What are the key differentiators for a successful MGA and what are the opportunities and threats going into 2013?

On 26th September 2012 senior executives from the likes of Aon, Allied World Insurance, Axis, Chartis, Dual International, Hiscox, Marsh, the MGAA, Novae, Torus, Sagicor and WR Berkley Syndicate attended an Executive Briefing entitled ”What are the key differentiators for a successful MGA and what are the opportunities and threats going into 2013?’.

The event coincided with the launch of RiskWrite Managed Service, the addition to RiskWrite Enterprise, Sabrefish’s multi channel eInsurance software.

Feedback from attendees was very positive so I thought I’d summarise the presentations. If you would like to put forward any areas of interest for future briefings and content, make a recommendation,  or read more about RiskWrite see Sabrefish’s multi channel insurance software here.

Dan Martin, Head of UK Regional Development at Catlin Underwriting Agencies Ltd

Neil Hodges, Salmon’s Insurance Client Executive introduced the first speaker, Dan Martin, Head of UK Regional Development at Catlin Underwriting Agencies Ltd, as a ‘mere boy’ having only spent twenty years in the industry! Dan commenced his presentation on ‘Distribution is a key factor but an MGA needs to add value in order to break into new and existing markets – the underwriter’s viewpoint’. Dan addressed the current options for MGA’s to access the market looking at traditional channels such as retail, wholesale, strategic partnerships and modern channels such as online, mobile, price comparison websites. He questioned whether customers are tiring of social networking as a distribution channel and whether share prices are indicative of the value of Facebook. Dan cited the hefty financial investments required for price comparison websites and online as a medium – but their growing necessity alongside mobile apps – and recognised the most unproven traditional channel of sub-delegated, calling it a ‘leap of faith’.

Most notable of these insights was the separation between traditional and modern channels. For example the move to online, social and mobile and the news that Google is now partaking in the price comparison motor market.  The high cost and resource investment required in technology, time and the new generation of specialised talent were recognised as key profit generating factors. Dan said to not deviate from basing your multi channel distribution strategy on your customer’s behaviour.

“Are we planning an IT business, a marketing business or an insurance business?”

Dan said the opposite of a highly structured multi channel distribution strategy and the natural partner of many distribution channels is acquisition costs. Whenever removing acquisition costs from the chain, be careful you are not exposing greater structural costs such as IT, marketing and compliance. An underwriter’s role is to write profitable business – overall profitability relies upon a high level of stability.

As an underwriter Dan reminded the audience that MGAs are an underwriting proposition, the MGAs are acting as an agent to insurer and it is not just about filling a book of business as quickly as possible with exceptionally high conversion rates.

Dan concluded ‘’It is imperative you get multi channel distribution correct, understand the relative importance of each channel and be intuitive to the future purchasing decisions of your customers –  as well as investing time and energy in a unique proposition that adds genuine value and therefore provides longevity through beyond the market cycle…’’

Top 6 macro-economic considerations for gratifying and enacting MGA purchasing decisions – Less trust: in banks, FS and insurance – Increasing regulatory change: advice importance/ transparency – Innovations in IT – cloud and mobile technology – How do your channels inter-relate and which take priority – Rare to be price setter, often following the market – Slim margins outside of risk exposed premiums

Top questions to ask yourself when setting up an MGAs – Are you sticking with the business plan? – Do you have due diligence, do you know who you are getting involved with and in what way? – Is communication clear? Shout if there is a failure of disclosure from the underwriter or in the instance of unheard disclosure – Do you have the appropriate referral channels? – Access to decision makers? – Is bordereaux received and paid on time? – Is the market moving around you and are you responding?

 

John Holm, Commercial Director at Capita Insurance Services

Neil Hodges then introduced John Holm Commercial Director at Capita Insurance Services as having 30 years experience – but within banking, in particular analysing risk. John then took the floor to present on ‘Market opportunity is a starting point however finding the team, raising capital and seeking outsourcing partners all need to be addressed’.

John’s presentation promoted Capita’s investment in MGAs, he started by emphasising evidence of the quality and sustainability of the underwriting, involving a risk analysis of any MGA business plan and underwriting results from previous years. The most favoured types of MGAs for investment are niche businesses with a profitable track record. John referred to the value of ‘skin in the game’ i.e. financial investment from the MGA management/owners, in particular cash, those that are asset rich and cash poor would need some kind of guarantee. Capita, John highlighted, are investors that would only request a negotiable minority share.

Financing growth is usually via a loan or acquisition and Capita are an alternative. Also if a bank pays half, for example, and Capita is an option for assist with the other half.

