What do investors look for in underwriting agencies?

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

While participating in a recent webinar on underwriting agencies (known outside Australia and New Zealand as managing general agents, or MGAs), I was lucky enough to be privy to thought provoking insights 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 over larger insurers in Australia. 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 a collaborative and holistic ecosystem in which agencies can continue to grow.

“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 how the underwriting agency sector is booming in Australia. He provided insight into what capital providers and investors look for when partnering with underwriting agencies. He described this as six “pillars”: underwriting; distribution; claims; technology; regulatory compliance; and capital.

• 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 said agencies are teaming up with their suppliers, so distribution groups that buy their products will increasingly provide either equity or underwriting capital. “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 also will be important, particularly where there is delegated claims authority. “Third party administrators (TPAs) are active in the claims space but claims as a service will be a focus for TPAs and underwriting agencies.”
• Technology
  Underwriting agencies have typically been much quicker than larger insurers to embrace new technological trends. This is, in part, due to the lean design of the businesses as well as the lack of legacy systems and processes. In short, they are freer to test and fail than their larger competitors. This means that, when they create something successful, they can rise to the top very quickly. However, technology is not a cure for all ills. The big differentiator in technology is where and how it is applied.
  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 typically 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 highlighting 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 should take priority, or which ones underwriting agencies can implement best and/or fastest. One thing, however, was abundantly clear: the underwriting agency sector is booming in Australia.