MGAs – The Good, The Bad and the Ugly
Last night I re-watched the classic Italian Spaghetti Western, ‘The Good, the Bad and the Ugly’. Despite this masterpiece being more than 50 years old I started to draw some striking parallels with MGAs in 2021. It’s debatable whether the film’s central themes of greed, betrayal and violence are indicative of the insurance industry – even in a hard market such as now (for some lines at least)! However, the characterisation of the three (anti)heroes on the hunt for hidden Confederate gold does resonate in the evolution of the MGA model. The ‘Bad’ are dead or dying; the ‘Ugly’ are unsure as to the value they bring to the distribution chain and probably where a number of MGAs are right now; and the ‘Good’ are riding off into the sunset (with the gold), successful and confident of their place in the insurance ecosystem.
The UK MGA space is facing increasing challenges due to hardening markets, rising regulatory scrutiny, increased polarisation, the proposed AM Best ratings and growing carrier pressure. It’s becoming harder than ever to break into the sector. To ensure survival there are several critical areas in which MGAs need to make significant changes. How do the ‘Ugly’ plan for the future to avoid becoming the ‘Bad’, and dead? What do they need to do to join the ranks of the ‘Good’ and establish a firm place in the distribution chain?
The New Data Frontier
Undoubtedly data is key to the success of an MGA. The majority of the market have already taken steps to improve the way it is collected, enabling the provision of more actionable insight for both themselves and their partners. Leveraging information from multiple data sources to facilitate a deeper understanding of clients allows for more intelligent decision making and consequently improves the overall customer experience.
However, there is still a whole lot of the data Wild West to tame. Most MGAs continue to lack the high-level MI capabilities that their carrier and broker partners are demanding and thus are struggling to prove their value. Primarily, the focus needs to be on collecting and using data to design products that consumers want, at a price that they are willing to pay. There is no point implementing the latest AI technology to collect data around the key engagement points with customers if you are not going to act upon it. Data enrichment really allows companies to reap the commercial benefits by optimising the information available about their customers. The ability to analyse behaviours and access granular detail of geospatial, health or other such information can assist in the development of new personalised products and deliver cost savings.
Providing value is also an area of increasing focus from a regulatory perspective. Norman Hughes of Compliance Management Services comments that “The FCA made it clear in its 2018 review of the insurance distribution chain that customers should always expect value from the products they buy. To support this, MGAs should have appropriate ongoing MI and processes in place to monitor and assess customer outcomes”. Beyond that, MGAs need to look at analysing underwriting data to improve the turnaround time of a risk and also make sure the same due diligence is being applied to claims information to drive faster settlement for policy holders.
Crucially, conducting a data exercise doesn’t have to be expensive. There are plenty of new technologies that can work in conjunction with existing systems to ensure good results. Focussing on infrastructure now will improve operational efficiencies, ensure scalability and build business resilience.
Avoiding a Shootout
What is critical to MGA survival is the strategic direction that their key carrier partners take. Will they continue/increase full-service capability or become much more focussed on the best use of their capital by using external resource provision? Accordingly, it is vital that MGAs work hand in hand with their capacity providers, rather than engaging in a gun battle. The integrity of this delicate relationship is so dependent on the value that the MGA can be seen to portray. MGAs need to look to provide lower cost models and, with an increased regulatory focus on remuneration and value for money, perhaps should be focussing on a deliberate strategy of reducing their retained commissions, and subsequently lowering the cost to the policy holders.
In this current ‘ugly’ environment, as has been the case historically, MGAs share in the underwriting profit but rarely take on any of the losses. However, in this modern age, it seems clear that taking on the responsibility of loss (or at least some of it) will allow for a truly holistic relationship with the carrier. Additionally, it should lead to a higher quality of underwriting across the board, as MGAs will raise the stakes due to more skin in the game.
Being able to provide niche, relevant products so that carriers can diversify their portfolio is the undeniable goal of MGAs. Gone are the days of the vanilla offering; MGAs need to be able to open the door to a particular market that is not accessible to the carrier. As capacity becomes more and more restricted these businesses need to be driving innovation and ensuring their pricing matches the quality of the product. Most importantly they need to take that first faltering step into the unknown and write risks where no-one else wants to go.
For an MGA to be successful then they need to adapt to thrive. Digital propositions will grow and challenge analogue incumbents, products will have to become laser focussed on the specific needs of individual policy holders and innovative solutions to drive profits must be implemented. Flexibility and real-time decision making should be at the core of the offering.
It doesn’t matter whether you are in the Sad Hill Cemetery or on the Lloyd’s underwriting floor, there will always be examples of ‘the Good, the Bad and the Ugly’. The question is, which one are you going to be?
P.S. Spoiler alert! The bad guy NEVER wins.
Focused on getting innovative insurance businesses to market – and fast – OneAdvent provides a springboard for growth across the industry. Operating as an MGA platform, Lloyds broker and niche product distribution business, OneAdvent brings its sector expertise and technical know-how to bear for established industry players and entrepreneurial start-ups around the world.