John concluded that as with all good businesses the key differentiator from his experience is the people. The quality of the people who run the business as there will always be threats and opportunities and good people know how to deal with threats and take advantage of those opportunities.

 

Mike Walton, Case Study – setting up an MGA

Neil Hodges then introduced the final speaker Mike Walton referring to his senior roles at Nexus, Novae and PRI Group. Mike then commenced his presentation, ‘A Case study – a current MGA project – the key drivers and challenges’. Mike started stating he is currently evaluating a new start up opportunity. Mike shared his view that MGAs were easy to set up and became profitable as they are attractive to disenfranchised corporate underwriters. He mused about MGA’s increased popularity and the regulators attempts to create more resistant regulatory structures to better manage the market.

Simple components –  what is needed in order to set up an MGA; – Regulatory environment – insurance capacity – An underwriter – A distribution platform – Brokers to promote the product – Initial capital – TPA (Trading Partner Agreements)

Mike shared his key challenges and the many questions he asked himself. Questions such as; ‘I want to do it now and cheaply – do I outsource or keep in house?’, ‘How to put in little money for the greatest return?’, ‘Whether to use a carrier or sell direct?’, ‘Whether to set up one’s own carrier or sell into insurers and brokers that want it?. Mike acknowledged that the whole process will be based on value creation, but ultimately the bottom line – underwriting profit; a talented underwriter who gets the right price and creates profit.

Mike Walton’s regulatory requirement cost as a percentage of income

Regulatory CapitalMike shared his experience that regulatory capital is ‘not going to break the bank’ and gave this quick breakdown of regulatory requirement cost as a percentage of income.

Mike said regulators are not interested in regulatory capital but cash flow forecasts, as proof you can satisfy the business liabilities as and when they are due. Another challenge is that the overrider can’t really exceed costs, it needs to equate to costs. Also that owners shouldn’t make a profit on business written irrespective of profit commissions, otherwise the loss is felt by the underwriter and insurers are becoming ‘wise to this’. According to Mike, MGA owners should expect the business to break even for approximately two years.

 

 

Working capital costs six months prior to trading as an MGA

Working capital

 

Mike’s top 3 cash flow forecast insights

• Premium income never arrives as quickly as the plan indicates

• Deficit will exceed £500,000 before business revenue flows steady

• Reasonable to assume that working capital requirements will equate to 6 months of annualised cost base

Financing your MGA

BROKERS – Brokers within your specialism will  contribute funds – loans to fund the start up of the business – to secure you as capacity for their products.

SPECIALIST OUTSOURCERS – Outsourcers provide intelligent money, they see and know deals. They are good long term partners, if the deal is right they will also be focused on exit. Some will fund the working capital up front, so it can be a cheap opportunity to start making money but you don’t really want to give them more than 20% and they must deliver.

INSURERS – Insurers will give you an advanced overrider, however he emphasised the seriousness of this transaction saying that he knows of insurers that have lent money to MGAs and they have never underwritten a pound of business, it is not free money and can impact your career!

BANKS – Banks not looking to lend money now; whereas three or five years ago they would. Last year, for example, they would not invest in a binder business which had large books of guaranteed business and guaranteed commissions, they will no longer ‘touch’ future streams. If they do it is requires personal guarantees = unnecessary pressure?

INTER-MANAGEMENT LOANS – People lending one another money within the management team can result in uneven traction when it comes to business decision making. Means tested is one option. Those who don’t want to invest means tested are likely to have the most money!

Mike covered his experience of Lloyd’s vs. the FSA regulatory frameworks (see Regulatory Framework slide).  Mike shared his insights saying Lloyd’s comprehensive questioning around why you will win the business is reassuring, they are reputable and to be Lloyd’s approved you must detail a niche product, service proposition or strength of personal relationship that will move a portfolio from one insurer to another without reducing profit. Benefits such as security and licences prove attractive and they are dogmatic in expecting an IT strategy and platform and disaster recovery.

The FSA is an easier environment as they don’t have Lloyd’s additional responsibility to protect the franchise – they will just look at the business plan.

For the full event presentation, click here to download from Sabrefish’s resources

 

LMG Forum: 10 tips for E-endorsements and Lloyd’s touch tables – a solution to ‘ping-ponging’?

Salmon was pleased to sponsor the Endorsement Manager of the Month awards at the London Market Group Forum on 26th July at the Willis Building in London. Congratulations to the winners – Ropner Insurance Services and Chubb.

