In amongst the impressive displays put on by the UK’s largest insurers at this week’s Biba conference, another presence was strongly felt on the exhibition floor – that of an increased number of busily growing MGAs.
Several delegates, many of whom are involved in the creation, incubation or servicing of MGAs, said there has been a flurry of activity in the sector, with more expected to come to market this year.
In the past six months alone, MGA launches include transactional risk vehicle Devonshire, marine business Ocean Special Risks, Algorithmic follow-only MGA Vi Digital and marine hull and war firm Clearwater. Lloyd’s service provider PoloWorks has also launched an MGA incubator.
The sector has been defying expectations for some time. Many sector participants believed that the hardening market would bring a reckoning for MGAs, often branded as a soft market phenomenon borne out of carriers chasing top-line growth. The theory goes that in a sellers’ market, where insurers may name their terms, they have no need to give the pen away.
This reckoning, however, has not happened as some predicted. It is true that many MGAs experienced a capacity contraction as the market hardened, but not to the extent predicted.
The main reason put forward to explain this is the belief that these businesses have become more sophisticated, branching out from monoline to multiline offerings (while retaining niches of expertise) and developing underwriting discipline.
A broad overhaul of MGA remuneration to prevent reward for failure and align the profits of MGAs with those of their paper providers in recent years has aided this process.
It would seem that the hard market has not meant the wholesale ejection of MGAs from the value chain, aside from those that do not bring enough value. As we explored in this piece on the post-pandemic market, MGAs with scale and expertise are more likely to hold on to their paper.
Scale certainly has been a successful strategy for some. CFC’s meteoric rise, culminating in a private equity deal valuing it at £2.5bn ($3.2bn), is a case in point – as is the swelling of Howden’s Dual to worldwide GWP of $3.5bn.
So far, then, predictions about the impending MGA bubble have been overdone. A few factors are now colliding to inspire a new wave of interest in the vehicles, even as market conditions remain broadly firm.
Investor interest
There is continued interest from PE firms in UK distribution businesses, which throw off a rich and regular supply of cash with which to meet borrowing costs.
That was one of the main attractions for PE firms in the UK broking sector, which spurred much of the consolidation in both the retail and wholesale intermediary segments in the past decade.
At this mature stage of broker consolidation, however, the intermediary play is less attractive than it once was – good quality assets of scale are less available, and multiples are still relatively high.
MGAs, however, provide potential PE suitors with the same cash flow model as brokers would, as well as exposure to the UK insurance market without the need for a balance sheet.
Meanwhile, there is demand from brokers themselves for MGA acquisitions, as they look for assets that can diversify or complement their distribution models.
Capacity provider demand
On the other side of the equation, there is also growing demand from capacity providers to back MGAs.
Rather than the market turn killing off MGAs, the improved rating conditions are driving some insurers to seek growth opportunities off the back of stellar 2023 results and they are looking to delegate that top-line push in areas where they lack reach or expertise.
This demand is not limited to primary carriers. Sources have reported increased interest from reinsurers looking to use MGAs as another distribution avenue, via fronting carriers.
For enterprising underwriters too, the hard market – and its anticipated turn – could also act as a spur.
After a successful 2023, many individuals will have a solid set of underwriting performance figures to pitch to potential backers.
New dogs, new tricks?
The question concerning the current crop of MGAs is to what extent the sector has changed since the last wave of start-up activity.
No carrier or MGA wants (or would admit) to ill-disciplined underwriting that would spark or contribute to a race to the bottom on pricing, undoing all the hard remedial work done to portfolios over the past few years.
Demand from investors for growth, however, can prompt irrational market behaviour, driven by a fear of losing market share. MGAs are just as susceptible as any business to that – if not more so, as a loss of fee income can be less of a deterrent than booking direct earnings losses. Where investors are only in for a relatively short period – such as with PE – that pressure to grow can be even greater. Whether or not the current cohort of MGAs can resist the pull of underwriting for top line now remains to be seen.
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