PAUL HIGHAM: The hardening of the market over the last couple of years has really driven a different dynamic in terms of the degrees of delegated authority. So you can see that prices are at their peak, you can see a drive towards insurers looking to expand their portfolios. And delegated arrangements can be a really good opportunity to do that.
SPEAKER: You're listening to (Re)thinking Insurance, a podcast series from WTW where we discuss the issues facing P&C, life, and composite insurers around the globe, as well as exploring the latest tools, techniques, and innovations that will help you rethink insurance.
ANAND PATEL: Hello and welcome to (Re)thinking Insurance. I'm your host Anand Patel, and today we're talking about the MGA market. This podcast is inspired by our video series Thinking Unbound, in which we explore the latest trends and challenges facing the commercial and global specialty markets. If you'd like to watch the full video on this topic, please search for Thinking Unbound on our website wtwco.com. Today, I'm joined by our guest Paul Higham and Jonathan Aubrey-Smith. Thank you for being here.
PAUL HIGHAM: Thanks, Anand. Great to be here.
JONATHAN AUBREY-SMITH: Thank you, Anand. It's also great to be here. We're looking forward to an interesting conversation.
ANAND PATEL: Today I want to start by talking about the MGA market. We've seen that the growth in that market has been booming over the past couple of years. The global premium is now $110 billion with over $90 billion in the US. There's been a lot of change in that market as well. So the low-cost funding models, which drove InsurTechs to be able to propagate in that particular market has now appeared or at least what appears to be unwinding itself. And therefore, there's new challenges coming about. I'd be really interested to hear your takes in terms of what's particularly changed in this particular market, and what's creating that growth and the drive towards insurers using that marketplace.
JONATHAN AUBREY-SMITH: I think it's a great question. I think there's two or three things that come out in that. Firstly, I think with the hardening of the market over the last few years, insurers have been taking the opportunity to try and expand their footprints and delegated authority is a great way of doing that. And a relatively low cost, internal cost to the insurer.
I think there's a realization when you take the InsurTech piece where a lot of them were focused on fixing specific problems. They didn't necessarily always target making better underwriting decisions, which I think is why that's plateaued, but I think it will come back again as people begin to realize that there's much more power they can get into the underwriting decisions. They can make better underwriting choices for their capital providers.
And I think it also just comes back to a market where people are looking for opportunities to set up on their own. I think insurance, particularly in London's, always been very entrepreneurial. Setting up an insurance company on a standalone basis is phenomenally expensive, setting up an MGA becomes much more doable. And I think people use it as a route to use their entrepreneurial skills to start new businesses.
PAUL HIGHAM: Yeah. Jonathan, I'd agree with most of it. I think the drive towards the hardening of the market over the last couple of years has really driven a different dynamic in terms of the degrees of delegated authority. So you can see the prices are at their peak, you can see a drive towards insurers looking to expand their portfolios. And delegated arrangements can be a really good opportunity to do that.
So there's also the drive towards in InsurTechs, as you mentioned, Jonathan, and the ongoing drive to improve customer service. So a drive to have decision making as close to the customer as possible, I think, is also a dynamic which is growing the world of delegated authorities. I think from an insurer perspective, having so many opportunities to grow is so important for an insurer to make sure that where they delegate the authority, where they give their pen away is in clearly in line with their underwriting strategy and their business strategy.
So are you delegating authority so that you can access expertise you don't have in your organization? Are you delegating authority so that you can expand distribution to customer bases, you can't otherwise access? Or are you doing it so you can expand your portfolio rapidly and at a lower cost base? I think making sure that those three things are in an insurer's mind as to where they delegate authority is hugely important.
ANAND PATEL: I think that's a fascinating point that you've just made there in terms of having that real USP in order to be able to operate in that market as an MGA has proven critical to the success of the MGAs, which have prospered. I just want to pick up a point that you mentioned around the correlation with the market cycle and the fact that we've been through a period of a hard market cycle and perhaps that's led to the growth in this particular market.