The awards were presented by Christopher Croft, LMG Secretariat who also gave an update on modernisation. Chris attributed the fall in E-endorsements in June to the Jubilee celebrations, noting that the July figures have already ‘oustripped June volumes’.

Next up was Hayley Spink, from the LMG  Endorsements Group who shared good practice tips from brokers, carriers and MGAs who have implemented E-endorsements, including:

  1. Having a strong visible senior sponsor.
  2. Having access to good quality management information.
  3. Setting targets,and including these in underwriters’ or brokers’ personal objectives.
  4. Communicating internally.
  5. Having champions within the underwriting or broking team.
  6. Seeking and sharing feedback.
  7. Sharing the Clause wording internally and with the client each time a  risk is being negotiated or renewed.
  8. Talking to peers at other companies and sharing good practice.
  9. ‘Hand holding’ when the company first goes online to ensure the first endorsements go smoothly.
  10. Setting up internal competition between teams.

Paul Willoughby, Project Manager in Market Development at Lloyd’s concluded the morning’s proceedings on the topic of future technology. He talked about various market development initiatives, including the collaboration project.

Paul provided some background to this by summarising the process for the lifecycle of a risk as Preparation, Negotiation and Processing. He commented that in the Lloyd’s market the traditional face-to-face negotiation model can be very efficient.  However, he then went on to describe intriguing-sounding practices like ‘ping-ponging’ that actually make the negotiation less efficient. Fortunately, he explained that ‘ping-ponging’ was the repeated sending of a contract back and forth between underwriter and broker for many small changes.

Lastly, he shared feedback from the recent interactive ‘touch table’ experiment in the Lloyd’s coffeeshop. Paul said he was shocked by the 90% positive feedback from market practitioners.  He saw this type of technology as supporting the traditional Lloyd’s face-to-face business model but improving speed by giving underwriters and brokers access to everything they needed in one place. There are more details here.

All in all, an enjoyable and informative start to a Thursday.  You can  register here for the next LMG Forum on 23rd August.

Download the slides here

New eInsurance Client Executive and Nexus go-live with RiskWrite

Like when you’re waiting for a bus and then two turn up together, we’ve made two announcements recently regarding our eInsurance practice and our multi channel insurance solution, RiskWrite.

First up, was the arrival of Neil Hodges who joined us in the new role of Client Executive with the aim of helping to grow our eInsurance business and to continue to develop RiskWrite.  He will also be contributing to Upstream on Insurance industry topics.

Commenting on his new role at Salmon, Neil said, “I am very pleased to be given the opportunity to help Salmon’s clients grow their business across multiple product lines, distribution channels and regions. RiskWrite is a highly regarded insurance solution and I am looking forward to helping shape the future roadmap.”

Chris Harvey, Chairman of Salmon said, “Neil brings with him extensive experience of the insurance and IT services industry meaning he is well placed to support the ongoing growth of our eInsurance business. He joins us at an exciting stage in the development of RiskWrite, our multi channel insurance solution. Neil’s experience will help us capitalise on the opportunities within the UK and international markets and continue to help our clients respond to the ongoing challenges and opportunities within the insurance market.”

Neil has 30 years’ experience of the insurance industry, having started his career as a Lloyd’s underwriter before moving into the insurance technology and services sector working for companies like Xchanging and Tri Systems.  He is based in our London office and can be contacted on +44 (0)203 170 8546.

This was closely followed by the announcement that Nexus Underwriting Management (Nexus) have gone live on RiskWrite.

Nexus Underwriting Management

Nexus launched its new Lloyd’s Managing General Agency, Nexus Professional Risks (NPR),  earlier this year and approached Salmon to supply a new insurance solution to service and grow the business. Salmon configured and implemented RiskWrite to provide NPR with a full insurance underwriting solution, including policy administration and broker portal. Following initial planning, the project was delivered in just two months.

NPR depends upon reliability and service delivery for its underwriters and 1,800 broker portal users. They needed a smooth, fast transition and are very happy with the outcome.

Colin Thompson, CEO of Nexus Group said “Our partnership with Salmon was created to help achieve our key objective – going live quickly and easily so the service to our underwriters and brokers wasn’t disrupted. The migration process itself started on a Friday and was completed by the following Monday. Ensuring a smooth and fast transition was absolutely key to the success of the Novae acquisition. RiskWrite™ will allow us to respond quickly to rate and market changes and to communicate with agents and brokers across all our channels – so much so that we are considering adopting it in other areas of our business.”

In a troubled global economy, how are brokers and underwriters responding to the threats and opportunities in 2012?

