Briefing: Where has all the capacity gone?

By Stuart Reid

So, where is capacity going?

Just look at motor insurance – particularly within the MGA market – and capacity, or the lack of it, is becoming a big issue. Insurers too are pulling out of the market – even household names that have been in the industry for years.

And it’s not just motor. The industry has seen market withdrawals hit household and specialty risks too, among others. This is hard to fathom when we have had such a surplus of capacity for so many years.

Sadly, what this development means for our clients is less choice and even higher premiums – exactly the opposite of what they need as the economy stutters.

There are many reasons for this capacity contraction, not least the once in a generation weather events that global capacity is having to deal with on what seems like an annual basis now.

World economics and inflation play a big part as well, but so too does regulatory change. No one faced with the facts thinks that it is fair for loyal clients to pay a higher premium compared to new customers, but inevitably prices rise for many consumers and appetite alters for suppliers as this model changes.

Balancing insurers’ portfolio

Perhaps one of the biggest issues that gets little publicity is that insurers, like any business, need a balanced portfolio. They have products that have both low and high claims ratios.

Regulation has brought a much greater scrutiny on products with a low claims ratio, to ensure fair value.

Few would argue against the benefit of this, but if insurers’ portfolio model is subsequently ignored, then many of the products that suffer a higher claims ratio will become more expensive or simply no longer be offered because insurers have lost the benefit of balancing these higher costs against lines of business that have less claims.

We all know that guaranteed asset protection (Gap) insurance is under scrutiny at the moment.

As I understand it, the FCA has demanded that all providers put their foot on the ball until further work is done. Poorly received responses from some providers are being investigated and rightly so.

It would also appear that, from some, the claims ratios are very low and demand scrutiny. As an industry, I am sure many of us can guess from where this issue arises.

But let us not forget that Gap insurance can be sold well. I am guessing that not all providers will have a sub 30% claims ratios – for example, prices can come down and cover can be widened.

There is without doubt a significant demand for this product, especially in these days of falling prices for used vehicles – just ask anyone who needs their car for their job, or who has a balloon payment due under a personal contract purchase agreement.

The MGA opportunity

As brokers, it is our job to find solutions for our clients. A reducing marketplace for whatever reason hinders us in that role and causes issues that have harmed us as an industry before, such as the proliferation of utilising unrated insurers in a desperate search to provide cover.

Additionally, a lack of products or higher prices for products inevitably exposes clients to a greater degree of risk, going uninsured, or having to take higher excesses and deductibles. This is the antithesis of what we want to provide.

Despite all the doom and gloom, there is hope.

I still fundamentally believe there is a seismic shift occurring in our marketplace that will help address many of these issues – I am referring to the continued rise of the MGA.

Although I have set out here that it is difficult to get capacity, where capacity is available, it is greedily being gobbled up by MGAs that can be more fleet of foot, more specialist, more competitive and more innovative than insurers – many of which struggle with the massive cost of IT, infrastructure, legacy and much more besides.

It is not easy but maybe insurers’ exit of certain lines of business will give an extra boost to MGAs that are able to eke out the capacity needed, maybe even from those insurers that have exited dealing direct.

By reducing the cost of operation, being able to move much more quickly and being able to develop products in short order, MGAs can succeed where insurers can’t.

This would be good for the economy and our industry – but most importantly, it would be great for our clients.