20th December 2021
We live in a world where speed is of the essence, where change seems to be implemented quicker day by day. New, innovative ways of working, new thinking, and new capital and competitors are challenging traditional insurance business models.
We continually look at insurance compared with other industry sectors typically, and correctly, identifying that insurance tends to lag behind. Hence, it is around 10 years since, as individual consumers, we’ve become familiar and comfortable with shared economy platforms such as Uber and Airbnb launched from the ground up by entrepreneurs.
Much of the change in the insurance industry over the last 5 years has arisen from a combination of tech entrepreneurs, and the more forward looking insurance entrepreneurs, either combining, or, in parallel, pushing in the same direction. What has happened during that period is that the new entrepreneurs entering the insurance space have often tried to look at insurance differently, often reflecting on their own personal experiences.
Some even look completely afresh, contemplating whether there is an opportunity to re-imagine the current insurance world in a ‘back to basics,’ ‘what is it all about’ fashion. This recognises that customers really need a simple solution to a worry that they are carrying a risk in their lives which can be significantly reduced, or removed, if it’s shared with others.
The driver for this change for MGAs is the upside in value. i.e., it is the financial impact. An MGA may well have profit commissions in order to share the underwriting result, but most commonly, consideration is given to finding other ways of retaining underwriting or portfolio profit. Sometimes this will be by looking at a captive solution, sometimes by creating a Lloyd’s syndicate in a box (SIAB), sometimes by the raising of sufficient capital to create an entirely new capitalised insurer. Each route has its own pros and cons and associated costs.
An insurer will need to carry a much higher cost base and the overall capital efficiency must be assessed. The even more extensive regulatory hurdles and associated personnel requirements, ranging from actuaries to risk managers, to more compliance officers, translates to a higher fixed cost base. So, as many of us know, this gives the MGA model an edge in terms of margin, agility and funding needs – particularly in the setup phase. Depending on the growth of the insurance portfolio, often considerably thereafter.
It is in the product where differences become most apparent. Most of the time, a start-up MGA will have little leverage and hence rely on the partnering risk carrier having a significant say in the insurance product, this will include the terms and conditions, underwriting rules and pricing. This means that for an MGA, it might have to choose to source products from the risk carrier’s existing portfolio with some customisation. In rare cases it is possible to develop products from scratch with a degree of freedom that resembles that of a Full-Stack Insurer.
The fact that MGAs can leverage the risk carrier’s resources and, in some cases, even collaborate with multiple insurers, allows for a shorter time to market, efficient product development cycles and quick expansion of the product portfolio.
However, although in theory the Full-Stack Insurer has immediate full control over every aspect of the insurance product, in reality it is more complicated. Not only may regulatory matters slow down product development and time to market, but so may qualifying requirements of reinsurers, which new Full-Stack insurers typically rely heavily on to manage their regulatory capital (i.e. proportional reinsurance providing an element of capital relief.)
A new Full-Stack insurance player may quickly find itself entangled in the complexities and dependencies of regulation which can draw attention and resources from its actual core value proposition.
Quite aside from the flexibility, cost efficiency and speed to market there are other elements which are at the fore of the market’s current thinking.
Fundamentally the business must have customer centric solutions which often relates to an end user’s preference about interaction with the service or product provider and very often relies on app and smartphone to create that interaction. It also relates to creating the optimum customer experience.
Embedded insurance remains a hot topic – it’s key in my world where around 50% of new enquiries arise from a non-insurance ecosystem. Typically I am referring to a linkage between a core product provider and insurance acting as an enabler, as in the case of Uber or Airbnb, or sometimes a complementary financially accretive add on.
Change is coming and the market is being affected by dynamics from increasingly non-traditional sources, at Davies we are working with our clients to continue to meet the challenges and position themselves to make the most the of the opportunities a move to a greater use of technology and digitalisation will present.
If you would like to discuss any of this in more detail, please contact our CEO of Intermediary Services, Chris Butcher on firstname.lastname@example.org.
This article was first published in Insurance Day As technology plays…
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