This article was written by our Head of Compliance, Shyam Raikundalia and first published in Insurance Day.

The pandemic is transforming investment and the market environment in a way that is testing the compliance and capital management capabilities of MGAs and brokers alike.

New brokers and managing general agents (MGAs) are facing rising levels of regulatory scrutiny, driven by economic uncertainty, which is changing their relationships with investors and capacity providers. Those seeking to start a broker or MGA have been faced with demands for more data regarding how the business would manage being forced into run-off, as the risk appetite from capacity providers and corporate investors has significantly changed.

Recent months have highlighted the fundamental shift in the approach and attitude from corporate investors. Worryingly, that change in attitude has not been confined to start-ups. We are seeing large corporate investors becoming increasingly sceptical about market conditions today and the longer-term impact of the pandemic on the economy. This has resulted in a number of cases where investors have decided to simply pull the plug on MGAs. What is concerning for the market is that these MGAs are not struggling for business or failing to meet the targets set out in the business plans on which the investor had made their decision to provide support. It leaves several perfectly viable businesses having to be placed into run-off and the regulatory issues that entails, through no fault in either performance or management.

Regulatory uncertainty

The trend has not gone unnoticed by the regulators. The Financial Conduct Authority (FCA) is concerned about how the market’s stability is being affected by the change in risk appetite from investors and also capacity providers. The FCA is fully aware a U-turn in investment can create regulatory uncertainty and conduct issues, as the regulator needs to have confidence MGAs and brokers have the ability to act in the best interest of its customers at all times.

Insurers are also becoming concerned about the future of the MGAs they support. If an MGA is forced to move into run-off be-cause of a change in its investors’ appetite, the run-off needs to be handled in a way that meets the regulatory and compliance requirements of the market; failure to do so will leave the insurer as the ultimate entity that will be held to account. As such, some insurers have begun changing their approach to request for capacity. The hardening market has already required underwriters to re-examine their portfolios to ensure their capacity is focused on the classes that will deliver the best returns. They are increasingly looking to the run-off market for support to best manage portfolios that need to be placed into run-off.

It has had an impact on MGAs that are looking for capacity to support their business plans. Insurers are become far more prescriptive in terms of the data and detail they require from the MGAs before they will consider any lev-el or form of support.

MGAs are being asked for greater detail not only on the risks and classes of business they are seeking to underwrite, but also on the structure of the company, its ability to meet compliance requirements and details of its plans should it need to go into run-off. It has led to a situation where in our discussions with prospective MGAs and brokers, we are also having to include members of our run-off office team to discuss exit strategies to have the structures in place to assure the insurer all eventualities have been considered. Those plans need to be de-tailed and clearly demonstrate the structures are in place to ensure regulatory compliance.

Different questions

It leaves firms that are seeking investment and capacity support for their planned broker or MGA required to adopt a different approach themselves. It is becoming apparent that the questions they have to ask of their prospective investors need to change. In the past, firms would have concentrated on questions which focused on the amount of investment that any would be partner would be willing to commit. In the new reality, it has become more important to ascertain the risk appetite of any prospective investor. The need to satisfy yourself the investor is committed to the project for the long term and under-stands the nature of the market is, in many ways, now more import-ant than the level of the investment it is willing to commit.

The ability for brokers and MGAs to evidence their regulatory and compliance capabilities is growing in importance, with both investors and capacity providers. In today’s economic environment not only are insurers demanding more before they commit capacity, but the changing approach from investors that has seen them questioning their long-term strategies requires firms to think how they will meet the regulatory challenges of run-off even if the business is hitting every target set.