In a troubled global economy, how are brokers and underwriters responding to the threats and opportunities in 2012?
On 22nd May 2012 senior executives from the likes of Novae, Axis, Chartis, Hiscox, Markel, Mitsui, Torus, Liberty, Marsh, Cooper Gay, and Allied World Insurance attended an Executive Briefing on the theme of 'In a troubled global economy, how are brokers and underwriters responding to the threats and opportunities in 2012?'.Feedback from attendees was very positive so I thought I’d summarise a few of the key points here.
Peter Montanaro, Head of Delegated Authorities at Lloyd’s addressed the question of ''The number of MGAs has grown rapidly in the last two years - is this the quickest route to leveraging global opportunities?" Peter started by saying ‘No they haven’t and yes, so thank you very much’, proceeding to mock leave the podium. Luckily for us he was joking, and returned to go on ‘I don’t know maybe the number of MGAs have grown, but in Lloyd’s our numbers have stayed stable.’ Peter was challenging the common perception of rapid growth of MGAs and coverholders and shared the losses they’ve experienced as well as the growth; “Since 2007 the total number of coverholders has gone up by 275, but only by 31 in the last 2 years” He acknowledged the growth and market presence of the ‘coverholder model’ but emphasised Lloyd's growth rate is steady, with losses.
Peter then gave examples of what Lloyd’s reps thought when asked whether coverholders are ‘the quickest route to leveraging global opportunities’ in their territories. The Italian rep said MGAs represent the best gateway to the market through technology, good market access and efficiency. By contrast, the German rep, thought it may be the quickest route but questioned the sustainability, profit long term and quality.
“I think at the moment automation is still a choice for each stakeholder but it will become a necessity’’ said Peter Montanaro, Head of Delegated Authorities at Lloyd’s[/caption]
Peter recounted a scenario when an Hawaiian coverholder had been approved by Lloyd’s and told him they were going to have a party, a bemused Peter remarked on their excitability only to discover they had been ‘waiting’ a year and a half to be approved. The Lloyd's Performance Management Directorate (PMD) is committed to the market as Lloyd’s turn approvals round in five weeks as long as they’ve received the necessary documents – it turned out the application had been sat with the broker all that time. Peter emphasised their punctuality and flexibility on a case by case basis; welcoming feedback on the compliance questions Lloyd’s ask on MGA/coverholder applications.
The role of technology as a competitive tool emerged as Peter emphasised the need for automation; how it is still a choice in the current market but soon will be a necessity as technology is becoming part of the decision making process when people select a broker, MGA or underwriter as a partner.
Simon Wilson, Director of International Development at Markel tackled ‘Distribution strategy for specialty insurers”
Simon marvelled at the unique nature of London market geography compared to its international counterparts. When working for Lloyd’s Asia he recalled his surprise when during a business trip he not only had to walk what he thought would be a ‘a couple of blocks’ to visit the Canadian coverholder; but travel 45 minutes. BY CAR.
"Mass market retailers (low size and low complexity risks), motor, home owner and personal lines for example, are attempting to move into ever more complex lines"[/caption]
Simon mapped the levels of risk complexity and premium size associated with different parts of the Insurance market (left hand slide). Simon noted that mass market retailers (low size and low complexity risks), motor, home owner and personal lines for example, are attempting to move into ever more complex lines.
He positions ‘classic London market play’ as high complexity and high size risks that are coming under pressure from two new groups – regional wholesale markets and specialist SME suppliers. Not only is the ‘classic London play’ coming under pressure from different types of insurance companies but international ‘regional hubs’ too are posing a threat, as they are underwriting more and more of the large, complex risks in Singapore, Miami and Zurich.
Simon perceives segregating parts of your business into these four categories may, operationally, be more fruitful. If you try to sell wholesale products through an international network of offices, for example, you may meet unnecessary internal discrepancies.
Simon emphasised this competitive landscape as ‘never still’ and questioned the avoidance of silos, where they are beneficial; however it seemed the stand out trend was a desire to increase the complexity of risks underwritten therefore increasing the mark up per policy.
Simon of Markel drew similarities between supermarket retailers and underwriters in making a profit; considering overheads and getting the most out of suppliers[/caption]
Simon shared his experience of financing small MGAs and coverholders with niche propositions, particular products to particular markets, and that their fixed cost base is usually a minimum of two million dollars. When operating these global entity MGAs and coverholders in a different territory he suggested that they need to write to a 35% loss ratio just to break even.
Roger Oldham Managing Director and Founder of Amethyst Business Consultancy discussed "Regulation, technology or process change - are they enhancing or hindering the competitive edge of London?” He highlighted the importance of getting buy-in for new technologies, helping people understand they are not being replaced but it’s designed to make their lives easier. Roger also observed what he perceived as the threats from the global insurance market’s platforms on the London market and the threat of resistance to invest in new Insurance technologies versus the opportunity of adopting technology and being able to profit from it moving to other territories.
‘’One of the biggest things to affect regulation over the next two years will be the new regulatory authority, the Prudential Regulatory Authority... there will no longer be any Arrow visits, we will move across to a more judgement based regulatory environment. ‘’[/caption]
‘’One of the biggest things to affect regulation over the next two years will be the new regulatory authority, the Prudential Regulatory Authority... there will no longer be any Arrow visits, we will move across to a more judgement based regulatory environment.‘’ Roger stated, referring to the FSA’s Chief Executive, Hector Sants' speech.
For me, these were the key points from the event:
- MGAs are the quickest route to market if effective systems and processes are in place
- Speed should not be the only focus for coverholders; quality and sustainability should also be considered
- The BRICS countries present huge growth and penetration opportunities in life, car and home insurance
- Companies that have invested in developing in house systems can be opposed to new technologies and change
- The traditional method of spreadsheets doesn’t do it anymore; systems are needed to cope with the demands of modern regulation
If you’re interested in hearing about Salmon’s next Executive Briefing, request an invitation here.