Welcome to Part 2 of the Underwriting Transformation - Future of Delegated Underwriting Blog Series, where we will focus on the evolving nature of market competition, capacity management and capital allocation on delegated capacity providers.
The insurance market is not a static entity; new risks, customer demand trends and external influences all create ripples or waves of change. As the insurance market evolves, how should Capacity Providers and MGAs react in order to proactively anticipate changing industry standards and expectations?
A number of market evolutionary themes are changing the face of the market:
Follow the bi-weekly blog series to understand how Delegated Underwriting and Coverholder operating models are being set up for future success.
Distribution in the traditional marketplace is ever more congested, especially for ‘vanilla propositions’. In its hardened state, with capacity reduced, appetites tightened and higher premiums, competition to retain existing business and onboard new policyholders is fierce. For this reason, exploration into delegated operations is rife as capacity providers and Coverholders alike, look for reliable distribution solutions.
To respond to the hardened market, and whether to place capital in vanilla risks or accommodate emerging risk pools which are poorly, or not at all accommodated in the standard marketplace, Capacity providers are assessing their strategic positioning by ensuring they are committing appropriate capital allocation to maximise sustainable returns for shareholders. Differentiation in such a market is not easy, with congestion faced across all revenue streams. Both carriers and Coverholders must therefore identify their core focus and area of specialism which can be recognised within a delegated proposition.
Congestion also breeds uncertainty for risk placement and rates. Capacity providers must therefore weigh up the benefits of binder or schemes arrangements for which they may wish to lock in rates via binding agreements or release this capital to open market risks with room for trading and ongoing coverage review. For Coverholders, securing sustainable relationships is proving of paramount importance. What could be taken as a simple strategy has proven complex to achieve. In a previous review of the delegated market, one insurer exited a third of their outsourced agreements, within a short two-year time frame. This lack of certainty is unappealing as capacity decreases.1
As Coverholders explore long-term relationships, they are seeking adequate support and long-term investment which can withstand fluctuating conditions. In return, carriers expect robust book performance and meticulous trading and binder management. The most successful Coverholders are choosing to act proactively, continuously improving service capabilities and delivering value to their policyholders to delight both customer and insurer.
At the heart of the challenge is the question, will vanilla MGA propositions continue to be sustainable, economically and effective in the market against carrier peers?
New entrants that do not have the legacy architecture or archaic business practices of incumbent MGAs are providing a catalyst to transformation and challenging whether established business models suit the future. Neo-players or Insurtechs have the opportunity to deploy digital first operating models, without the complexity of unravelling what came before, but also breathing different approaches to assessing risk using technology and data.
Case Study 1: CQuence – A technology enabled MGA, operating in mid-market commercial insurance. Using sophisticated analytics, intuitive technology and powerful algorithms, evolving risk profiles are understood.2
Case Study 2: Corvus – A US based tech start-up and MGA, building Smart Commercial Insurance Products by applying findings from new sources of quality data, analysed with machine learning and AI techniques. This is enabling informed, data-driven underwriting.3
Case Study 3: Loadsure – An International Cargo InsurTech MGA and Lloyd’s Coverholder. Harnessing AI, predictive analytics, and automation to provide per-load, smart coverage in 40 seconds or less.4
Existing MGAs may seek to improve their own digital offerings, infrastructure and with that, ability to remain nimble. The challenges of this path are not unknown; achieving effective change whilst continuing to operate a complex business, solving the issues of legacy in parallel with imagining the possibilities of the future, building a flexible and future proof end to end technical solution whilst building skills for the future. In addition, and in many cases, technology and operational change, is limited by the extent of aligned cultural change that an organisation can endure or achieve. Each established player will face these trade-offs and challenges.
Whilst new entrants may be able to establish fresh methods of creating value or developing propositions that the market desires, there must be recognition of the value and advantage of existing players; through established relationships, client bases, knowledge developed over time, experienced and skilled staff, trusted names and reputation for coming through when a catastrophe does occur. On the other hand, there may be opportunities to those existing players that see new market entrants as prospects for collaboration rather than direct competition; to partner experience and proven capability with the advantages of developing clean slate capability being built without legacy complications. Some successful players are accommodating neo-style entrants in their appetites, providing incubator-style environments offering access to underwriting expertise, data and insight to partner for long term growth.
To weather or excel in a period of new entrants, advantages must be protected, built upon or brought to the forefront of adapting business models. Are existing MGAs and carriers utilising and taking advantage of their historic data effectively? What can be done to understand the changing expectations of customers, partners and in particular niche business types, and how can trusted providers or Coverholders provide the support to the market’s customers?
Brokers are continuing to explore MGA services as they seek to obtain net new or protect existing revenue streams, leveraging current trading relationships. As the traditional vanilla risk pool saturates, brokers continue to be enticed into delegated or wider scheme operations, offering the opportunity to develop strategic relationships and unlock greater remuneration. This may present a threat to existing MGAs with established broker relationships, unless the proposition is truly differentiated or specialist. For capacity providers, there may be an opportunity to confirm access to concentrated broker distribution pools at scale.
Historically, carriers may have sought to supplement their own distribution channels and propositions via MGA markets due to the limitations of their own operating models; unable to evolve sustainably, to address new market opportunities. These limitations may be a thing of the past, with insurers undertaking a wave of underwriting transformation; introducing new technnet result is likely that the cost of transacting non-specialist business is reduced, and any technological or operational barriers are removed.ology, taking advantage of data insights and redesigning propositions. This has the potential to disrupt the MGA value proposition as insurers remove legacy inhibitors to trading and enable scalable growth platforms. The net result is likely that the cost of transacting non-specialist business is reduced, and any technological or operational barriers are removed.
MGAs should look to continue to innovate and evolve their own operating models across operations, technology and data to grow with capacity partners – in some cases, they may even be able to take a step ahead.
Consolidation continues throughout the value chain and whilst this may bring economies of scope or scale for those involved, effective coverholders and capacity providers alike may interrogate the distribution landscape to find whitespace and new opportunities created from consolidation.
For the consolidators, their moves are directed towards to economies of scale and better bargaining power in the market; delivered via shared resources, collaborative strategies and extended ambitious growth targets. For those players not involved in consolidation, to respond responsibly to market makeup they might consider whether competitor propositions are at risk of diluting their specialist focus, in comparison with market expectations. Similarly, for capacity providers, closely monitoring developments is to be prioritised, in order to respond quickly to changes in operations and prevent service impact for policyholders. Subsequently, many carriers are seeking to prioritise due diligence for new arrangements, as they consider the trade-off between comprehensive binder set up versus fast proposition builds for slick market entry. Partnering at the right time is proving crucial for success, to grasp new opportunities, while obtaining reliable due diligence insight.
And for those on the outside? There will almost be certainly spoils to be fought for!
In the face of ambiguity, and a lack of a proven best response to market change, agents must determine their own preferences across various trade-offs:
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References
1FCA - Delegated authority: Outsourcing in the general insurance market
"The delegated authority ecosystem is an evolving entity and successful players must respond proactively to changing industry standards, solutions and expectations to remain relevant or attractive - this must start with trading partners, proposition and distribution."