Something special

As re/insurers grapple for new business and seek innovative growth prospects, managing general agents (MGAs) represent an increasingly promising avenue to explore with hopes of diversification and openings into new markets.

Producing positive profit streams based on a lower loss ratio than many mainstream insurance portfolios, many MGAs are writing niche business outside of the competitive environment of the traditional insurance classes.

“Large lines such as aviation, marine and property are under pressure, but the niche classes do not appear to be facing the same pressures, so insurers are looking to use their capital more effectively and are looking to provide more capacity for MGAs,” says John Holm, executive director at Capita Insurance Services, who focuses on developing the company’s presence in the MGA market.

He adds that MGAs offer the benefit of good business produced with low loss ratios which, given their specialist nature, can also have a strong diversifying impact.

“Reinsurers are suffering heavily; the reinsurance rates appear to decrease at every renewal."

“Those who don’t provide binders to MGAs and rely on the mainstream classes of business that are under pressure, are missing out on profits and an opportunity to diversify,” he says.

In addition, he says, as reinsurers continue to suffer with constant rate decreases, they are now thinking about using their capacity in the MGA market.

“Reinsurers are suffering heavily; the reinsurance rates appear to decrease at every renewal. However, the claims side hasn’t been too badly affected recently, so they generally have strong levels of capital, which they are now thinking about using in the MGA market,” he explains.

Holm also points to the low level of competition that niche classes attract which means that they can price business according to the risk rather than market forces which means that with good underwriters, MGAs should generally end up with better results.

“It’s therefore unsurprising that the best underwriters with a good niche class of business within large insurers or the Lloyd’s market may be thinking about making a move toward MGAs,” he says.

“I’m getting approaches on a regular basis from individuals and teams that are not being recognised within their fields or have ambitions to run their own company. They are considering the MGA route as an option.”

Outsourcing

As a major FTSE 100 company with nearly 70,000 staff, Capita’s vast resources and insurance industry experience mean that it has the capabilities to efficiently handle outsourcing for insurers and provide equity for start-up MGAs.

“The company has been hugely successful, as demonstrated by its consistently improving results,” says Holm. “In conjunction with providing outsourcing services, Capita also provides funds for start-up MGAs which demonstrates its commitment to this part of the insurance sector.”

Holm, who concentrates on these areas directly, says that while more companies are considering the substantial cost saving benefits of outsourcing, the length of the process can put some businesses off looking at it.

“It’s not a quick process, which can deter some companies. The larger the company, the larger and potentially older its IT systems are, can all significantly delay the process,” he explains.

“Finance directors should be regularly considering how to control and cut these costs and outsourcing should be part of this consideration."

“For existing MGAs, if they looked at some sources of outsourcing, they could potentially be even more profitable. However, there are two sides to this. Start-up MGAs are happy to outsource as they are keen to keep costs as low as possible and the business efficient. Existing MGAs will have built up their own back office and it may be harder for them to consider outsourcing.”

Speaking specifically of the insurers, Holm says that they should also consider outsourcing.

“Insurers have a large cost base and include legacy IT systems which could be 10 to 20 years old. Simplistically, there are two parts of every business: income and expenditure. The insurers have pressure from the income coming in due to pricing, therefore premiums are going down, but at the same time, the cost base is static or growing,” he says.

“Finance directors should be regularly considering how to control and cut these costs and outsourcing should be part of this consideration. The companies which get it right will be successful, but companies that stand still may well wither away or be consumed as the industry is caught up in a round of M&A activity.”

John Holm is executive director at Capita Insurance Services. He can be contacted at: John.Holm@capita.co.uk

Click here to see Intelligent Insurer's survey of 50 of the leading MGAs by turnover, comparing year on year pre-tax and operating profit.