Is there an "oversaturation" of Canadian MGAs?
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“We’re getting to the point where there’s an oversaturation of the number of MGAs in the market, and many who aren’t servicing a defined niche,” he said. “In the last decade, our portfolio mainly deals with MGAs that operate in specialized spaces.”
An MGA provides value to an insurer through its underwriting margin and compensation for additional commission, otherwise, insurers are generally better off trading directly with brokers themselves.
“It’s a balance that can be challenging for MGAs that take a broader approach. In our experience, they won’t make the above-average margin,” Spafford added. “The MGAs that we trade with actively say ‘no’ to risks that are outside of their appetite. We partner with those who specialize in spaces like environmental liability for example, as looking at the data, generalist MGAs tend to underperform.”
It’s also more difficult for MGAs that operate under a larger umbrella to build relationships from a delegated authority perspective, but Spafford said the approach is not necessarily bad, as it can serve a broker’s interest that has business that fits a larger appetite.
“Traditionally the MGA space is like an accordion,” Spafford explained. “As insurers restrict capacity, risks flood to the MGA space – as we’ve seen in areas like hospitality, [where] few have managed to retain capacity.
“There has been a lot of capacity for strata insurance, especially in BC, where business has flowed into MGAs, and I don’t see that trend changing.”
The industry has not fully developed solutions for cyber risk, and MGAs should consider moving towards the delegated authority space, according to Spafford. Some MGAs are doing an excellent job, he added, especially on the product side, but appropriate pricing for cyber insurance has yet to be established, not just within the Canadian market but globally.
“Its challenging for insurers to figure out pricing because the space is changing so quickly,” Spafford said. “It is very much like a moving target.”
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“We haven’t found a definitive cyber partner as we’ve been cautious. I think it has served us well as industry performance has not been very positive,” Spafford emphasised. “There are some good players in the Canadian market but getting the pricing right has been a hurdle.”
Establishing and maintaining long-term partnerships in the delegated authority space is vital, but this takes consistent communication as market appetite is constantly changing.
“We do our due diligence so there are no surprises,” Spafford said. “We try to foster as much transparency as we can, so we have the lead time to make the necessary changes for everyone to remain profitable.”
