12 September 2016 Insurance

Growing regulatory burden forces insurers to rethink

One of the outcomes of the increased regulatory burden that has been imposed on insurers in recent years, exacerbated by Solvency II, has been the forcing of smaller insurers to consider either converting into agencies, thus avoiding a big part of the burden, or selling out to bigger players.

That is what Martin Davies, chief executive of AHJ Capital Markets, told Monte Carlo Today he has been seeing in the market in the past year.

“If an insurer converts into an agency, it no longer has to worry about managing a regulated balance sheet, only about underwriting. On the flipside, the bigger carriers get better distribution, which is another driving force in the market at the moment,” Davies said.

He said Solvency II has driven companies to raise more capital whether that be through debt, equity or reinsurance arrangements. AHJ Capital Markets, which specialises in corporate finance for the insurance sector, is seeing more interest as a result of this trend.

The other factor driving the activity is bigger players, struggling for growth in other markets, looking to achieve it by extending their distribution. Often, acquiring a smaller player or agency achieves this.

“The big players need distribution and the smaller players need the financial strength and the balance sheet,” he said. “It is a good time for managing general agents (MGAs) at the moment.”

Davies added that advances in technology have also made it much easier for individuals to start small, niche agencies with minimal frictional costs.

“We are seeing individuals start insurers who before might not have. They are creating new entities, which need capital and also an exit strategy,” he said.

Speaking at the Rendez-Vous last year, Davies said he was seeing more third party capital taking an interest in moving into the MGA space. He said this trend has continued, with investors prepared to back the right management team and the right idea with anything from debt through to start-up funding.

“MGAs are a very attractive sector at the moment. It is a challenge and getting access to paper is critical, but for those that succeed, it is a good time.”

One of the few factors muting the sector is the continuing soft market, but he stresses that rates are not necessarily soft in all areas, with niche sectors in particular weathering the downturn.

“The fact is an MGA will be successful only if it is profitable,” he said. “There are cycles within cycles and much of the rhetoric about cat rates does not affect the type of business most MGAs write. That said, the margin for error can also be fine.”

Already registered?

Login to your account

To request a FREE 2-week trial subscription, please signup.
NOTE - this can take up to 48hrs to be approved.

Two Weeks Free Trial

For multi-user price options, or to check if your company has an existing subscription that we can add you to for FREE, please email Elliot Field at efield@newtonmedia.co.uk or Adrian Tapping at atapping@newtonmedia.co.uk