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Hardening market causing capacity concerns for MGAs: AM Best

15th February 2022 - Author: Matt Sheehan

Analysts at AM Best have warned that hardening underwriting conditions and reduced availability of underwriting capacity are posing challenges for UK Managing General Agents (MGAs).

The rating agency sees MGAs with profitable records, niche business, or strong technology integration as being best positioned to navigate these difficult conditions.

Accessing financially secure capacity over the long term is vital for MGAs, and is something that can occupy a significant portion of managements’ time.

While the more successful MGAs typically have strong relationships with their insurance partners, and also their distribution partners, AM Best notes that the long-term availability of capacity is not guaranteed.

In response to hardening re/insurance prices, remediation efforts at Lloyd’s and the COVID-19 pandemic, major insurers and Lloyd’s syndicates have altered their risk appetite and sought to shed unprofitable business, even exiting entire classes in some cases.

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For many MGAs this has resulted in reduced capacity available to support the risks they are looking to bind, AM Best says.

And even for those that have maintained capacity, there may have been changes to products and exposures that risk carriers are willing to assume, as well as revised terms and conditions, and significant time devoted to maintaining relationships with capacity providers.

“The risk of losing capacity and the associated uncertainty can make long-term planning extremely challenging,” analysts cautioned.

All MGAs are vulnerable to this threat, but AM Best believes that those with poor underwriting records or those dependent on a small number of short-term capacity providers are particularly at risk.

In particular, newly established MGAs face a challenging time, as firms without performance track records are forced to rely on factors such as the expertise of senior management and underwriters, governance structures, and a credible business plan to attract quality capacity.

However, as capacity becomes more selective, the threshold where these factors become deciders rises accordingly.

In contrast, AM Best sees established MGAs with demonstrable underwriting capabilities and a track record of delivering profitable business as being in a stronger position to maintain relationships with risk carriers and remain highly valued partners.

In order to ensure they remain relevant to the market and achieve long-term success, AM Best recommends that MGAs need to focus on profitability, be adaptable to changing market conditions, and align their interests with those of risk carriers, distribution partners and other important intermediaries.

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