On 22nd May 2012 senior executives from the likes of Novae, Axis, Chartis, Hiscox, Markel, Mitsui, Torus, Liberty, Marsh, Cooper Gay, and Allied World Insurance attended an Executive Briefing on the theme of ‘In a troubled global economy, how are brokers and underwriters responding to the threats and opportunities in 2012?’.

Feedback from attendees was very positive so I thought I’d summarise a few of the key points here.  If you want to read more about RiskWrite, Salmon’s multi channel insurance software here.

Peter Montanaro, Head of Delegated Authorities at Lloyd’s addressed the question of  ”The number of MGAs has grown rapidly in the last two years – is this the quickest route to leveraging global opportunities?”

Peter started by saying ‘No they haven’t and yes, so thank you very much’, proceeding to mock leave the podium. Luckily for us he was joking, and returned to go on ‘I don’t know maybe the number of MGAs have grown, but in Lloyd’s our numbers have stayed stable.’  Peter was challenging the common perception of rapid growth of MGAs and coverholders and shared the losses they’ve experienced as well as the growth; “Since 2007 the total number of coverholders has gone up by 275, but only by 31 in the last 2 years”. He acknowledged the growth and market presence of the ‘coverholder model’ but emphasised Lloyd’s growth rate is steady, with losses.

Peter then gave examples of what Lloyd’s reps thought when asked  whether coverholders are ‘the quickest route to leveraging global opportunities’ in their territories. The Italian rep said MGAs represent the best gateway to the market through technology, good market access and efficiency. By contrast, the German rep, thought it may be the quickest route but questioned the sustainability, profit long term and quality.

“I think at the moment automation is still a choice for each stakeholder but it will become a necessity’’

Peter recounted a scenario when an Hawaiian coverholder had been approved by Lloyd’s and told him they were going to have a party, a bemused Peter remarked on their excitability only to discover they had been ‘waiting’ a year and a half to be approved. The Lloyd’s Performance Management Directorate (PMD) is committed to the market as Lloyd’s turn approvals round in five weeks as long as they’ve received the necessary documents – it turned out the application had been sat with the broker all that time. Peter emphasised their punctuality and flexibility on a case by case basis; welcoming feedback on the compliance questions Lloyd’s ask on MGA/coverholder applications.

The role of technology as a competitive tool emerged as Peter emphasised the need for automation; how it is still a choice in the current market but soon will be a necessity as technology is becoming part of the decision making process when people select a broker, MGA or underwriter as a partner.

 

Simon Wilson, Director of International Development at Markel tackled ‘Distribution strategy for specialty insurers”

Simon marvelled at the unique nature of London market geography compared to its international counterparts. When working for Lloyd’s Asia he recalled his surprise when during a business trip he not only had to walk what he thought would be a ‘a couple of blocks’ to visit the Canadian coverholder; but travel 45 minutes. BY CAR.

Simon mapped the levels of risk complexity and premium size associated with different parts of the Insurance market (left hand slide). Simon noted that mass market retailers (low size and low complexity risks), motor, home owner and personal lines for example, are attempting to move into ever more complex lines.

He positions ‘classic London market play’ as high complexity and high size risks that are coming under pressure from two new groups – regional wholesale markets and specialist SME suppliers. Not only is the ‘classic London play’ coming under pressure from different types of insurance companies but international ‘regional hubs’ too are posing a threat, as they are underwriting more and more of the  large, complex risks in Singapore, Miami and Zurich.

Simon perceives segregating parts of your business into these four categories may, operationally, be more fruitful.  If you try to sell wholesale products through an international network of offices, for example, you may meet unnecessary internal discrepancies.

Simon emphasised this competitive landscape as ‘never still’ and questioned the avoidance of silos, where they are beneficial; however it seemed the stand out trend was a desire to increase the complexity of risks underwritten therefore increasing the mark up per policy.

 

 

Simon shared his experience of financing small MGAs and coverholders with niche propositions, particular products to particular markets, and that their fixed cost base is usually a minimum of two million dollars.  When operating these global entity MGAs and coverholders in a different territory he suggested that they need to write to a 35% loss ratio just to break even.

Simon drew similarities between supermarket retailers and underwriters in making a profit; considering overheads and getting the most out of suppliers.

For me, these were the key points from the event:

  • MGAs are the quickest route to market if effective systems and processes are in place
  • Speed should not be the only focus for coverholders; quality and sustainability should also be considered
  • The BRICS countries present huge growth and penetration opportunities in life, car and home insurance
  • Companies that have invested in developing in house systems can be opposed to new technologies and change
  • The traditional method of spreadsheets doesn’t do it anymore; systems are needed to cope with the demands of modern regulation