Attendees at this year’s Broker CEO Forum discuss the drivers behind the current MGA capacity crunch

By Editor Katie Scott

The MGA market is currently facing a “difficult” capacity crunch, with expense models ringfenced as the sector’s “most important issue”, according to expert panellists speaking at Insurance Times’ exclusive Broker CEO Forum event this week.

Addressing around 30 broking chief executives who attended the two-day retreat at Lainston House, Winchester, panellists with experience of the MGA market commented that a lot of insurer brands have “disappeared” over the last 24 months, meaning that demand for alternative capital is strong.

Katie Scott_bw_path

Katie Scott

One puzzle piece that has been missing from this capital conundrum, however, is private equity (PE). Although PE firms have been backing brokers left, right and centre, their interest in the MGA market has been distinctly nondescript.

Charles Manchester, chief executive of MGA Manchester Underwriting Management (MUM) and chairman of the Managing General Agents’ Association, flagged this same perspective at Insurance Times’ BrokerFest conference back in June.

At the time, he said: “The problem with MGAs and M&A is [that] a lot of M&A and consolidation in the broker market is fuelled by private equity.

“That works for insurance brokers because insurance brokers have no real responsibility for the underwriting result.

“PE doesn’t rest well with making an underwriting profit because there’s a time in the underwriting cycle when an MGA should write less income and PE won’t want to hear that. I struggle to see how PE will work in MGAs.”

One of Thursday’s panellists, meanwhile, told delegates: “It needs to be understood how difficult that capacity crunch is.

“It seems disjointed that PE houses and others don’t take a broader and wider view of what is a fantastic sector and, ultimately, if you hold the power of that licence, you are the ones that can control the market, hence the capacity crunch.”

Another panellist, however, urged that if MGAs do tap into alternative capital, they must definitely work to make a return for that capital.

‘Villains’ behind the capacity crunch?

Other drivers of today’s MGA capacity crunch, according to Broker CEO Forum panellists, is a lack of scale in some MGA businesses, as well as the fact that it is hard to establish new MGAs in the current climate – one panellist even commented that more insurance firms were set up during the last war than in today’s modern era.

Speaking on the idea that owning an insurance firm can be “where the capacity crunch comes from”, one panellist explained: “We’re at great risk at the moment of saying ‘you have very few avenues to market in terms of capacity provider’. That is really quite limited.”

He added that MGA backing from big reinsurers is the primary way to secure sustainability – however, the panellist also described reinsurers as “villains”.

He continued: “[Reinsurers] seem to have this view of the market which basically says there’s always an excuse - excess of loss (XOL) is always going to go up.

“It’s always going to go up because even in the event of Covid, where no one is driving, there are more catastrophic losses potentially because people are going faster on those roads. Great excuse that was.

“XOL hardening of rates is here to stay. It’s not going to change any time soon.”

Mitigating rising XOL rates is where scale becomes important, the panellist noted.

He explained: “If you’ve got scale in this market, you can offset some of that by having a huge programme which gets you a better rate.

“Quality of programme is not actually as important as scale, which is a bit offensive in some respects. MGAs have to price accordingly.”

Another of Thursday’s panellists agreed that MGAs must have scale to weather the capacity crunch storm and remain sustainable in the market.

The panel concurred that there appears to be more longevity in commercial line focused MGAs than personal line centric businesses, as personal lines MGAs are more reliant on scale driven by underwriting.

However, one potential solution could come from Lloyd’s, added the panel. They believe that the marketplace’s syndicate-in-a-box proposition is a viable route to market that is significantly cheaper than other available options.

Service opportunity

It’s not all doom and gloom, however.

Thursday’s panellists noted that MGAs have the opportunity to be “aggressively responsive” to fulfil broker service requirements after “the working from home culture has absolutely murdered quite a lot of insurers” both during and following the Covid-19 pandemic.

Listening to brokers’ and delegates’ interactions with the panel, there certainly seems to be an appetite for specialist MGAs – as opposed to those that are more “vanilla” when it comes to their risk appetite.

The problem here is that highly specialised, niche businesses may naturally start as smaller MGAs, or may have a smaller pool of potential customers where they are so targeted in terms of their specialisms. This, in turn, could mean that the necessary scale needed for sustainability and to attract capacity is harder to achieve.

Capacity in the MGA market will always be a focal point for brokers – especially as more brokers are getting involved MGAs themselves. But will the current capacity situation improve by the time brokers gather for next year’s Broker CEO Forum? We’ll have to wait and see.