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Solvency II brings a challenge for MGAs - 2011-08-22
In an increasingly competitive environment, the role of managing general agents (MGAs) is becoming more important. Insurers are increasingly dependent on them to package up business and provide access to customers. This dependence will increase as more enter the market.
Niche teams within carriers see the MGA route as a way of developing their business outside the confines of the insurance company model, where increased regulatory burdens add cost. At the same time, brokers, whose margins are under pressure, are turning to the MGA structure as a way of raising commission levels.
When compared to the regulatory regime under which insurers operate, MGAs have it easy. However, the implementation of Solvency II has knock-on implications. Solvency II will assess an insurer's risk by reference to the specific risks it is exposed to, with credit given for the way it is measured, monitored and managed.
Insurers are preparing for Solvency II and a great deal of work is going on to model risk and establish minimum capital requirements (which are likely to increase). This is where there are likely to be implications for MGAs, which have the underwriting authority to bind risks on behalf of the insurer.
Insurers have been forced to analyse their book of business and the risks associated with it, and assess those parts of the book which are particularly capital intensive or which do not generate a sufficiently high return on capital. Through this mechanism, insurers can identify poorly performing parts of the account or more risky counterparties where action is needed. In some instances, this might mean curtailing writing in certain areas and MGAs might find themselves with business but nowhere to place it.
Help for intermediaries
Intermediaries can protect themselves from this scenario by developing stronger relationships with their providers and understanding the methodology the insurer is using to model risk, as well as the assumptions and judgments applied within the model. The intermediary can then decide whether it is possible to improve the quality of the data and information it provides to help the insurer refine its model to produce more accurate results.
For example, if the intermediary can produce granular risk information, as opposed to block bordereau data, in a form compatible with the insurer's Solvency II model, the insurer will get a better understanding of the book of business and the way it behaves. The insurer will then be able to make more informed decisions and this may have implications on the levels of capital it is required to hold. To generate the information required by the insurer, however, firms might need to invest in costly new systems and software.
Under scrutiny
Solvency II also delves down into operational risk. Unfortunately, because of the actions of a number of rogue coverholders and MGAs, insurers are likely to examine more closely the operations of those to which they have delegated underwriting authority.
Insurers are going to be looking for higher standards among coverholders and MGAs, and firms will be required to improve systems of internal control and governance. Failure to address this issue may result in insurers withdrawing or reducing capacity.
As with system enhancements, intermediaries will also have to bear the cost of improving the management, monitoring and administration of the delegated authorities. So although Solvency II is a regulatory standard that mainly applies to insurers, there are repercussions for insurance intermediaries. The challenge for MGAs will be to keep costs down while at the same time improving their systems.
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Impact of Solvency II on MGAs
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Philip Alexander is a partner in Littlejohn's financial services division. For further details contact Philip on 020 7516 2444 or by email.
This article was first published in Insurance Day, 19 August 2011.