Quite often, some of the narrative that we hear on the other side is actually that in those hard market cycles, it's often the insurers that want to bring the underwriting back closer to them, and therefore control some of the margins and limit the amount of expense and distribution that it costs them through that market. Do you see some of that unwinding as a consequence of a softening market when that does prevail?
JONATHAN AUBREY-SMITH: I think it's about stages. Because I think that reshoring happens as the market hardens. I think then you get to the point-- I think particularly in the last year and a half, two years, where the market has-- particularly in London, has been looking at each other going, ratings is about as good as it's going to get for a long time.
And the conversation of how quickly can we fill our premium coffers, how can we actually grow now, I think, has driven some of that thought process. I think you're absolutely right in the drive to control and bring a hardening market. There is that reduction in delegated authority. But I think it ebbs and flows in reflection to what insurers' goals are for what the preceding or most of the 2010s, it was a focus on trying to get back to a position or manage your profitability control, and therefore, the enthusiasm was more limited in some places.
Don't get me wrong. It was enthusiastic in others. But as we've crossed that bridge where we're now topping the curve as it were from that hardening market, there's an element of making hay while the sun shines and bringing on as much premium as you can. I think it's then going to be an interesting piece.
And the real challenge for insurers is where we go now, because that arm's length nature of a relationship with a delegated authority, even with great control systems, which some insurers have, even with a constant monitoring process, which some insurers have, you're still at risk of the cover holders going in another direction.
And I think managing that downward cycle as some markets soften and being realistic about when you need to pull the plug, when you need to make material decisions, and actually having that control environment, so you're thinking about that early rather than waiting for two or three or four years down the line. We've seen some market softening and those portfolios are now beginning to look a little bit jaded, probably is a nice way of describing it.
PAUL HIGHAM: Yeah. So I'd agree with your original point, Anand. I think the soft market has driven some particularly difficult conversations between capacity providers and delegated authorities. So there's been-- insurers have gone through a period of culling delegated authorities where they've produced challenging results as insurers look to rectify loss making positions.
Delegated authorities can be an area where results aren't always as transparent until the results are particularly poor. So you don't necessarily see the emerging trends until it's too late. That can drive some difficult decisions and difficult conversations. And I think insurers and delegated authorities come through that period. And I think you're exactly right.
Now we're in the hard market. Insurers can be somewhat spoiled by the opportunity to grow as they do look to take advantage of an increased price and increased levels of profitability. So for me, that decision making, also comes down to insurers maintaining their discipline, in terms of where they put their capacity and making sure it's aligned with their strategy.
And taking that next step to make sure that where they do delegate authority, they're getting the right visibility and transparency of results in a partnership with that delegated authority from the offset rather than not doing so and waiting for the softening of the market, and therefore those challenges that can come further down the line. So it's preparing themselves to make sure insurers don't repeat the challenges of the past.
ANAND PATEL: And I think that's a lot of what we hear in the market as well. Actually that insurers have had some very challenging relationships, especially within that soft cycle with particular MGAs that they've supported. What I'm really interested to hear about is given your experience in the market and having seen both sides of that cycle, the hard cycle that we're in at the moment and the soft cycle that prevailed before, I'm really interested to know, from an insurer's perspective, what should they be thinking about today in terms of how they're going to manage and work with those MGAs?
Jonathan, to your point, in terms of when to pull the plug, because this is an arms length transaction, and in order to get the benefit, it is about optimizing distribution in order to improve profitability.
JONATHAN AUBREY-SMITH: I think it's a really good question. I think where I would be focusing my time and energy, which is what a lot of insurers have been doing, although with varying degrees of success from what I can see, is making sure that they really understand what their cover holders are doing.
Getting much more focused on their cover holder relationships to make sure that they are reliant on good working relationships, that it's not just, are we getting all the information that we need? That we have a good proactive personal relationship with people leading those cover holders in our behalves. So the people making those decisions.
