Despite the fact it’s now more challenging than ever to establish an MGA and with heightened competition across the marketplace, the UK’s £4.7 billion MGA market is on track to become an increasingly popular feature of the London market, according to law firm Clyde & Co.
Clyde & Co. recently conducted a survey of more than 100 insurers and MGAs, of which 80% of carriers said they expect to increase MGA capacity in 2019.
This is in spite of rising competitive and regulatory pressures and, while the market appears confident of further capacity growth, respondents were divided on whether this growth would come from new or existing MGAs.
69% of MGAs and 67% of insurers said the market was more competitive, while 67% of MGAs and 78% of insurers said that it was now more difficult than ever before to establish an MGA.
“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,” said Jennette Newman, Partner at Clyde & Co.
The survey and accompanying analysis from the global law firm reveals that the London market is benefitting from the heightened pressure within the Lloyd’s of London marketplace.
Lloyd’s is no longer viewed as the number one location to develop MGA business, with less than 33% of survey respondents selecting Lloyd’s as their top choice, with many citing regulatory and compliance pressures as the main driver of this.
Commenting on the Lloyd’s and London market dynamics, Ivor Edwards, Partner at Clyde & Co. and European Head of its Corporate Insurance Group, said: “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.”
63% of MGAs said that they feel that the London company market offers the greatest growth potential, and, at the same time, insurers have shown a greater interest than MGAs in both the U.S. and other geographies.
“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,” added Newman.
Regarding technology, which is becoming an ever more important part of the global risk transfer landscape, around 25% of MGAs said they look for tech support from carriers, while 45% said the opposite. Insurers were split roughly 50/50 on tech, with half noting an expectation from their MGAs to show technological strength, and the other half saying that they do not view technology as an important factor in their MGA relationship.
Newman continued: “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.”
The survey reveals that respondents were also divided on claims expertise. While just 38% of MGAs said that claims performance was a key criteria when selecting a capacity provider, Clyde & Co. notes that this area was a main focus of many of its subsequent interviews with both MGAs and insurers.
Newman added: “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.”
Concluding: “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.”
