Few markets are as changeable or as cyclical as the insurance market. It swings between the lower premiums, relaxed underwriting criteria, and broader cover of the “soft” market and the more expensive, tighter criteria, and narrower cover of the “hard” market. What’s clear though is that commercial insurance in particular, exacerbated by claims inflation, has been hardening over the last 12 - 18 months and there’s an increasing trend towards digital transformation across the whole sector.

Claims inflation…

The reasons for claims inflation are various. They include the weak pound driving up the cost of building materials, more frequent and more severe flood events, new types of liability claims like discrimination, mental anguish and bullying, and skyrocketing vehicle repair costs. The last point being due to new technology in modern cars, as well as labour shortages in the repair network and a squeeze on the supply of parts and new vehicles.

…plus digital transformation

Another key trend is the accelerating use of technology, especially data. A whole raft of new and exciting Insurtech start-ups have appeared during the last five or so years, drawing on cutting-edge technology like the Cloud and AI to broaden access, streamline processes, and improve customer journeys. But while these “upstarts” are not yet stealing any significant market share from the traditional incumbents (with their antiquated systems), the consensus is that with such large sums being invested it’s a matter of when, not if.

Full disclosure: as part of my role at Beech Tree I sit on the Board of Avid Insurance, an MGA that, among other things, develops and supports niche insurance solutions. But another part of my role means talking to a lot of MGAs and brokers, and I’m continually surprised by how many still rely on manual processes and spreadsheets to control and manage their data. Introducing even relatively simple technology would be positively transformative for their businesses. And, just as important, make them more attractive to insurers (and PE houses), and thereby putting them in a stronger position to maintain capacity.

There’s good news…

As in any changeable market, there are risks to avoid and opportunities to grasp and it’s no different for MGAs. The good news is that as premiums go up, so do the commissions paid for writing business. In effect, MGAs receive more income for the same level of work they did previously.

…and there’s not-so-good news

The not-so-good news is that a hardening market often results in capacity being withdrawn from certain markets as insurers look to increase profitability, streamline their offerings, or focus capacity in specific areas. Overall, this creates a less stable, less predictable market.

So the big question is: what can MGAs do to navigate the choppy waters ahead? Here are four ideas…

1.    Find your niche, showcase your expertise

Being another mouth to feed in the insurance food chain, MGAs have to demonstrate their value and expertise both to insurers and brokers. For example, if you're an MGA focusing on standard car insurance you’re going to struggle to prove you know car insurance better than competitors writing 100,000 or 200,000 car insurance policies.

Using Avid as an example, one of the areas we specialise in is social housing, which has its own unique set of challenges and risks, not least because every building is unique but also because social housing is typically funded by public money. But we’ve built 30 years’ experience in this niche including developing deep relationships with stakeholders, navigating the public sector procurement processes involved and most importantly, understanding the risk profiles of these sorts of properties. Few other MGAs can claim to have the same depth or breadth of expertise we have, so Avid’s value is crystal clear to insurers and brokers.

Another niche for Avid is equine risks, so insuring riding schools, stables and the like, which, again, requires a high-degree of specialist knowledge that few others can offer. So my advice is to niche down in order to show your competitive advantage.

2.    Up your data game

Data (along with capacity) is the life blood of an MGA. Collecting, storing, controlling, and using data well is absolutely key to thriving in a hard market but, as I mentioned earlier, so many ignore its potential. Having real time, high-quality data processes and insights allows MGAs to make better underwriting decisions faster, but also to scale without needing to hire lots of extra people. And with the right management information (MI) to hand, MGAs can react faster to changing market conditions and adjust premiums, underwriting criteria, and cover accordingly.

The key is to marry the right data with the right expertise to achieve real insightful MI. In fact, being able to create regular reports with high-quality MI and insight underpins a lot of the trust and confidence-building that goes into developing long-term relationships with insurers and brokers. A case in point: before investing in Avid, we took references from various insurers and, without exception, they all considered the company’s monthly reports and MI to be “gold standard” and a key part of their decision to choose them. So my advice is to invest in your data because not only is it good for winning business, it’s also good for keeping it.

3.    Keep a close eye on claims

Of course, not every MGA gets to choose the third-party administrators (TPAs) they work with, but it’s worth keeping a close eye on things and working with them as closely as possible. Why? Because no matter how good your data is, or how smart your underwriters are, if your TPA isn’t hitting their SLAs, or they’re paying out for things they shouldn’t be, then losses can quickly escalate and erode margins to the point where they start affecting profits.

But if the three-way relationship between MGA, insurer and claims handler is close, open, communicative and collaborative, everyone wins.

4.    Balance diversification and scale

Being an MGA with a single capacity provider is a risky business. In a soft market, having all your eggs in one type of insurance – whether you’re writing good business or not – would make your business vulnerable. In a hard market, you’re in an even more precarious position. So if you are over-reliant on one capacity provider, diversify your specialisms and build capacity in other niches to spread the risk and give you time to replace a capacity provider if one pulls the rug.

Conversely, if you have eight, nine, or 10 insurers, you’re not only in administrative hell, you’re at risk spreading yourself too thinly with capacity providers. When Avid joined our portfolio of companies at Beech Tree, it specialised in social housing and travel. Since then we’ve added leasehold housing, specialty, gap insurance and construction risks.

But we have to balance this with the size of business Avid is. For example, it now has around 10 different insurers and about £100 million in premiums. If we’d had the same number of insurers when we were a £20 million premium business five years ago, it wouldn’t have worked. So it’s all about finding the right balance between diversification and scale to smooth out the risks.

Last word

So there you have it: four ways MGAs can make sure they strengthen their businesses, protect against turbulence, and stay relevant to A-rated insurers, brokers and the markets they serve. Do one or two of them and you’ll have a more resilient business. Do all of them and, well, where could you be in two years’ time?