Lloyd’s has recently added weight to this view in an update from Patrick Tiernan (Chief of Markets). When talking about the longer term nature of DA agreements and their performance lag he explained “in softening conditions, performance has tended to deteriorate more quickly, and, likewise, as the market hardens, remediation efforts take longer to take effect”. He went on to reference the need for appropriate governance, alignment of interests and transparency.
Underneath the skin, this message from Lloyd’s is focused on profitability and market cycles. That is noteworthy as companies’ oversight of DA arrangements has focussed more on technical and contractual compliance.
So if we acknowledge this changing view, how do DA businesses and their capacity providers move to a process that ensures profitability over those market cycles?
Portfolio management in this context, as illustrated below, is the constant cycle of assessing performance and profitability to determine actions to improve.
The key to governing such a process is the constant cycle and ongoing monitoring. It is important for MGAs and capacity providers to establish the right leading indicators at the right granularity. They may be unsurprising (e.g. loss ratio) but must be constantly watched. In turn when actions are taken as a result of these indicators, it is important to monitor their effectiveness to feed back into the cycle.
Trends are spotted quickly through the leading indicators – be they price adequacy, claims inflation, underwriting cycle or changes in underwriting standards. Tiernan’s observation that hardening phases of the cycle tend to be slow in the DA sector is particularly interesting – it speaks to picking up these early indicators both in soft and hard markets and responding to optimise performance at all times.
At Calibrant our mission is successful portfolio management with robust processes. We are pleased to see the market mood is aligning to that way of thinking. We think portfolio management is a good thing in its own right, but when the regulators say it we modestly sit back and let the more influential voices speak for us.
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Calibrant was established to bridge a gap. The gap is that between MGAs and their carriers. And it finds many forms.