This article by Tom Kussurelis, SVP and chief operating officer of Arrowhead Programs, was published Nov. 27, 2023 in Carrier Management.
Just a year ago, the insurance industry experienced widespread and significant tightening in the reinsurance markets. “Volatility” was the watchword as 2022 wound down.
Reinsurers raised prices, toughened up terms and specified higher attachment points, all of which directly impacted the primary insurance markets—and especially those paying the premiums: insureds.
With these conditions, as 2023 began it was an open question as to how much capacity the MGA sector would muster.
Now, on the heels of a less difficult but still stressful 2023, what will conditions be like in 2024?
In my view, the MGA market is stabilizing as the new year begins. In the insurance markets overall, and in the MGA channel in particular, it’s time to normalize difficult conversations about tough market conditions in the interest of effectively serving customers and business partners.
Getting a grasp on the MGA market means looking at several factors:
1. The insurance world now operates in an environment where customer experience expectations are set by the speed and dazzle of the tech world. Every insurance organization faces the challenge of effectively serving customers (carriers, agents and/or policyholders) in that context, even as market disruption looms large.
2. The reinsurance market is stabilizing, and it seems unlikely the very hard market will continue. First-half 2023 results show that reinsurer profitability is generally improving. Part of the reason is the rate increases and tightening that were taken beginning Jan. 1, 2023, while another positive factor is a relatively moderate hurricane season.
As 2024 hits us, the tenor has changed around reinsurance renewals because the reality has changed. I expect more certainty around rates and capacity—although uncertainty hasn’t disappeared even if some of the market’s wild volatility from a year ago has been tamed.
What does that mean more specifically? An “orderly January 1” renewal for 2024 refers to underwriting terms staying level with a 10-20 percent rate increase. Capacity is tight. I don’t anticipate significantly more capacity coming into the reinsurance market in the near term. However, existing reinsurers may well adjust their portfolios to deploy in the catastrophe property line.
3. Many primary carriers need to improve business results. They’ve been hit by the reinsurance turbulence of 2022 to 2023, along with a significant amount of convective storm activity. Translation: Carriers will become still more selective about how they deploy capital and resources.
4. Different lines of property-casualty business are in difficulty, but in different ways. The property insurance business (both commercial and personal) still will be downright difficult for 12-18 months in my expectation. The watchword in the casualty market, meanwhile, is “caution,” with some lines softening but social inflation continuing to pressure loss ratios and rates.
These conditions will continue the movement of casualty business to the excess and surplus lines market, which already has captured significant property business. Regulatory pressure will also hasten the move to E&S for casualty lines, following a similar path seen in property over the last several years.
In professional lines, I expect public company directors and officers to begin to “flatten” after irrational drops in pricing in 2022. In the much-ballyhooed cyber insurance market, capacity is significant, although there’s been a fearsome rise in high-profile ransomware attacks that put pressure on pricing.
Last but never least, commercial transportation insurance lines remain challenged due to long-term stresses. Entering 2024, carrier exits are putting even more pressure on the sector.
5. Merger and acquisition activity in the MGA arena is always a juicy topic of conversation, both for speculation and analysis. Price-to-earnings multiples remain strong for top-tier MGA firms. In 2024, I suspect, the interest of nonstrategic buyers will dampen and the number of transactions will continue at a slower pace, in an environment of continued high interest rates. Related to M&A, market reports note that several large national brokerage groups are expected to engage in initial public offerings or other recapitalizations or restructurings. The impact on the overall marketplace is to be determined.
6. Three significant technology fronts face the MGA market. First, InsurTech startups using the “disrupter” model continue to slow, while the (few) proven InsurTechs continue to find new rounds of funding. Meanwhile, insurance carriers continue to pursue healthy “enabler-efficiency” strategies by partnering with InsurTech firms.
Second, technology security is a never-ending pursuit (and expense) for all players, who are intertwined in their business models and technology risks. Protection of customer and other data against ransomware attacks, phishing schemes and other cyber crime is often discussed in relation to policyholders and cyber cover. Carriers and distribution firms of all types must be keenly aware of and have ongoing active protection against cyber risk.
Third, generative artificial intelligence was deployed broadly in 2023. At times AI sucked the air out of the technology room. ChatGPT/Bard/Bing and other large language models, along with machine learning, continue to pick up relevance and are starting to impact daily tasks across the industry. A big constraint is that the industry must fully contend with security, quality and copyright issues. But the adoption and leverage of this new technology is underway.
2024 Outlook
Given these factors in the MGA market, what should customers (brokers and insureds) expect?
First, MGAs should be willing and able to soften the blow of rate increases, higher deductibles and term tightening by providing choices, education on coverage, providing options on deductibles and other ways to impact costs, and beefing up customer service. These are the basics of customer experience that must improve.
Second, MGAs must work hard on cybersecurity. MGAs (and other companies) must be “security forward” by continuing their focus on keeping bad actors out of their own ecosystems. In 2024, in my view, MGAs must have a more advanced answer when brokers and insureds ask: “What are you doing in cybersecurity to be as secure as possible?” That type of question is going to come up more in 2024.