Why an MGA shouldn’t fear the hard market

By Andrew Kealing
February 6, 2023

As 2022 was drawing to a close, insurers across the UK were starting to look at their results, keeping their fingers, toes and everything else that they could, crossed in the hope that December would fizzle out in a whimper.

But alas it was not to be as temperatures plummeted and the industry suffered a freeze catastrophe event that was a worthy rival to the Beast from the East.

The true cost of this is not yet clear as insurers are still counting their losses, but it will be big. We have already seen insurers signal to the market this very point and the likes of Direct Line cancelling their full year dividend as a result.

But what does this mean for MGAs in UK property? There has been talk of a hardening market for some time and evidence that this has already started to take hold in some markets which can only be a good thing, hardening market = improved profitability and increasing commission values.

Perfect, right?

Hold that thought for a moment and before we draw a conclusion, let’s just look at this from an
insurer’s perspective. They’ve suffered not just the cat event (which in itself usually leads to a
bounce in prices). They’ve also been hit by a dry summer and subsidence; and even the most
prudent inflation assumptions 12 months ago have proved deficient to cover the cost of claims.
They also, in light of Hurricane Ian in Florida, have been hammered with huge rate increases on their catastrophe reinsurance (yes, seemingly unrelated matters merge together in the pool that is international reinsurance capital). The backdrop is that they will be demanding a bigger share of the pie going forward, not just the natural benefit of increased rates. What might their approach be, specifically in relation to their delegated authority business as they look to bounce back from a very tough year and deliver a profitable 2023?

Exiting certain channels/lines of business. We have all seen insurers dip in and out of markets throughout the cycle. A large MGA supporter today can often be a detractor in five years-time and vice-versa. Quite often it is market-impacting events that is the catalyst for insurers to review their distribution channels and exit the least profitable.
Comparing you to your peers. We have all seen this when a market cat event arises. Results are published and we look at how the losses from company A compare to those of company B, C etc. That same comparison takes place within distribution as well. If an insurer has a number of MGAs operating in the same or similar markets, it will undoubtedly compare the performance of one with the other. This is useful as it establishes just how good your pricing, underwriting and risk selection really is. This puts the spotlight on all of the disproportionate share of the business you have written on the banks of the River Severn or built on top of Cornish tin mines.
The goalposts are moved, targets are redrawn, and expectations changed. Insurer CFOs demand better returns and as such pressure is placed on your retained income. Now you have the challenge of balancing commission reductions with rate increases and changes to your risk selection as you exit poorer producing brokers and lines. In short, your top line may be cut as is your % of retained income.

So what may initially present itself as a great time to increase revenue and profits may actually put at risk the lifeblood of your business, your capacity.

No MGA is immune to these risks, but the well managed MGAs are surely the ones with the best
chance of weathering the storm and this is where long-term capacity arrangements with aligned
interests really are worth their weight in gold. In practice this means:

1. Agreeing a range for performance and having clear contractual metrics in place that dictate the actions required should performance be out of the target range

1. Employing good portfolio management discipline to identify early signals in performance and ignore noise in the results (and of course acting quickly). By good portfolio management we mean analysing your historical performance and available data in a way that allows you to credibly inform the value of business you are writing today.

1. Repeat…… Portfolio management is a process, not an event

1. Taking responsibility (and the pain) for those performance elements that are within your control, but also sharing more in the up-side. So if you do need to look at initial commission, having the right profit share metrics in place should compensate.

Over time, your performance should stand out from your peers and deliver a level of stability and comfort capacity providers crave. And your reward? Multi-year capacity that goes some way to protecting you from knee-jerk reactions when these market-wide events occur.

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