What are the key differentiators for a successful MGA and what are the opportunities and threats going into 2013?
Oct 1, 2012 1
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?’.
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
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
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.