But it doesn’t always go to plan which can be catastrophic, indeed existential, for the MGA. When results are (consistently) bad, insurers can lose faith and given they tend to have limited control, the safe option is for them to withdraw capacity. And the loss of capacity is usually the number one worry that keeps MGA bosses awake at night.
Of course, there can be a number of reasons why MGAs may lose capacity, some of which are outside of their control e.g. insurers retracting from or consolidating certain lines of business (just look at the emerging market results for 2022 and it is easy to understand why!) However, one common theme in all of this is usually linked to growth and diversification.
The owners of an MGA usually seek growth. But growth in a niche market is, by definition, tough.
Cutting rates to drive volume leads to an obvious problem down the line and the responsible, well managed MGA will avoid that route at all costs. So, we sometimes start to see MGAs broaden their offering into different products or blur the lines between mainstream and niche profiles in order to achieve their growth ambitions.
There are advantages to diversification. For example, a diversified company is potentially better insulated against a loss of profit/revenue in one business area and there are multiple examples where careful, measured diversification has worked. Amazon is a prime (no pun intended) example of this, moving from purely retailing books to the digitisation of these and the associated Kindle device from which to read these on, not to mention their “buy everything here” shopfront, cloud computing, and TV production.
Unfortunately, though, there are numerous examples of diversification gone wrong. AIG entered the credit security market, selling a form credit default insurance with a systemically-exposed value of $400bn at risk, and which led to the company failing after the 2008 financial crisis.
Or Blue Circle diversifying from cement into all things home related (bricks, bath-tubs, lawnmowers). One executive at Blue Circle stated that “our move into lawn mowers was based on the logic that you need a lawn mower for your garden—which, after all, is next to your house.” Association alone is not a good enough reason and is no surprise therefore that Blue Circle’s efforts failed.
MGAs want to grow and evolve, but expansion has got to be carefully thought through, measured and controlled. Before diversifying, consider:
But if you can’t tick all the requisite boxes, then maybe it is best to stick with what you know.
There has been a lot of speculation recently around the use of AI in insurance and how this signals the death knell for Underwriters. Having mopped up the coffee that I spat out and checked my life insurance provisions, this got me to thinking. Surely not all underwriters? But if not, then who?
The ineffable question of the “effs”. What should a business aim for – and more specifically, for us, the underwriting function in an insurance business – efficient operations or effective decision making?
We have all heard of the boiling frog syndrome which says: if a frog is put in boiling water, it will jump out to protect itself. However, if you place a frog in cold water and slowly turn up the heat, it won’t notice the subtle increase in temperature and be boiled alive.
Game theory aims to shed light on outcomes where multiple actors operate. Dry academe often assumes “ceteris paribus” even in social sciences, but in the real world when we are trying to anticipate the outcomes of decisions one actor makes it is essential to consider the possible and likely responses of other actors…
In various parts of our lives, we are examined and tested to grade our ability and knowledge, be that driving tests, ‘A’ levels, or piano exams.
And so it is with the insurance industry. Boards and regulators are increasingly pushing for demonstrable oversight. This is especially true in the field of Delegated Authority (DA)…
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…
What use statisticians and actuaries when the world is being transformed by modern data-analysis techniques? What hope for clunking humans in the era of Big Data (Facebook sells data which influences US presidential elections), of Artificial Intelligence (China can identify disliked racial groups through automatic facial recognition technology)…
Catastrophes – natural events where one “system” (wind, earthquake etc) causes multiple insurance claims in one go – are difficult. Much else in insurance pricing is subject to conceptually simple averaging-over-time, but cats are different. You can’t take a 5 or 10 year history of natural-peril losses and assume you have an accurate view of exposure to catastrophes…
In part 1 of this triptych on insurance pricing we looked at Technical Price (TP): what must be covered over the long run to make reasonable profits. I finished that note by considering TP in the context of the market. Here, I take this theme further and explore more how to think strategically about pricing.
This note covers the fundamentals: the three building blocks of a technical price and a note on the role technical price plays. It is followed with a deeper look at pricing strategies. Finally we consider a knotty topic, cat(astrophe) pricing, in particular the use of cat models to inform the price.
On 26th September 1983, at the height of the Cold War, Soviet missile monitoring picked up apparent signs of five nuclear missiles launched from the US. Retaliation was the default planned reaction.
Charles Dickens opened A Tale of Two Cities with these lines, contrasting calm enlightenment London with turbulent revolutionary Paris: “It was the best of times, it was the worst of times…
Calibrant was established to bridge a gap. The gap is that between MGAs and their carriers. And it finds many forms.