Willis announced last week that it is to launch its own managing general agent. How much of its business will go into the MGA channel and how will larger brokers react?
Brendan McManus is all too familiar with the trials and tribulations of placing underwriting in the hands of brokers.
Willis’ new UK & Ireland chief was part of the Royal & Sun Alliance leadership who dramatically pulled out of a binding authority deal worth hundreds of millions of pounds with Primary Group, in March this year.
Eight months down the line, McManus was in the news again, confirming last week that Willis would be launching its own managing general agent (MGA).
The move, first suggested at the company’s investor day conference in New York on 2 November, is a significant part of Willis’ strategy to adapt to accelerating changes in the pattern of distribution in the UK.
It comes as the global brokers continue to search for ways to boost income and efficiency in the seemingly limitless wake of the Spitzer reforms.
As a result, Willis says it is “considering investing between $30 and $50m in targeted growth areas.” First on the list is the MGA.
Given the broker market’s consistent complaints about the quality of underwriting that insurers provide, and Willis’ reputation for innovation and its experience in the MGA space overseas, the move seems to make good sense.
“Facilities, binders, and MGAs are some of the most effective ways brokers can improve their margins without compromising overall levels of service,” says a spokesman from a larger broker.
In particular, the MGA approach is a good way of securing more and longer-term business from insurers, using the leveraging power derived from size and scope to benefit both parties.
As a chief executive at a major UK insurer explains, the move is partly the result of Willis’ success at earning good levels of commission, and consequently an attempt to drive them up further still: “Willis has one of the largest margins of the broking community, which would suggest that it has already got a good commission deal out of insurers,” he says.
“The Willis subsidiary that is the broker is the agent of the insured. The MGA subsidiary is the agent of the insurer.”
That spells an opportunity. Independent expert Mark Winlow, director at LECG, explains: “If you write the business, you don’t necessarily have to charge a competitive rate.”
Though the business case appears to be relatively clear, three questions persist: how significant a proportion of Willis’ total book will be funneled into the MGA channel, what lines of business will they be, and what will the other larger brokers do in the wake of this development?
Commentators agree that the larger players may adopt a similar approach. Andrew Hubbard, senior insurance partner at Mazars says: “The MGA side is already widely used by other brokers. The next logical step would be for the other larger brokers to follow suit.”
As for the potential lines of business, general opinion expects Willis’ MGA to be positioned at the lower value end, not representing a large chunk of the brokers’ total business. Winlow suggests that it will likely only be looking to underwrite the straightforward, lesser value lines.
“Rather than having to broke a subsidiary line, it will be able to place it more quickly with a sole provider,” he says. “Compliance costs will be lower, while the best advisors can focus on big ticket lines.”
“Though the business case appears to be relatively clear, three questions persist: how significant a proportion of Willis total book will be funneled into the MGA channel, what lines of business will they be, and what will the other larger brokers do in the wake of this development?
Andrew Linnell, director of business management consultancy, Xceed Radix adds: “Insurers are generally nervous about brokers underwriting some lines, such as liability. It is likely that this venture will be property led.”
Referring to smaller ticket business, in particular SME, Winlow suggests the move could be more strategic: “In a way this can be seen as a defensive route to prevent insurers from disintermediating their business.”
On a related note, experts have played down suggestions that it could be a direct response to UK’s largest MGA, Towergate.
“People suggest that this is a ‘copy Towergate’ effort, but Towergate is only one influencing factor,” says one chief executive.
“Brokers have invested heavily in building underwriting competence,” adds Linnell.
“The key is the MGA has to deliver an underwriting return to the insurer. It is using the insurer’s capital. You have to implement effective auditing controls, and you have to administer good service. None of these are easy.”
Benefits and risks
In the absence of sufficient underwriting expertise, the move could end up adding complication and cost into the insurance transaction – the exact opposite of what Willis is trying to achieve.
All of which suggests that the MGA approach could prove perilous for insurers, let alone brokers. But there are benefits.
Damian Keeling, managing director of Peart Insurance Brokers, explains: “A distributor acquiring capacity and vertically integrating higher up the food chain supplies a return on capital only to the ultimate insurer.
“The ultimate insurer is spreading his risk between different MGAs in different sectors, and if anything goes awry, it is a quick exit – there is no legacy and no fixed costs.”
In addition, according to Winlow, insurers that enter into an MGA agreement will gain the security of not having to compete for every line of business.
The flip side to that coin, of course, is “if it becomes significant, [an MGA] will create some tension with insurers the broker works with.
“Whoever [Willis] picks will be happy. Whoever they don’t, won’t.”
If the move threatens to alienate some insurers, it could also prove the source of fresh ammunition for smaller brokers, hell-bent on attacking their global competitors for their perceived inability to service local clients. Winlow explains: “MGA’s give less choice to the insured. Smaller brokers will be looking to exploit this opportunity.”
The MGA route will undoubtedly prove a challenge. The consensus, however, is that it is a necessary – if not inevitable – move. As Hubbard concludes: “It is a strategy aimed at bringing back the bottom line.
“And in the medium term, at least, it will work.”