The creation of MGAs typically gathers pace in the latter stages of the soft cycle as insurers struggle to secure premium volume amid falling rates – and one of the defining characteristics of the London market in the latter half of the past decade has been the mushrooming of the sector, as entrepreneurial underwriters sought to seize the moment and strike out on their own.
But few could have predicted that come 2020, the world would be gripped by a pandemic and the (re)insurance market would face what some expect to be the largest loss event in history.
Rates had started to gradually improve but Covid-19 uncertainty has fuelled that momentum, and now talk of a forthcoming hard market is rife.
The push by Lloyd’s and the wider market to remediate had already triggered a contraction of delegated authority capacity and a “flight to quality”, as flagged by this publication as early as January last year.
Now uncertainty around Covid-19 and the overall swell in rate improvement is set to accelerate that gravitation toward higher value distribution channels.
It now seems likely that the winning MGAs in this environment will be the biggest, the smartest and those with a credible claim to being unique – along with a track record of proven profitability. Those who have more run-of-the-mill offerings or are mediocre performers will struggle at their next binder renewal.
This can be largely condensed down into four major trends for the MGA space:
1) Rapidly rising rates in the open market space will trigger capacity redeployment
With pockets of the open market now booking double-digit rate rises, paper providers will question the economics of accessing business through a delegated authority solution – which can come with a hefty acquisition cost.
Rates on binder business in particular can also rise at a slower pace than the open market – this is currently most notable in the US property binders space, where rates are rising around 10 percent, whereas open market property rates are currently up 20 percent or more.
Those delegated authority arrangements which do not bring unique distribution or product may well find themselves with a much smaller capacity pool to access at its annual renewal – and sources in the US property binders market are already bracing themselves for a capacity crunch come 1 January, when most binding authorities renew their arrangements.
2) There will be further pressure on MGA remuneration
MGA commissions have come under increasing scrutiny over the past few years as worsening results and fears over disruption intensified pressure on carriers to get their expense ratios under control.
Toward the end of last year, paper providers had already started imposing ceilings internally on acceptable commission rates by class of business, and in a harder market environment that ceiling will be reinforced or even lowered as the negotiating power starts to tip slightly further in carriers’ favour.
Those MGAs that can be flexible in remuneration structure and are willing to move away from a fixed commission focus toward a structure more weighted to profit commissions are likely to have an easier time at their renewal.
3) Smaller, monoline MGAs will come under pressure on multiple fronts
Independent MGAs that specialise in just one class of business may find themselves scrabbling for capacity at renewal, particularly if their given class is experiencing a surge in open market rate or has seen a sudden drop off in premium as a result of Covid-19 – warranty and indemnity insurance being a prime example.
Those monoline MGAs with unique distribution or product offerings will stand in a better position on the capacity front, however these MGAs also tend to be smaller in size and more vulnerable to external shocks – such as declining insurance dollar spend in a recession.
Brexit also looms large on many UK-based MGA agendas and many will not yet have Brexit plans in place, which will require additional investment at a time when revenues face decline. A number of incubator platforms speaking to this publication have noted an increase in enquiries from standalone MGAs looking for a Brexit solution so they can trade forward.
This challenge on multiple fronts could result in MGA consolidation or the takeover of distressed businesses by larger players.
4) The biggest MGAs will get bigger
Conversely, the current rating momentum gives well-established, multi-line MGAs a major opportunity to take their businesses up a gear.
The so-called “super MGAs” and multi-cell platforms in London are well set up to see rapid premium growth, with portfolio diversification providing an element of protection against shocks in individual classes.
Recent headlines have already demonstrated a bullish stance from some players – with Nexus expecting to hit £500mn in premium (and consequently triggering a strategic review) sooner than expected and Beat Capital looking to fundraise to support new growth.
The recent increase in private equity interest in the insurance space may also push the larger MGAs to bring forward investment rounds or buy-in plans to pursue additional growth either organically or inorganically.
If the coming recession proves to impact premium spend more significantly than expected, then the PE-backed MGAs may struggle to meet the growth targets expected by their backers, although so far intermediaries suggest that they are yet to see a substantial slowdown.
Covid-19 and the resulting trading environment will work to accelerate the process of natural selection that had already started to slowly gain momentum in the delegated authority world in the past 18 months.
In the new post-Covid market, it looks likely that scale, expertise and access to capital will win.
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