This is the second in a series of blogs containing excerpts from my forthcoming publication, 'The MGA Book'.
I was head of capital management for AIG, UK & Europe. We had over USD10bn of capital to invest in our underwriting business. I worked directly with the Chief Finance Officer and Chief Executive.
A big part of my brief was to see how best we could deploy and utilise the capital. This meant reviewing the performance of product lines and supporting those which were making money, and fixing and reducing those that were not.
The only problem was, we could only tweak, and any changes were slow to implement.
People. People are expensive to let go and hire. The costs sit with you. And talented insurance people are hard to find.
Infrastructure. Yes you may have the systems, but they always need customising for new product lines. And then there is the legacy debt.
Distribution. Setting up a new distribution channel from scratch can take years to develop. You can buy a channel through acquisition, but there are many risks and significant capital investments above the risk capital required.
MGAs allow insurers to deploy their capital with variable expenses. Yes, you may lose the benefit of economies of scale (although I’ve yet to see a big company really deliver on these). But at least insurers can increase or decrease capacity quickly, with immediate effect and variable expenses.
Make yourself an attractive capital investment for an insurer. So they freely and happily lend your their capacity.
The future of underwriting is coming your way.
Underwriting will be done by more MGAs, with the support of large capacity providers.
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The author, David Hughes, is the founder and CEO of the Insurance Data & Analytics consulting business mulberryrisk.com