Posted in News on 06 Mar 2019

The delegated authority market is experiencing significant change as insurers impose greater underwriting discipline to restore profitability. Over a period of 10 years, protracted soft market conditions saw premium income under delegated authorities increase, whilst  underlying technical rates deteriorated. This disconnect between premium growth and rate movement was unsustainable.

The rise in premium income was significant – around one third of Lloyd’s of London’s income is derived from the sector, approximately GBP11.1bn. The issue was not Lloyd’s alone – composite and  specialty (re)insurers were all in the same position.

In 2016 evidence of issues with technical pricing began to appear, with the failure of several insurers:

  • CBL
  • Alpha
  • Elite
  • Prosight
  • Gable.

Mounting losses

Then in 2017, we saw a period of significant catastrophe activity at a time when attritional loss ratios were already high and causing concern – all of this led to the market making a significant loss. In the case of Lloyd’s this loss was GBP2bn. The issue at hand was not the specifically exposure to catastrophe losses but was far more fundamental – underlying risk pricing adequacy had, for many classes of business, been left behind.

Changes in worldwide markets had already become evident by this time. In Australia and New Zealand, property pricing had seen increases following the Kaikoura earthquake in 2016. However, this was not the case in other markets – notably Europe, the United States, and Canada - which all continued to see reductions in rate.

Market remediation

Insurers needed to take action, and did so in late 2018. For Lloyd’s, a process of remediation called ‘decile 10’ was introduced, with the simple but effective goal or either improving or removing the worst performing 10% of business held. This led to wide-scale changes in business composition for many syndicates and in one case (The Standard Syndicate) a closure. Lines particularly affected included:

  • Cargo
  • Professional Indemnity
  • International Property
  • Construction.

Delegated authority business was a particular area of focus. The preceding 10 years had seen a large number of MGA launches, with the model being deployed more and more commonly. Fundamentally, MGA business is about specialism – based on product, territory, distribution or indeed a combination of all three. However, many MGAs had been launched with a premise more focused on outsourced underwriting operations for mainstream business, which is fine provided the results delivered are acceptable.

However, the trailing market had seen rates reduce due to the over deployment of capacity and results had not always been adequate. Prevailing market conditions mean that many MGAs are now operating under greater constraints than in prior years – certainly with greater scrutiny from the insurers. In many cases, delegated authority contracts were not renewed or are under extension whilst seeking alternate capacity. Many are operating under reduced commission terms than previously.

2019 is therefore a year of great change and opportunity for those MGAs and coverholders who are actively trading. The removal of downward pressure on pricing and a renewed focus on risk quality mean that results can improve, which will in turn bring greater earnings from profit participation.

Carriers will continue to seek improvement – the changes imposed in 2018 were not a one-off event. The Lloyd’s decile 10 initiative is an ongoing process and once again this year the worst performing accounts will be held to scrutiny – and either remediated or removed.

Top tips for MGAs

Alesco Delegated Authority has been helping existing and new customers to successfully renew or replace their capacity arrangements. Many MGAs are still seeking new capacity and we would urge anyone in that situation to make contact to discuss their business with us. We are able to offer alternative solutions.

The particular areas that we find most MGAs struggle with are:

Data and Analytics: Some MGAs are not aware of subtle differences in portfolio composition. Some insurers also issue blanket rate increases, which do not discern between areas of profit versus areas which actually require rate improvement. Modelling is vital and portfolio trends requite constant attention.

Bespoke Capacity: Specialist business often requires specialist capacity. We access Lloyd’s, companies and international markets to design and optimise programmes and delegated authorities.

Specific Reinsurance: Many facilities operate within the net retention of an insurer when certain perils can be reinsured through financially efficient means to ensure a smoother and more certain margin for the insurer.

Digital Solutions: We work with customers to deliver systems to quote, bind and issue insurance efficiently to remove frictional cost from distribution.


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