Bradley Chadwick reviews the current landscape for insurance intermediaries, their lenders and investors. Can we expect a capacity crunch in the market?
Earlier this year, my colleagues and I spent some time considering how COVID-19 may affect insurance intermediaries, their lenders and investors. With hindsight we were too focused on headwinds, including anticipating a reduction in binding capacity. We also underestimated both the consolidators and private equity sponsors' appetite for growth, which has continued to drive M&A activity and has been a major part of our business in Q3 and will be in Q4.
Two recent industry surveys by Insurance Times and Clyde & Co asked respondents about their capacity expectations. The responses to these surveys point to the strong performers getting stronger and the weaker performers struggling.
In a survey of 1,276 brokers, conducted by Insurance Times – the Five Star Rating Report: MGA Market 2020/21 – participants were asked about the prospect of removal of capacity from a managing general agent (MGA). The results showed that 33% of respondents were very concerned about this prospect, 38% were moderately concerned and 8% were extremely worried. The survey also noted that insurers are reviewing their existing business lines and cutting out poor performing areas instead of looking to maintain MGA partnerships.
However, if an MGA is delivering professional services on behalf of the carrier, including governance, data, innovation, product delivery, and that is leading to underwriting profits for the insurer, then MGAs should be confident that they will be able to retain their existing capacity, and potentially win new capacity as well. This is a view echoed by Mike Keating, managing director of the Managing General Agents’ Association (MGAA), and quoted in the Insurance Times survey1.
Results from Clyde & Co's Proceeding with Caution survey of both carriers and MGAs about the state of the MGA sector appears to build on this and to contextualise it. When MGAs were asked how they expected carrier partnerships to develop in 2020, the answer was relatively positive with 19% expecting partnerships to increase and 47% expecting them to hold steady. But this still leaves a third of MGAs – a significant proportion – who expect the relationship with their carriers to reduce.
Similarly, looking at capital availability, the Clyde & Co survey shows that 38% of MGAs and 51% of carriers believe capital levels will hold steady or increase. While this does sound encouraging, it leaves the majority of MGAs and half of carriers expecting reductions in capital.
Flight to quality
The other key takeaway from both surveys is that carriers are focusing on MGA quality, both in terms of underwriting and conduct, and that strong performers are confident about retaining capacity.
This sentiment was echoed by Doris Höpke, management board member of Munich Re, with responsibility for Europe. She sheds some more light on the issue, believing that with very few exceptions, there is still sufficient capacity: “In general terms there is still enough capacity in the market, but it is not available at any given margin anymore. There is a more distinct expectation to earn adequate profitability when putting money into our markets.”2
This stance, combined with the results of these two surveys, paints a picture of winners and losers in the insurance intermediary space.
While some of the weaker intermediaries will be absorbed through acquisition, there may well be failures. And unlike some other industries, the failure of an intermediary is a market event that impacts the full ecosystem that it operates in, including policyholders, MGAs, third-party administrators (TPAs) and carriers. This is why we are so interested in market dynamics, and why the FCA prepared and issued its wind-down planning guidance to intermediaries.
Purposefully assessing both your resilience, as well as the resilience of your partners is as critical now as ever.
Points to consider for insurance intermediaries
For any concerned parties, as well as their counterparts, this is an opportunity to assess your operational resilience and planning. Some useful questions may be:
What level of sales/capacity can you afford to lose before triggering your contingency plans?
What is your governance process around the decision making if your tolerances are breached and your contingency plan is triggered?
What is the resilience of your counterparts (brokers, MGA and TPAs)?
In the event of counterpart failure, how resilient are you to withstand it? What changes would you need to make?
Have you revisited your wind-down plan and is it still implementable?
For more information or advice, contact Bradley Chadwick, Financial Services Restructuring.