DA Strategy director Charles Rowley provides recommendations for managing the disequilibrium in the delegated authority sector as hard market conditions take hold globally and insurers press for demonstrations of true value in their MGA or coverholder partnerships.

Charles Rowley DA Strategy

MGAs and coverholders are currently facing more challenging market conditions than they have navigated in the almost 20 years since 9/11, and are experiencing intense scrutiny from their insurance partners as a result.

My message to the market is direct – MGAs that cannot clearly demonstrate their value to their insurance partners when challenged on issues such as underwriting profitability, distribution cost and a unique proposition (for their carrier) need to seriously up their game for 2021.

The jolt into a global hard market has been a shock. Businesses have become accustomed (addicted?) to cheap capital over the last few decades. The market has become comfortable operating amid a surplus of “easy capacity” facilitating an easier ride on the distribution side.

“MGAs, coverholders and brokers increasingly must prove – in detail – to their carriers that they are adding value”

This shift to a tighter market is exacerbated by the radical uncertainty coming from increasingly frequent and severe natural catastrophes, the impact of climate change, the implications of the pandemic and the expanding consumer protection drive led by government entities.

MGAs, coverholders and brokers increasingly must prove – in detail – to their carriers that they are adding value.   

The shocking under-investment in data and systems seen over the last decade or more can make providing this proof a struggle.

Data, data everywhere – but not a drop to prove?

Running actuarial analyses over limited existing data sets is, at best, a temporary solution. MGAs must provide their insurance partners with real insight – capturing and analysing data is at the heart of this.

To succeed, MGAs partnering with carriers must identify what “in-product” data is relevant, integrate this with third-party data feeds and then synthesise this into quantifiable and logical outputs.

MGAs that do this will be able to precisely identify their specific pools of profit or peaks of risk and stand out from the crowd. It is no longer sufficient to have a good idea about a product, a network of contacts in the market and experience. Data-led evidence is required to carve out a sustainable competitive advantage.

An MGA can carve out and prove a unique proposition – i.e. their value-add – by harnessing data insights in key areas such as the correlation of claims frequency or severity against identified and relevant third-party data sets. Other examples include using customised off-the-shelf packages to identify patterns in claims data and quantitatively evaluating customers habits and buying journeys.

MGAs that use data in this way will attract more backing and attention from insurers or risk capital partners. The technology to achieve this is readily available and can be integrated with existing IT platforms to capture and analyse these data sets.

Operations – we need to talk about commissions

Strident conversations with carriers about product value-add and commissions together with inexorable regulatory focus on whether insurance products are offering value to their customers are ongoing. Streamlining operations whilst adding “data proof” of value-add is essential.

Nothing is off the table in terms of discussions and transparency. The right MGA systems must prove they can reduce overheads dramatically via API connectivity with customers, brokers, claims TPAs/DCAs and carriers whilst upgrading data capture and analytic capabilities.

There are some excellent, customisable products in the market which can support the drive towards smooth end-to-end workflows and data gathering needed to maintain margins and evaluate risk.

“The right MGA systems must prove they can reduce overheads dramatically via API connectivity with customers, brokers, claims TPAs/DCAs and carriers”

Distribution – digital first every time

MGAs and coverholders, particularly those in the micro and SME spaces, need to consider not just the digital customer journey but also the “remote post-Covid” journey. Insurance policyholders are, of course, increasingly buying online and radical distribution changes can upend business prospects for intermediaries.

Insurance’s adjacent fintech sector has seen disruptive start-ups develop “wallets” and “hubs” offering reliability, convenience and consistency across multiple services (e.g. quote, bind, issue and claim) with omnichannel offerings.

MGAs can adopt and adapt these tools to improve efficiency and deliver to customers “remote post-Covid” requirements. The solutions are already there, and an experienced specialist can help work through the flexible build outs of portals, hubs and wallets for MGAs and coverholders. These enhancements can increase customer stickiness and satisfaction whilst fostering enhanced automatic data collection at the back end.

Change is coming and digital will win

Are MGAs working closely enough with their carriers and claims TPAs (or DCAs) to develop omnichannel wallets where new, renewal and claim transactions for policyholders can be handled far more rapidly than before? If not, why not?

Current customer touchpoints must be evaluated and upgraded with systems that draw data on the customer journey, simplify this and embed it. Again, there are some excellent, customisable products already available in the market which can support this.

Integration

The traditional model of data and relationship flows moving linearly between customer/MGA/carrier is dated. Successful MGAs should, at the minimum, integrate third-party data and claims data through automatic capture and analysis into this relationship – a web is better than a line.

For most MGAs, data and relationship links have been “physical” or bilateral with regular monthly reporting, periodic phone calls and meetings. In all delegated authority businesses, in addition to these interactions, it is important to identify the highest value data integrations and build digital connections for these. This will harness data effectively to add value and future proof the business.

Whether called out as “data science”, “algorithm underwriting”, “actuarial analysis” or just plain “SI” systems integration, carriers, MGAs and coverholders need to work closely to pull data and systems together to gain insights that help to price business and to manage, process and service risk.

Capacity challenges in 2021

Capacity is becoming more selective. Automatically generated and analysed data-driven insights are limited for many delegated authority products. Decisions by some start-up carriers to eschew delegated authority business are like a carbon monoxide alarm going off for this sector.

Lloyd’s Blueprint Two plans for harnessing data to streamline the end-to-end process at lower costs are exciting and will eventually deliver, but not immediately.

“Decisions by some start-up carriers to eschew delegated authority business are like a carbon monoxide alarm going off for this sector”

In the meantime, MGAs and coverholders must be proactive to develop joined up data demonstrating real value – superior bottom line risk adjusted profit – to their carriers.

This year will be the ultimate proving ground for the delegated authority sector if it is to maintain the 40 percent market share attributed to Lloyd’s delegated authority through its circa 4,000 coverholders and 350 service companies that channel and manage much of this business.

Success will depend on the ability to enhance data, streamline operations and integrate whilst maintaining niche expertise. Only the data savvy will be able to prove their value.