Room for growth

Myles Gould, director of analytics at AM Best, looks at Europe’s DUAE market…

MGAs and other similar delegated underwriting authority enterprises (DUAEs) represent one of the fastest-growing segments in the insurance industry, but the European MGA landscape is a mixed picture on a country-by-country basis.

In many ways, the disparate stages of development across European MGA markets reflect how insurance business is transacted and distributed in individual countries, along with prevailing regulations governing or enabling the activity of MGAs. Collectively, AM Best views the European MGA sector as continuing to offer significant growth potential. However, this potential and the starting points vary significantly from country to country.

The picture for most lines of business in European insurance markets over the past 12 months has been one of firming or hardening market conditions. Premium rate increases across personal and commercial lines have been predicated on a combination of factors, including post-pandemic claims frequency normalisation, catastrophe and weather-related events, rising claim costs emanating from global supply chain issues and growing expenses due to rising general inflation.

Although the hardening market conditions have driven more challenging discussions and negotiations between MGAs and carriers in recent reinsurance renewals, AM Best has not witnessed a sector-wide pullback of capacity provided to MGAs across Europe to date. Reinsurers were prudent in their deployment of capacity at 1 January. Rate increases and the tightening of terms and conditions were visible across most business lines, with cedants forced to increase retentions, reduce limits and accept lower ceding commissions.

However, the capacity dynamics driven by these market conditions are viewed to have varying impacts from MGA to MGA. Those DUAEs with underperforming portfolios, or those whose profitability forecasts fall short of carriers’ latest expectations, are at greater risk of capacity pressures. MGAs engaged in commoditised lines such as property catastrophe risks have also faced greater challenges in demonstrating their value to carriers, absent a clear differential.

In contrast, MGAs that have been able to demonstrate competitive advantages through technology, data-driven analytics and specific areas of underwriting expertise and business access are seen as particularly valuable, and so the dynamic relationships that have been developed between MGAs and carriers over recent years should help both navigate evolving market conditions.

Where MGAs have taken root

The UK and London market are among the most developed MGA segments outside the US, and in particular, the London market benefits from its position as a global insurance hub. Lloyd’s is expected to remain a major source of domestic and global delegated underwriting capacity.

The UK and London markets also exhibit developed regulation regarding the conduct of MGAs, with the Financial Conduct Authority responsible for overseeing the sector. AM Best views appropriate governance and controls to be important for all MGAs sector-wide; an established regulatory regime is often an underpinning element of this.

Other European markets with prominent MGA activity include Belgium, Germany, Ireland, Italy and the Netherlands. However, the business models of MGAs, types of risk classes underwritten and the prevailing regulation differ quite substantially across these markets. Some European countries have very limited or even nascent levels of MGA activity.

As the MGA sector across Europe has grown, the range of capacity providers backing this expansion has also broadened. To a large extent, this is viewed to have been supported by the appetite of global reinsurers to participate in MGA business, with fronting and platform models providing ease of access for reinsurers to engage in the sector.

Reinsurers have long sought avenues to get closer to original insured risks and MGAs are one route to achieving this. Providing capacity for MGA-placed risks can often enable reinsurers to access more primary-like business, which can provide desirable diversification against their traditional reinsurance exposures. For example, a reinsurer providing capacity to an MGA may be able to access a particular type of risk profile or portfolio of business that simply never makes it to the reinsurance market through traditional risk transfer.

The concept of “skin in the game” by fronting companies is likely to remain an important consideration to ensure appropriate alignment of interest with their reinsurance partners. AM Best also considers the long-term appetite of insurers and reinsurers to provide capacity to fronting companies – and ultimately the underlying MGAs – as a key driver of this business model going forward.

Performance key to sustainability

DUAEs are not immune to the challenging economic outlook across Europe over the near term, including the prevailing inflationary environment.

For the customer base of MGAs and other DUAEs, an economic downturn heightens insurance affordability concerns and may impact purchasing behaviour. For carriers, the impact of rising inflation and interest rates can influence loss experience and have a bearing on return expectations for their cost of capital. For MGAs directly, the inflationary environment is likely to be an obstacle to meeting expense budgets and targets over the near term.

As service providers, the sustainability of profit margins for MGAs is often closely tied to their ability to generate revenues and commissions through underwriting a profitable portfolio of risks, whilst successfully managing their cost bases. With potentially above-average expense growth pressures over the near term for MGAs, the close management of revenues and expenses will be important to achieving desired profit margins. More confidence in DUAE capacity, stability and longevity among all stakeholders could very well pave the way to further expansion of the market.

About the author

Myles Gould is director, analytics at AM Best, based in London. Myles is the international analytical lead for AM Best’s newly launched Performance Assessment for DUAEs.

Previously, he was the head of analytics at AM Best in Singapore, responsible for rating analytics across Southeast Asia, Australia and New Zealand. Myles first joined AM Best in 2013 as part of the analytical team in London, with ratings coverage including the UK, Europe and the Middle East.

Before joining AM Best, Myles spent three years working for Willis Towers Watson in the global market security division based in the UK. Myles holds a bachelor’s degree in business management from the University of Suffolk.