Lloyd’s profitability push may cause ‘pandemonium’, says MGAA chair
Lloyd’s review of underperforming syndicates could cause pandemonium for managing general agents and disruption in many lines of business if it results in syndicates retracting their capacity from unprofitable areas quickly.
That is the view of Charles Manchester, chairman of the Managing General Agents' Association (MGAA), who has warned of the consequences the Lloyd’s profitability push for the MGA sector.
Lloyd’s is conducting a portfolio review, focusing on the poorly performing classes, and is talking to syndicates about potential action.
Lloyd’s aims at reducing the business volume of particularly challenging classes. As part of the review, Lloyd’s is asking syndicates to pull out of certain lines.
“There are some syndicates that are quite well known for not having made money for three years,” Manchester said.
“As Lloyd’s looks at tackling the underperforming business, if MGAs happen to be in that segment, and aren’t adding the value that they are taking out of the value chain, then obviously they are going to struggle.”
In 2017 Lloyd’s has posted its first aggregate pre-tax loss in six years as major claims more than doubled, causing an underwriting loss of £3.4 billion. The results were mainly impacted by major losses from natural catastrophes in North America but also by a soft market in the sector.
While the losses from natural catastrophes may be seen as part of the insurance sector’s business, a soft market may have resulted in some lines of business becoming unprofitable for syndicates at Lloyd’s. And MGAs may have played a role in it.
“The root cause of the problem is insurers’ top line growth strategies in a soft market coupled with the fact that MGAs need to make their ends meet. They are businesses, they need commission income to pay the bills," Manchester explained.
Syndicates pulling out of lines of business have caused trouble in the past. In 2017, for example, US-based niche insurance provider ProSight Specialty Managing Agency ceased the underwriting of Syndicate 1110 and placed the syndicate into run-off.
ProSight had been writing a lot of business through MGAs and binding authorities at Lloyd’s, Manchester noted. “When they pulled out people were left high and dry. And that was just one syndicate pulling out. If it becomes a more wide-spread issue then it becomes more difficult,” he explained.
“When insurers or syndicates that have been supporting MGAs pull out of the market it can cause a bit of pandemonium.”
Most exposed to the Lloyd’s profitability review are syndicates that are overall losing money, Manchester suggested. “Those syndicates that are consistently losing money are going to be more challenged in their bottom 10 percent plans.”
The market is likely to be more understanding with profitable syndicates and their strategy to turn around the underperforming lines of business than with the unprofitable ones, he noted.
“There are some syndicates that have got a lot more respect capital in Lloyd’s than others. Some are consistently profitable and Lloyd’s is likely to support them in their plans for their bottom 10 percent business,” he said.
At the same time, Manchester expects Lloyd’s to consider the consequences for the MGA sector when pushing syndicates to take actions on their portfolios.
“Lloyd’s will be acutely aware that a third of their business comes from delegated authority and they don’t want to kill the goose that lays that particular golden egg,” Manchester said.
While the quality of the business produced by MGAs may vary, Lloyd’s will not want to get a reputation for being not supportive of their coverholders,” he noted.
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