Willis Towers Watson’s PC Insurance Evening · §Peer group competition §Big payoff potential...

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Willis Towers Watson’s PC Insurance EveningThe Managing General Agent (MGA) revolution

20 March 2018

Tim Rourke

willistowerswatson.com

MGA definition

2© 2018 Willis Tow ers Watson. All rights reserved. Proprietary and Confidential. For Willis Tow ers Watson and Willis Tow ers Watson client use only.

The role of an MGA is to coordinate and provide underwriting & pricing services whilst ensuring that it achieves adequate returns to its capacity provider and / or investors.

MGA’s in the current environment typically have some unique attribute that allows them to trade effectively in certain segments, provide access to certain customers or markets.

These characteristics are desirable to the capacity provider who may not have this expertise in house or resources to develop this capability itself.


Benefits of an MGA


Access to new markets and

customers that an insurer would typically not trade

in or have the expertise

Access to new markets and

customers that an insurer would typically not trade

in or have the expertise

Lower operating costs

Lower operating costs

Increased diversification

of product lines

Increased diversification

of product lines

Outsourced R&D

Outsourced R&D

Alternative use of capital

Alternative use of capital

Opportunity for growth if

insurers own markets are

saturated

Opportunity for growth if

insurers own markets are

saturated

Potential reputation benefits of

partnering with an exciting

MGA (Insure-tech)

Potential reputation benefits of

partnering with an exciting

MGA (Insure-tech)


Some market observations


The number of registered MGA in the last three years has increased significantly.

Obtaining capacity is not necessarily easy Do you build the model / rates first and then hit the market or the other way round?

What is the typical set-up of an MGA?

Which is more likely to be successful?

More and more MGA’s are looking for capacity and support.

Insure-techMainstream / segment spotters


Why are we seeing the revolution?


Technology & Environment

§ IT & systems development are enabling more start-ups

§ Insure-tech & innovation can disrupt mainstream markets

§ Large organisation looking to support a renaissance in insurance such as Munich Re Digital Partners

§ A recognition that insurance needs to provide other value added services. Traditional models are less desirable

§ Are MGAs paving the way to understand the future of how insurance needs to sold and serviced?

Technology & Environment

§ IT & systems development are enabling more start-ups

§ Insure-tech & innovation can disrupt mainstream markets

§ Large organisation looking to support a renaissance in insurance such as Munich Re Digital Partners

§ A recognition that insurance needs to provide other value added services. Traditional models are less desirable

§ Are MGAs paving the way to understand the future of how insurance needs to sold and serviced?

People

§ Self fulfilling – insurance cycle or MGA cycle

§ MGA is the fun stuff with less governance

§ Peer group competition

§ Big payoff potential

§ Frustration with large corporate culture / sluggish / protocol

People

§ Self fulfilling – insurance cycle or MGA cycle

§ MGA is the fun stuff with less governance

§ Peer group competition

§ Big payoff potential

§ Frustration with large corporate culture / sluggish / protocol

Brokers

§ Small personal lines brokers frustrated with the net rates provided by intermediated insurers – sign of the times

§ Fill the gaps on the brokers panel that insurers are not competitive on

§ Utilise fully the broker’s in-house knowledge of the segments

§ Survival as the intermediated insurers struggle in certain markets – especially personal lines

§ Be less beholden to the panel

§ Diversify business model

§ Broker believe they have the unique experience to underwrite their niches effectively

Brokers

§ Small personal lines brokers frustrated with the net rates provided by intermediated insurers – sign of the times

§ Fill the gaps on the brokers panel that insurers are not competitive on

§ Utilise fully the broker’s in-house knowledge of the segments

§ Survival as the intermediated insurers struggle in certain markets – especially personal lines

§ Be less beholden to the panel

§ Diversify business model

§ Broker believe they have the unique experience to underwrite their niches effectively


The typical MGA model



Basic structure


MGA

Tech

Pricing

Underwriting

Distribution

Systems

Culture

Claims

Virtual insurer

Re

Performance Management

Capital / Regulatory / Actuarial

Capacity

Reinsurance

QS XOL


How do the various entities get paid


MGA Capacity

Reinsurance

Commission Reinsurance premium

Commission / GWP /

Expense contribution

Profit commission


Why is it so hard?


MGA actual Expense

MGA funding requirement

MGA Commission

Target Loss Ratio for MGA

Commission paid by capacity provider

COR for capacityprovider Reinsurance

20% 0% 5% 60% 25% 95% 10%

20% 5% 0% 70% 15% 95% 10%

20% 0% 10% 50% 30% 90% 10%

MGA needs to achieve a very low attritional loss ratio to make the model work.

Target loss ratios are

challenging. (UK Motor?)


