There has been much talk about the e ffects of the Brexit vote and how that will a ect the insurance market in the UK going forward. While some of our European colleagues may be spouting doom and gloom, the UK has the professionalism, knowledge, capability and innovation to turn a challenge into an opportunity.
Personally, I think EU doom and gloom is a red herring when it comes to the future of overseas insurers in the UK. Few expect the triggering of Article 50 – and the subsequent extended period of exit negotiations – will prompt the exit of many of the companies. After all, the UK is one of the most dynamic and entrepreneurial financial centres in the world and, in my view, remains as the
leader in Europe, irrespective of moves by bureaucrats wishing to put Paris or Frankfurt into this position.
That said, Brexit does also raise some interesting issues in relation to the use of underwriting capital, especially where MGAs are concerned. In early July, Tom Bolt of
Berkshire Hathaway Specialty chaired a panel debate at the MGAA conference on this very subject.
The changing shape of capacity provision can be categorised by a shift of those once considered new entrants to the delegated authority space now, in a relative short period, becoming traditional alongside the longstanding established providers. But there are even newer kids on the block without some of the historic baggage that comes with old established businesses.
This new underwriting capital is coming from a plethora of directions into the MGA space. This could be as a result of the sustained growth within the MGA and delegated authority sector or an appetite for alternative and more cost-e ective routes to market. If this is the case, then MGAs would have to show a distinct benefi t to the capacity provider, for example, in relation to the distribution mechanism. But there are also cost benefits of using the MGA model, including lower operating costs than those of the capacity provider.
However, what the emergence of the new forms of capacity does highlight is why all insurers should be reviewing their own cost ratios and expenses and how using the MGA distribution chain could have an overall e ect on the unit price of the insurance product, which is a positive outcome for personal and corporate buyers.
Moreover, we are seeing some capital flowing into the UK delegated authority arenafrom the reinsurance market. The challenging environment for reinsurers may be fuelling this move to the delegated authority market as a way of utilising capital and capacity to generate a return greater than currently being provided by their existing reinsurance portfolios. Other financial providers are also looking at the MGA space. Institutions such as pension providers, hedge funds and private equity are all looking at ways of a sensible return on underutilised or low-performing capital.
But why the focus on MGAs? One factor could be the direct access and effective structure a delegated authority can bring helping the capacity provider to write the smaller risks. This would leave the traditional insurer to concentrate on writing the larger risks for which they have a huge degree of expertise, and can make a healthy return. For the broker setting up an MGA, it can separate and segregate its placing and delegated authority activities managing conflicts and clarifying their fi duciary duty.
In any event, new capital is looking di fferently at MGAs. Not only relying upon them for access to market but also to source untapped insurance buyers. These new kids on the block will be looking for experience and professionalism in relation to underwriting and, where appropriate, claims handling via the delegated authority mechanism.
The move by different and non-traditional sources of capital into the MGA sector will continue to invigorate this space. The change in structure, appetite and approach that this brings to underwriting will help to develop product distribution. MGAs will also be at the forefront of this evolution, not only enhancing the established distribution chain with increased access to markets, but also challenging it to develop and respond to the needs of buyers.
So while there may be some uncertainty about a post-Brexit UK, the MGA sector will not see standing still as an option and will embrace every opportunity that change brings.
Peter Staddon is the managing director of the Managing General Agents’ Association. He is an experienced insurance industry practitioner with more than 40 years in broking and delegated authority markets.
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