Nigel Roberts, Head of Distribution — AEGIS London.
Are MGAs working in the interest of customers? Or are they a cynical ploy to squeeze commission from a diminishing pool of premiums? AEGIS London’s head of distribution, Nigel Roberts, plays devil’s advocate.
Amazon has succeeded on many different levels, but one of the most important lessons it’s taught the world of insurance is that if you deliver a good product at a lower cost than your rivals, you’ll prosper. The more of that cost you can remove from the product – without reducing quality – the more product you sell. This is exceptionally pertinent to the London insurance market, which has been struggling to contain costs for years.
Time and time again, market commentators have expressed the urgent need to drive cost out of the London market’s distribution chain. When a US-based commercial client buys a product from Lloyd’s, around 40 cents in every dollar are going to intermediaries making up that chain – which is where managing general agents (MGAs) come into the picture. At the risk of being controversial, it’s important to recognise that the proliferation of MGAs is doing more harm than good to London’s pricing and, potentially, its overall reputation.
The harsh reality is that too many MGAs have been launched with very little thought for the end-customer. Generally speaking, there are two main drivers for their formation. First, a broking business sets out to increase its revenue; second, an experienced underwriter launches the firm out of a desire for greater independence and an equity stake. You’ll notice that ‘making life easier for customers’ does not figure highly on the agenda in either option. In some cases, the nascent MGA will make reassuring noises about developing new products, but all too often it simply presents an old product in a new wrapper.
In the bulk of cases, an MGA is just a vehicle for a broker to squeeze more commission from the premium pool, which in turn places greater cost burden on the customer. Over the last decade, brokers have seen their commission levels eroded by regulatory scrutiny, greater transparency and soft markets. MGAs have presented the opportunity to slow or reverse that trend.
While underwriters tend to be comfortable with the notion of shrinking their business during tougher market conditions – withdrawing capacity in order to protect capital – brokers tend to be more focused on achieving top line growth though both good times and bad. This, in part, explains why establishing a new MGA is such an attractive option for a broker’s board members.
All in all, this means London underwriters are dealing with MGAs that charge up to 10% commission on an already overpriced transaction. As such, the cost of acquiring business can be as much as 30%.
As a practitioner in the London market, you’ve probably heard this view of MGAs expressed privately before – but not in public. It’s something that’s discussed behind closed doors in EC3 but rarely gets a public airing, which is a shame. Unless we address this issue transparently and constructively, it will remain the elephant in the room as far as commission and cost go.
However, the reality is that MGAs can play a very positive role – as long as they take the right approach to their business. MGAs can add value.
Take, for example, an MGA founded on underwriters with unique skills and experience – underwriters who operate in niche markets in which customers are relatively poorly served. This is where the MGA model truly comes into its own. I can think of at least one example of an underwriter with whom I’ve worked previously who’s now at the heart of an MGA that writes an extremely specialist book of business. This is the type of MGA that we at AEGIS London are prepared to partner and support.
There is, however, an even bolder approach an MGA could adopt. Consider the US surplus lines market, which already has a large number of commission mouths to feed. What if an MGA were to charge no commission to distribute the London underwriter’s product, but in return, the London underwriter reduced the price of its product? This would then allow the MGA to take a commission based on profit, which would have no inflationary impact on the price paid by the end-customer.
To my mind, this is the way ahead – underwriter and MGA working in partnership for the benefit of the customer but being rewarded out of profits earned.
We all know that doing insurance business in London is too expensive. Let’s work together and focus on the customer, thus making MGAs part of the solution, not part of the problem. Amazon has shown us the way; we just have to be brave enough to follow its lead.
This article was first published in Insurance Day on 18 February 2019.