Risk capital: What’s next for data-driven MGAs?

2nd September 2020

This is a challenging market for an MGA, but there are opportunities for those that bring something different to the party. There is little demand for generalists and the pressure to stand out is probably a sign of a healthy, demanding and changing market.

“Being different” in an MGA context is increasingly analogous to data-driven underwriting and a technology-driven approach, particularly by harnessing artificial intelligence (AI).

The more advanced uses of AI, machine learning, can produce the sort of predictive vision and edge that will deliver insights and efficiencies that augment human underwriting expertise alone.

Technology partnerships

That’s not to say niche specialty MGAs won’t continue to rely on niche specialty underwriting talent. The secret sauce is increasingly in the partnership between good people and smart AI.

For tech-driven MGAs it is usually the quality, breadth and volume of the data feeding into this partnership that are the core ingredients. And the recipe list is constantly expanding, thanks to the internet of things and cloud technology to store the big data for the AI to crunch.

Not forgetting some other key ingredients to success: a simple engagement process, the right packaged product offerings, and intelligent distribution. You may not be surprised by this point that these should also combine smart technology with the enduring qualities of human relationships.

And for the MGA sector, these are increasingly global relationships. We’ve found our teams increasingly play a key personal role by working closely to understand clients’ unique needs to achieve their international expansion goals, whether that’s in Europe or the Americas.

Risk capital alignment

There are some major opportunities for niche specialists as well as the emerging so-called super MGAs. But what’s vital is the alignment of all these elements with risk capital, keeping a firm grasp on acquisition costs.

There are big growth opportunities. Insurers increasingly want to underwrite more through existing or new delegated authority (DA) relationships, particularly as the good times of hard pricing have come back to the market, following years of squeezed rates.

Reinsurance plays a role

In this environment we are seeing insurers moving to ring fence their reinsurance purchasing on DA business with reinsurers taking around 60-70% of the risk involved via quota share arrangements, effectively fronting the business, allowing insurers to allocate more capacity to their favourite MGAs.

Not neglecting the other potential investors that MGAs can source for further growth: the private equity funds, venture capital, angel investors, sovereign wealth and long-term family funds.

While investor timelines vary, many of these backers are looking for medium to long-term relationships. This is what MGAs need to effectively demonstrate their value, stand out from the crowd, and give themselves the foundation to grow and diversify in specialist niches, powered by AI and fuelled by data.

Danny Maleary,

CEO

Pro MS

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  • Author : MGAA
  • 2nd September 2020