What do investors look for in underwriting agencies?

By Prateek Vijayvergia, Business Leader – Key Accounts, Australia & New Zealand

During a recent webinar on underwriting agencies (aka managing general agents, or MGAs), I was lucky enough to gain insight on why this sector appeals to investors; how they make investment decisions; and why and how the sector is growing so rapidly.

I was there to discuss technology and innovation with my co-panellists: Jenny Bax, CEO of the Underwriting Agencies Council; and Adam Matteson, Director, Underwriting Agencies – APAC Region with Howden Re.

The environment for growth

Underwriting agencies are gaining significant market share. While test-and-fail mentality is important to foster innovation, Ms Bax told the webinar that a combination of investment, technology and strategic support creates the ecosystem in which agencies can thrive.

“The sexy end of insurance is always in the agency space where innovation, professionalism and dedication to clients are built in; technology is second to none and built for streamlining and efficiency; and small structures foster innovation, knowledge and swift responses.”

The six pillars

Mr Matteson also talked about the underwriting agency boom in Australia. He provided insight into what capital providers and investors look for when partnering with underwriting agencies. He described these as the six “pillars”:

• Underwriting
  Capacity providers want agencies to be portfolio managers. Regulators are starting to take a great interest in risk appetite. Underwriting agencies can augment an insurer’s risk appetite by providing additional expertise, access to separate capital, a different reinsurance structure, better service and/or swifter claims handling.
• Distribution
  Agencies have always accessed brokers for distribution, but some retail brokers are now packaging functions like product and portfolio development, claims, and regulatory compliance into agencies. Mr Matteson also noted that “We’re seeing some insurers take reasonable stakes in agencies, even at the seed stage.”
• Claims
  Because claims management is now a regulated service, Mr Matteson predicted that it will be a vital issue, particularly when the Australian Prudential Regulation Authority introduces regulatory standard CPS 230. That will strengthen outsourcing arrangements for agencies and other industry players. He said technology will also be important, particularly where there is delegated claims authority.
• Technology
  Underwriting agencies adopt new technologies faster than larger insurers because of their lean structure and absence of legacy systems. This agility allows them to experiment and succeed quickly, but the true advantage comes from how and where technology is applied. Not just its adoption. Ms Bax said agencies could provide a more nuanced customer experience by teaming with best-in-class technology partners. “These partnerships, from an agency, technology and investment perspective, complement each other, expanding services beyond traditional insurance products, enabling a move into new customer markets, and creating opportunities to launch new and innovative products that benefit all parties.”
• Regulatory compliance
  Until recently Australian regulators have focused on the big insurers, but there has been a noticeable shift: their scrutiny is now pivoting towards smaller insurers and those supporting underwriting agencies.
• Capital
  Mr Matteson said subscription is “a nice way” for insurers to enter the market, and reinsurance is also supporting insurers.

Conclusion

While reviewing the qualities that investors and capital providers look for in underwriting agencies, Mr Matteson was clear that it is not all expected at once: “At the early stage, we like agencies to have at least two of those pillars and they can build some of the others up over time.”

There was no consensus among the group as to which of the pillars was most important, or which ones underwriting agencies can implement best/fastest. One thing, however, was abundantly clear: the underwriting agency sector is booming in Australia.