As published by Insurance Day: ‘Adapting to endure: MGAs and the realities of compliance’ by David Hill, Managing Director of Advent Group, and Paul Bermingham, Director of Advent Insurance Management.
The number of new managing general agent (MGA) businesses launched in recent years is a testament to the model’s enduring popularity. MGAs, as underwriting-focussed businesses, provide insurers and managing agents with access to specialist teams of underwriters which are often a source of profitable premium. It has been said that where Lloyd’s syndicates were once the vehicle of choice for start-ups, MGAs have now taken their place.
The rise of MGAs arguably corresponds with increasing regulatory requirements for starting up syndicates. However, MGAs now face similar challenges with the implementation of Solvency II, changes to Lloyd’s Minimum Standard requirements and the FCA’s new reporting obligations. The FCA’s thematic review of delegated authority arrangements resulted in insurers being required to make changes. These are mainly to improve the way these relationships are managed, to ensure that customers are being treated fairly and to provide evidence to prove that these requirements are being adhered to. This in turn poses a challenge for MGAs because a proportion of the information that insurers must produce to demonstrate compliance must be provided by MGAs, and other businesses that act on their behalf in a delegated capacity.
With the first bordereaux under the new rules being processed now, it remains to be seen how well MGAs, third party administrators and insurers themselves are complying. The next few months will be crucial in testing not only the ability of businesses to cope but the durability of the MGA model. Operational inefficiency is also an issue. It can contribute toward MGAs plateauing, despite having great business models, products and loss ratios. Improving operational efficiency and complying with regulation are the two fundamental aspects for MGAs to grasp in order to withstand these pressures and to sustain the model as it enters a period of unprecedented change.
MGAs in the UK tend to be among the most efficient globally in collecting premiums, handling claims and reporting accordingly. This is because they are accustomed to Solvency II type requirements and the principles of the FCA’s Treating Customers Fairly initiative. But, even for those that are efficient, responding to Solvency II, particularly the operational data collection and analysis requirements of pillar 2, will be a huge challenge. Many MGAs, as businesses focused almost exclusively on underwriting, will find it difficult to meet these requirements, which is likely to force the sale or closure of some firms in the UK. MGAs overseas may simply decide the new regulations are too onerous and seek alternative capacity locally. It is not uncommon to hear MGAs express the view that they already operate in a highly regulated environment. Many struggle to see the need for anything beyond the high standards with which they already comply.
Although regulation poses a significant challenge, a further issue is a lack of awareness about changing regulation among MGAs, particularly outside the UK. In the US, larger MGAs tend to be aware of the new regulatory requirements and are talking to their principals in London about it. However, the message simply hasn’t got through to many mid-size and smaller MGAs. Despite the quality of an MGA’s underwriting, if conduct reporting is lacking capacity providers will have little choice but to discontinue those relationships.
A further difficulty MGAs face stems from the decline in rates over several years. Five years ago inefficient models and non-compliance were less of an issue. With rates continuing to fall, added to the changes in regulation, the market is under considerable pressure. Faced with these challenges there is a need for MGAs to improve efficiency and to comply with the requirements, and support is available from specialist firms that guarantee both.
The limitations of bordereaux are also exacerbating these regulatory and an operational challenges. Much effort is being spent on making bordereau management more efficient, but with all parties still duplicating work, this is not a long-term solution. The qualitative analysis required by regulators about workflow and service level agreements etc. cannot be captured by bordereaux as it is a numeric format. As regulation will only grow, so bordereaux will become increasingly unable to fulfil market requirements. It is one thing to produce data, but another to produce accurate data and yet another to analyse it appropriately. For instance, audits show that at least half of coverholders and third part administrators with claims authority habitually state the wrong year of account on claims bordereaux. Such additional requirements and the sheer volume of information now required is prompting many in the market to move toward straight-through processing, which is faster and reduces the potential for error. Employing this technology is something that will further help to sustain the MGA model as monthly or quarterly work flow-related reports become the norm.
The convergence of these combined pressures is likely to mean there will be fewer MGAs in the near future. Lloyd’s delegated authority premium, around a third of its total, will be affected should MGAs decide to switch to non-Lloyd’s capacity in significant numbers. This could further be detrimental to the UK’s balance of payments. However, Lloyd’s is alive to this which is why making Lloyd’s easier to do business with is at the top of the agenda for its Target Operating Model initiative. Ultimately MGAs are resilient beasts often run by keen-minded entrepreneurs so, while these issues are unlikely to break the model, individual firms will have to work hard to adapt in order to prevail.