Canada quickly getting in on the DUAE market boom
The MGA sector is among the fastest-growing segments of the insurance industry. Specialised brokers have shifted to MGA operations, giving insurers a more cost-effective conduit to new markets and growth.
Given the strong growth trends in the US, it is AM Best’s view that this growth is also happening at a significant pace in Canada. AM Best recently held its annual market briefing on Canada’s insurance industry in Toronto, and this was one of the key messages delivered.
AM Best has observed in the past that Canada runs a few years behind the US in adopting industry trends.
We think Canada is moving in the same direction as the US. The extent of this shift remains cloudy, however, as one main issue that stands in the way is the paucity of MGA-related information in Canada – it’s not detailed in filings.
We know that in the past decade, the volume of insurance premium moving through the global delegated underwriting authority enterprise (DUAE) market, which includes MGAs, as well as managing general underwriters and other similar entities, has doubled.
As a floor, we can pinpoint $65bn-$70bn of premium flowing through these DUAEs. On US statutory statements, companies only report premiums that exceed approximately 5 percent – consequently, we’ve seen other estimates that place the market around $85bn, once you factor in what isn’t making it into US statutory statements.
At the same time, acquisitions and consolidations among insurance distributors have meant a decline in the number of brokers, while the number of MGAs has increased. There's a consensus that the US MGA market will top $100bn of business in the near term.
Right now, we estimate that there are more than 80 MGAs in Canada, representing the fastest-growing segment in Canada's insurance market. From a commercial lines premium perspective, estimates are that $3.5bn-$4bn dollars of premium are flowing through the MGAs.
That would account for nearly 10 percent of Canada’s gross property/casualty premium (compared with an approximate 20 percent share of total gross premium in the US, as well as in the UK).
There is a cautionary aspect to unlocking this growth potential, though, given the segment's relative lack of uniform regulatory oversight in Canada.
However, the segment does have access to resources and support from the Canadian Association of Managing General Agents, a national trade association formed in 2017.
For our own monitoring work, we’ve developed the Best’s Performance Assessment, which encompasses a set of key assessment factors that independently gauge the effectiveness of DUAEs and their ability to perform services and generate results on behalf of insurance partners.
We use quantitative and qualitative elements to assess the strengths and weaknesses of the DUAE. There's increasing interest across the board, not only from capacity providers, but investors, intermediaries and regulators as well.
Better-aligned interests between DUAEs and their partners are really a driving force behind this global growth.
In addition, MGAs would point to their technical expertise and product knowledge – and to their technology, which is unburdened by legacy systems that could create issues with incumbent carriers.
MGAs have shown an ability to place specialty risks and emerging risks that the standard markets won’t take on. The collaboration with MGAs to write specialty business, given hardening commercial prices, is fueling premium increases.
They can offer a range of products and have considerable geographical reach. We’ve also seen an uptick in the talent calibre of not only management, but also of underwriters, moving into the DUAE space.
PE and reinsurance appetite
We also see growing interest in the program business from a variety of capacity providers. We see private equity continuing to fund the DUAE market. This has declined over the last year, but we do expect that to pick back up.
Reinsurers’ appetite to participate in MGA business is an important growth driver in Canada, as they can build a diversified book of business from multiple MGAs and get closer to the original insured through fronting companies.
All these factors underpinned the positive outlook AM Best placed on the global DUAE market in December 2022.
To note, at that time, companies were also trying to renew their reinsurance capacity in what was probably one of the more difficult reinsurance renewal periods in recent memory.
Ultimately, AM Best felt that the strengths of the market far outweighed any near-term concerns, which included some pullback from capacity in the property and cyber liability areas, and economic challenges that were increasing loss costs.
Going forward, we might see more-restrained terms and conditions that could slow MGA growth, particularly in the wake of the Vesttoo collateral event.
AM Best will issue its 2024 DUAE market segment outlook in early December, and is internally weighing whether any remaining or emerging factors are enough to hamper market growth significantly.
It's safe to say that Canada’s MGA space is closer to being aligned with developed markets around the world.
While Canada’s near-term macroeconomic challenges will still impact MGAs, those that can demonstrate competitive advantages through technology, data analytics and specific expertise are better suited to evolve alongside market conditions.