs with specialised expertise and technology can expand quickly to service specific niches or sub-niches.

AM Best’s research found that DUAEs, overall, tend to be ahead of the curve from a technology standpoint. Remaining so will be critical to continued success. The combination of agility, resources, access to greater specialty expertise and cost-effective distribution will set these entities apart from other players in the distribution chain. Product innovation, actuarial capabilities, and full confidence and authority in claims handling will be paramount.

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