CSF for Capacity providers and Investors



Consideration for capacity provider / investor

§ MGA’s can not just rely on being “agile” and quick to react as the main reason for success

§ MGA’s cannot just rely on a unique idea / unique technology alone to ensure profitability

§ Still need to focus on the fundamentals or running an insurance entity (pricing,dist, underwriting, MI, claims, fraud, monitoring & control)

§ Great people are critical but is not a panacea to ensure profitability – especially in highly competitive areas such as UK motor or home

§ Segment spotters – is this really a viable MGA model – especially in mainstream markets

§ Be wary of unrealistic premium targets

§ Be wary of unrealistic loss ratio projections and how this interacts with the premium targets (see diagrams)



Beware of too optimistic premium forecasts


UW

qua

lity

/ Los

s R

atio

Market share / Premium

UW Quality

Expected Loss Ratio for a given level of UW quality

The better the UW quality, the higher market share achievable for a given loss ratio


Beware of too optimistic premium forecasts


Loss

Rat

io /

UW

qua

lity

Market share or £GWP

UW Quality(Bad)

Expected Loss Ratio (Bad )

TLR

UW Quality(Good)

Expected Loss Ratio (Good)

Higher market share whilst still maintaining TLR.

Make sure that the quality of the MGA’s USP is commensurate with the premium target

Achievable GWP

Target GWP


CSF MGA



What are the MGA hygiene factors


Distribution

Technology

Significant investment

Data

Robust underlying underwriting

The MGA needs to be able to get its product to market. Advantage for the broker creating their own MGA

to help disrupt the market and create their underwriting ‘edges’

from backer to do it right

unique underwriting insight to create more ‘edges

UW/Claims/pricing/fraud


Advice to the MGA

§ Absolute focus and rigor on the underlying underwriting – can be challenging with more restricted resource typically seen in MGA start-ups.

§ Early indication of profit risk. Some warning signal to suggest pre-emptive remediation before the actual experience run-offs.

§ Ensure that innovation remains in MGA pipeline – especially if the MGA§ Wants to grow,§ Original USP is not as effective as expected § The original USP is easily reproducible§ The original footprint is saturated

§ Other avenues of income:§ Retail pricing as buffer or additional income stream (broker models) – especially early on as experience

is being gathered, § If a technology driven MGA, can the technology be sold to others. Careful not to give away the uniqueness.

§ Be careful of segments. Machine learning has probably made it easier for the larger insurers to spot mechanically the segments that MGA’s would have chosen as the premise for their business.



How can MGA increase the chance of success

© 2018 Willis Tow ers Watson. All rights reserved. Proprietary and Confidential. For Willis Tow ers Watson and Willis Tow ers Watson client use only.


Important areas to consider?


Where can the MGA operate effectively - segment discovery

Build rate book – using market data or assets available to the client

Underwriting criteria and acceptance logic

Claims

Retail pricing – buffering for defects in the

risk price

MI / visualisation / fast-fail / graphical

Anti-fraud

Software


How to improve the likelihood for success


Loss

Rat

io /

UW

qua

lity


Doing these things well can improve the likelihood of success for the MGA.

UW Quality levels


How to improve the likelihood for success


Loss

Rat

io /

UW

qua

lity


Loss ratio improvement


Where can the MGA operate effectively - segment discovery


UK motor market

Insurer 2 Insurer 1

Can the MGA operate effectively in these areas if it does not have unique data?

Insurer 3 MGA

UK motor market

Insurer 2 Insurer 1

Vanilla highly competitive area


Segment discovery


UK motor market

UK motor market

MGADay 1

Day 2

Vanilla high competition area

Machine learning, market data and leveraging off the entities unique data, expertise or technology


Build rate book– using market data or assets available to the client & Underwriting criteria and acceptance logic.


Radar BaseMarket premium data in combination with

WTW insight and benchmarks

More refined and calibrated rate bookFail fast / visualisation /

faster response & market calibration

Novel proposition data

Trade & real market feedback


MI / visualisation / fast-fail / graphical.


§ All the relevant material on one screen§ All the data capture to the what and why of the decision

Process level support:§ New Business Triage§ Augmented renewal lists§ What if metrics

Real time access to:§ Portfolio Data – risks like these§ Claims Data – claims from these§ Distribution analytics and insight§ Negotiation support§ Data about the individual risk§ Geospatial Data


Claims


Imperative that the claims function is tight to support the challenging loss ratio required to make the MGA model work.

The MGA must remain on top of this – too often claims is secondary and underinvested, whereas it should be given equal importance as pricing, underwriting and reserving.

Being high performing in claims is an opportunity for MGA’s to differentiate, not only on service, but also in key claim cost control areas such as: § FNOL / third party invention§ Credit hire cost management§ Fraud detection§ General leakage and claims management.

Also important that the claims function uses its data and analytics in a smart way, supporting underwriting and pricing colleagues in developing a deep understanding of the segments and niches that the MGA has chosen to trade in.

Is this harder when claims are TPA.


Conclusion


MGAs are becoming more common utilising data and technology to disrupt the insurance market.

However, to make them a success is not easy with onerous performance targets to achieve in a busy market place.

The technology or insight to create the required underwriting edges need to be market leading.

Low loss ratio targets can impact capacity. Is it really possible to create a successful MGA that is writing £100m in five years with a loss ratio that low?

Don’t be complacent with the traditional underwriting and pricing –especially if you are trading via aggregator.

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