The UK's GBP4.7 billion MGA market looks set to become an ever more popular feature of the London market, even as competitive and regulatory pressures increase according to a survey of more than 100 insurers and MGAs concluded by global law firm Clyde & Co.
According to the firm's report Which way now? Is the UK MGA market at a crossroads?, which also involved interviews with leading MGAs and insurance carriers, 80% of carriers expect to increase MGA capacity in 2019, but the market is divided on whether this will come from new or existing MGAs (53% of insurers and 51% of MGAs saying there will be more MGAs), largely dismissing fears that an MGA bubble has formed and might burst.
However, overall, most MGAs and carriers believe the market has become ever more competitive (69% of MGAs and 67% of insurers) while more still (67% of MGAs and 78% of insurers) agree that setting up an MGA is much harder now than at any time previously.
Jennette Newman, Partner at Clyde & Co, says: "The entrepreneurial spirit of MGAs adds tremendous value to the market but the drive for efficiencies in the company market, combined with regulatory hurdles and a lack of capacity at Lloyd's, has seen MGAs come under increasing scrutiny to ensure that they are delivering on their promises to efficiently reach new customers in new markets in a way that delivers profitability for all parties involved".
London market benefits as Lloyd's comes under pressure
The research demonstrates that Lloyd's is no longer viewed as the best location to develop MGA business. Fewer than one-third of respondents selected Lloyd's as their top choice, citing the rising regulatory and compliance burden as a primary factor behind the decision to look elsewhere.
Ivor Edwards, Partner at Clyde & Co and European head of its corporate insurance group, says: "The contraction in capacity at Lloyd's is a necessary evolution for it to return to profitable underwriting. There will be a concern that the business it loses should not be the profitable business. But while carriers are keen to focus on new opportunities outside the UK, Brexit has thrown a spanner in the works by creating issues around licensing. It has focused attention on where companies are licensed to do business and impacts how they conduct it."
According to the research, 63% of MGAs believe that the London company market offers the greatest prospects for growth, but interestingly, carriers show greater interest than MGAs in the US market and other geographies.
Newman continues: "A change of location does not mean that the challenge of regulation is going to be any easier. It is becoming progressively tougher for MGAs to get established – wherever they choose to set up – due to the rising regulatory and compliance burden, the FCA's systems and control requirements and more particularly, the new Senior Managers and Certification Regime which comes into force in December 2019."
Respondents divided on who should provide technology and claims expertise
The research shows that the market is divided on who should provide tech capability and investment, and on the importance of claims handling services.
Around a quarter of MGAs say that they look for technology support and assurances from carriers with 45% taking the opposite stance – seeking to differentiate themselves on their technology capabilities. On the insurer side there is a roughly even split between those insurers who expect their MGAs to demonstrate technological strength and those who do not see technology as an important factor in their MGA relationship; for these players underwriting skill and customer reach are what count.
Newman says: "MGAs come in all shapes and sizes with those with a single product and a strategy based on generating volume likely to prioritise and invest heavily in technology while others may choose to emphasise their niche specialisms and customer relationships. But the over-riding factor is cost. Not all MGAs have the financial clout to invest on the scale needed to utilise technology as a service differentiator. As with the market as a whole, technology is a huge opportunity and threat to the MGA sector and we see it as a key area of focus over the coming decade."
Another interesting issue uncovered by the research is the significance of claims performance. Although this was cited by considerably less than half of MGAs (38%) in terms of key criteria in selecting a capacity provider, this area was the focus of many of the subsequent interviews with MGAs and insurers. This suggests that claims performance, while not a critical factor in initial selection criteria, is fundamental to the day-to-day relationship between insurers and their MGA partners.
Newman says: "MGAs that do not handle claims direct are particularly exposed to poor performance in this area as a bad claims experience has the potential to have a negative impact on their ability to grow and drive profitability. As a result, they prioritise good relationships with brokers and the claims handlers at their capacity providers, and place great emphasis on the importance of doing thorough due diligence – not just around an insurer's financials but its claims record as well – before entering into any partnership.
Sector is maturing
Looking ahead, the survey findings suggest that new MGA start-ups or those without a track record and strong management information systems in place may struggle.
Newman concludes: "As the opportunities to establish new businesses diminish, but capacity increases, companies that survive the increased scrutiny and pressure to perform will emerge from 2020 as bigger, better run and more profitable. These are the hallmarks of a maturing sector."
Download the report here.
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