Blog: MGAs need to know how secure their capacity is

This time last year, the first signs of a capacity crunch for MGAs were becoming clear. Capacity was contracting in a perfect storm of syndicate run-off, heightened scrutiny on rising costs and deteriorating performance ratios.

Roll forward 12 months and that capacity contraction is accelerating at pace. All the talk is of collapses — CBL, Alpha, Elite, Prosight, Enterprise and Gable — and what this heralds for the coverholder and MGA market at large.

Recently, we’ve witnessed large numbers of coverholders and MGAs suddenly appearing in the capacity markets. Not just the continued stream of new start-ups, but those that have lost their main providers seeking to reload, including several large London market MGAs.

Now Lloyd’s has declared the market’s underwriting performance inadequate and is taking assertive action over results, with a very clear message from the centre that syndicate business plans will not be signed off without corrective action being evident and proposed ratios being acceptable. Central to this is the so-called ‘decile 10’ initiative, mandating the remediation or removal of the worst performing 10% in each portfolio. By today — 3 August — those plans were due to be agreed, or unprofitable syndicates dealt a closure notice.

This action was inevitable. Returns have become insufficient, forcing syndicates and managing agents to pay significantly greater attention to margin. But for MGAs and coverholders, the knock-on challenge ahead is significant. Projections and forecasts will need to be good, with solid data to support them, or times will get even tougher.

Lloyd’s is the largest market for MGA and coverholder business and much of that premium remains profitable, producing strong returns from those expert in specialist classes and territories. But rate attrition through continued competition has significantly challenged underwriting profit.

While the market is achieving rate improvement in some territories, it’s not universal. So we have a market that is hardening from a margin improvement perspective but not yet rate. Cost reduction seems to be the only lever currently available.

Part of Lloyd’s plans to improve margins comes in the form of Bridge, a coverholder ‘matching service’ connecting prospective coverholders with syndicates that write the relevant business class. This has — not surprisingly – gone down quite badly with brokers and some are quite vociferous about it.

Unlike PPL, which has obvious gains for the market, we see Bridge as a more controversial move from Lloyd’s. While it proposes to cut costs by delivering direct access, it ignores many key issues, such as who has the best policy form or the best rate. What about delegation and partnership culture, or claims handling service? And how do you distinguish between who is capricious and who is here for the long term? When it comes to matching capacity with coverholders, it’s vital every deal structure is optimised for both sides of the transaction and any potential channel conflict identified.

And all this at a time when an MGA might need more help than ever to navigate the market. These are the issues that make a real difference and MGAs should be thinking hard about where their capacity comes from and how secure it is.

What matters most is attention to detail, market knowledge and relationships, and data, technology and innovation. When matching capacity with coverholder, you’ve got to really understand their respective needs and motivations to deliver the best results for both sides.

Many Lloyd’s markets are under pressure and many are nervous. For others, margins may not be ideal but they are certainly not bad either and small improvements can add up to a big difference. Working together with MGAs to improve performance will achieve that. It is all about partnership.

The best MGAs and brokers remain a source of specialist and profitable business. But there will be many others for whom even more challenging times lay ahead.