Redefining the MGA business model

15th January 2020

This article was first published in Insurance Day

As the operating environment in the London market is being redefined, tough questions are being asked of the assumptions and processes that underpin the business models of MGAs.

On a macro level, the outlook for the MGA sector can be summarised in three words: certainty, capacity & consolidation. For the MGA sector, the past quarter has been a positive one as they look to 2020 and the opportunities that it will present.

The UK general election result last month has provided a clear majority for the ruling Conservative government which based its campaign squarely on the delivery of Brexit. The size of its majority has delivered certainty for the country and the insurance sector around the fact that Brexit will now occur. It has changed things for the market.

The certainty is likely to increase the capital flow to the market. We have been aware in the US private equity investors have been reluctant to make any decisions whilst the future of the Brexit process was unclear. It has been tough for many in the market but there are already signs that the capital flow is starting to increase and we are likely to see a growth in investment and with its consolidation. Deal flow will increase and what we are seeing at present is an indication that those deals around the MGA sector will be larger than in the past.

If we look at December 2019 we did not see any real level of deal activity and there were few if any, structured deals. Across the market conditions have been tough. Things remain tight at best and particularly in the specialty risk classes where we are seeing a continuing hardening market given the experience of recent years.

That said, if we can use the MGAs we work with as an example, we have not seen any reporting a reduction or withdrawal of capacity from their insurance and reinsurance partners. In fact, for some, we have seen more capacity at 1/1. However, we are finding that it remains a difficult job to get some insurers to articulate their strategy when it comes to their approach to delegated authority business. It is a conversation we are continuing to have as both established and potential new MGAs are looking for capacity across a wide range of classes.

Complexities

In terms of the London market, the situation remains a complex one. There is a great deal of activity befitting its role as an international risk centre and MGAs have shown an appetite for greater participation in international programmes and business.

While Brexit will now happen, the debate over the shape and structure of any future trade deal and the environment for financial services remains unclear with that lack of clarity likely to remain for the year ahead. The recent remarks by Bank of England Governor Mark Carney that the UK should not seek to adhere to EU regulatory systems make the ability for the continued passporting of financial services look less likely after Brexit.

It has left MGAs to look at the issue of forming EU operations that will allow them to underwrite European risks in 2021 and beyond. However, with market conditions still challenging such operations come with a significant cost implication for MGAs and decisions will need to be made.

What has been something of a surprise has been the changing approach to the insurtech sector. Currently, there does not seem to be the same enthusiasm for insurtech start up and initiatives that we have seen in the past. The appetite from the capacity providers does seem to be waning despite the fact that those insurtech operations we have partnered to establish have done well and are continuing to do so.

What we are seeing is MGAs now moving towards obtaining regulatory authority in their own right and with it autonomy. It is creating a demand for greater levels of support, not only to enable the MGAs to provide the necessary information to obtain regulatory approval, but also for the systems that enable MGAs to meet their ongoing regulatory obligations.

We are also seeing some looking to get closer to their customers as they look at the creation of long term relationships. Technology remains at the heart of the MGA offering as they use technology to enhance efficiency and reduce operating costs. What we are seeing is some MGAs that have developed their own technology and systems looking to market those systems to the wider insurance industry.

The growing impact of technology is evident across all areas of business and we cannot believe that we will remain immune. It will create challenges but the ability for the MGA sector to be agile will create new opportunities. There is a lot for the MGA to be positive about, however, those opportunities will require the ability to adapt and move quickly if they are to be realised.

The London market is looking to redefine how it operates and MGAs will need to be aware that this new environment could place new demands on the skills and processes that underpin their business.

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