Delegated authority expansion deemed ‘unjustified’ in market survey

A majority of insurance professionals do not believe that the recent growth in delegated authority business has been justified by market conditions and results, according to a survey launched by this publication.

The Insurance Insider’s Market Sentiment Survey, in association with EY, found that 55 percent of those canvassed said the strong growth in coverholder business was either unjustifiable or difficult to justify.

Only 6 percent of respondents thought the expansion of delegated authority business was absolutely justified.

The survey quizzed 434 industry members about their impressions on the coverholder market. Just under 40 percent of premium at Lloyd’s is now generated through delegated authorities.

Respondents attributed the expansion of MGA business to market consolidation and the subsequent job losses, as well as the high costs associated with operating at Lloyd’s.

One industry player commented: “Bearing in mind the additional acquisition cost that comes with delegated authorities, it seems unjustifiable that the recent strong growth has come at a time when rates have been falling.”

The report also found that over 60 percent of those surveyed believed the expansion of MGA business would be hard to sustain.

A total of 43 percent said the expansion was difficult to sustain, whilst 18 percent thought it was unsustainable.

Some questioned whether smaller firms would be able to cope with increasing data and regulatory burdens, while others highlighted an oversupply of niche MGAs.

Others held the opinion that, while the delegated authority model needed to be tweaked, there were still opportunities to be had through improved technology, capacity and modelling capabilities.

“Right now, delegated authorities might be the best way to access growth in policies that might otherwise be too small to process through the bureau,” one participant commented. “At some point, there will be a better way to access and process such business.”

Another respondent added: “There will be consolidation in the space and several super-delegated authorities with a portfolio of products will emerge.”

In terms of remuneration, 45 percent thought MGAs were appropriately remunerated, while 47 percent said they were paid excessively. Around 8 percent thought they were remunerated inadequately.

There was a consensus in commentary that remuneration should be linked to performance rather that premium income, which would lead to better-quality underwriting.

“With profit commissions representing such a small part of overall remuneration there is not a good alignment of underwriting interests,” one respondent noted.

Another commented: “MGAs will argue that they do a lot on behalf of capacity providers and any pressure on their commissions will come at a cost of the work that they are able to do.

“This is not to say that the underwriting quality will necessarily suffer, but capacity providers may find that it becomes harder to track the day-to-day performance if MGAs are forced to reduce their internal admin outgoings.”

There was more positivity about how managing agents were performing, as measured by combined ratio.

About 60 percent thought coverholders were performing well or acceptably, with 4 percent saying they were doing extremely well. It was noted that specialist binding authorities were performing better that generalists.

The sentiment about the future of MGA business in the survey was mixed. Those that believed there would be growth in the delegated authority market thought the increase in market share would be between 5 percent and 20 percent.

Some suggested that technological developments could allow carriers to operate more efficiently, reducing the need for MGAs.

A total of 37 percent said the value added by delegated authorities had increased somewhat over the last three years, while 28 percent said it had stayed the same.

Andy Worth, associate partner and head of specialty (re)insurance at EY, explained: “As delegated authority business now represents just under 40 percent of Lloyd’s revenues, managing agents are giving their portfolios proper focus across their lines of business in order to improve governance and address the very mixed underlying performance.”

The respondents to the survey came from different areas of the insurance market. Some 51 percent of people quizzed were risk carriers, whilst 21 percent were brokers and 21 percent were from MGAs. An additional 7 percent came from other areas.

About 58 percent of survey respondents came from the London market and 42 percent were from the wider insurance sector.

For the full Market Sentiment Survey on delegated authority business, click here