So whilst the personal side has always been quite strong from a London perspective, the success around data has been at best variable. And I think focusing on making sure you can get the data in, but also then using in that data to do things like risk scoring, running it through your algorithm, so you understand and score your quality of your cover holders relative to one another. You understand how they're relatively pricing.
Because a lot of the time, we see an MGA will be handed either a free pen or they'll be given a rating matrix, which is relatively basic. And actually, understanding the quality of the underlying risks and the actual makeup of that portfolio. Coming back to Paul's point about strategy.
Being really clear, this is the business we want you to write and making sure you're then monitoring that in a much more proactive way where historically, I think particularly in the last soft cycle, and before, it was much more reactionary, much less thoughtful where, I think, the people who were making a lot of money at that point, who are still making money in that market were focused on making sure there was that alignment and constant ongoing communication to ensure it stays aligned.
PAUL HIGHAM: I think the only thing I would add to that is probably just reiterating the final point, I think, traditionally certainly a commercial lines market. This is quite generic comment, but insurers can be quite reactive in terms of how they manage delegated authorities. And I think the really important factor now is becoming proactive and becoming partners in the relationship.
Too many times, an insurer can just receive information, receive data from a delegated authority, and not do much with it. And therefore, they're wholly reliant on the insight coming from their distribution partner to inform on trends. And actually, I think that's the balance that probably needs to level out to make delegated authority successful and make sure that both parties are bringing insight and analysis to make sure there's longevity in the relationship.
ANAND PATEL: Yeah. Absolutely. And I was really interested, and actually, you mentioned a point around risk scoring. This is often a new area for a lot of insurers, a lot of MGAs. Can you just tell us a little bit more around, what is risk scoring? I think I'm sure there's a lot of viewers out there who are interested in thinking, that's something that I haven't come across in their work.
JONATHAN AUBREY-SMITH: Sure. So from what we're really talking about there is understanding a risk beyond price. So traditionally, whether we're talking about delegated authority or open market business, risks have been put through a pricing model. We've come up with a pricing adequacy assessment, et cetera. Those pricing models can be vary from highly complex to relatively simple, but that gives you a measure.
What we're thinking about from a risk scoring perspective is understanding more about the quality of the risk that goes beyond pure price metrics. And also understanding the alignment with your strategy. So your intent was to write only construction projects averaging between 3 and 6 months, and that accounts for 80% of the portfolio.
Is that what's happened? And so scoring each individual risk relative to your expectations about what's coming through, relative to underlying quality metrics for the particular line of business, the types of construction they use and giving a different score between them. So there is overlap and alignment with your pricing models. But going beyond those functions that don't sit within the pricing model, so you're being really clear that how this aligns to what you want it to happen.
So your strategy was x, is x happening? And being able to score each individual risk relative to that. And I think one of the things we want to lose when we focus on data from a DI perspective is about to ingest that data so you can score and say, I've got two flood binders in the states. The core drivers you're going to look at is your modeled outputs and your loss ratio.
Actually, what we're interested by there is what else is going on there? What else can we understand about those two portfolios that aren't just being picked up by the existing modeling? So we can say, actually binder a is more powerful to us. So it might not have the better loss ratio this year, but actually might be the one that you want to retain, if you're then making a choice about where you want to move forward.
ANAND PATEL: Well, there you have it. A new metric to be able to monitor your performance. Paul and Jonathan, thank you. It was great to hear your perspectives. And to all our listeners, thank you for joining us today. And if you find this interesting, then please do make sure to join us again in the future for the episodes of (Re)thinking Insurance.
SPEAKER: Thank you for joining us for this WTW podcast featuring the latest perspectives on the intersection of people, capital, and risk. For more information, visit the Insights Section of wtwco.com. This podcast is for general discussion and/or information only. Is not intended to be relied upon and action-based on or in connection with anything contained herein should not be taken without first obtaining specific advice from a suitably qualified professional.
