Delegated underwriting authority enterprise are enjoying strong growth rates in underserved segments but the market warrants a note of caution on capacity and fronting concerns.
AM Best affirmed its positive outlook for the DUAE market segment in November 2023 but there are some headwinds for the market, said Greg Williams, senior director, analytics, AM Best. There are three main tailwinds to that affirmation, he said.
Growth and performance have been sustained globally, he said. AM Best is also impressed by the market’s ability to address the underserved and emerging risks. Thirdly, technology and talent are entering the DUAE segment.
Williams spoke as part of an AM Best briefing, “Delegated Underwriting Authority Enterprises: Keeping Up With Market Dynamics.” The briefing explored recent developments in the DUAE sector.
Cautionary headwinds include capacity trends, Williams said. Capacity is the lifeblood of the DUAE segment, so anything negative would affect the market. Two years ago, there were some capacity constraints in property catastrophe and cyber, but those seem to have lessened.
There was substantial growth in 2023 in the DUAE sector, said Dawn Walker, associate director, DUAE, AM Best.
Premium growth within the U.S. DUAE segment grew at a double-digit rate for a third consecutive year in 2023, increasing by 14.9% to $81.4 billion, according to the new AM Best report. The growth was spurred by rising DUAE collaborations with insurers to write specialty business, resulting in a larger share of industry premium shifting to the managing general agent space.
The DUAE market has seen “phenomenal” growth over the past few years, said Lauryn Kothavale, vice president, insurance research, Conning. With double digit-growth, tailwinds included new MGA formations, demand for specialty niche products and continued growth in the excess and surplus lines, she said.
Kothavale said some of the MGA market is under-reported as certain smaller programs aren’t captured in regulatory data. Conning estimates about 15% of the DUAE market isn’t reported, bringing the total market size to about $95 billion.
Alan Dobbins, director, insurance research, Conning, agreed with Kothavale that MGA growth has been strong with a compound annual growth rate of 30% with several years of strong growth.
Walker said there was a slight decrease in the growth rate from the previous two years, the 2023 results still indicate healthy expansion of premiums despite capacity constraints in the property market.
Fifteen of the top insurers in the market saw premium growth year over year, with an increase in the number of insurers, from seven to 10, writing more than $1 billion in annual premiums with both affiliated and unaffiliated managing general agents, Walker said.
New entrants are driving MGA market growth along with a rising number of collaborations between carriers and DUAEs, Walker said. This is especially true of companies using a hybrid model for specialty commercial lines.
The DUAE model is also driving growth in excess and surplus lines as the hard market for lines, such as catastrophe-exposed property, commercial automobile, umbrella and excess continue to drive business to the surplus lines market, Walker said.
The model contributed to the momentum of fronting, hybrid fronting and startups helped to combat downward pressure that softer pricing has had on commercial casualty lines, she said.
On the casualty side, there are some adverse development trends that might alter capacity going forward, Williams said.
There has been turmoil in the fronting market over the past 12 to 18 months, he said. The fronting and DUAE markets paralleled each other in a symbiotic relationship, so problems with fronting could affect the DUAE market.
The Vesttoo Ltd. situation was a wake-up call but the financial impacts were limited, Williams said. Operationally and reputationally there was an impact but he said the industry responded well.
Vesttoo had allegedly issued fraudulent letters of credit and has since filed for bankruptcy.
The fronts have largely shaken off the collateral letter of credit issues from about a year ago and continued to grow rapidly, Dobbins said. The MGA customer base is expanding and customers are becoming increasingly comfortable with the fronting model.
There are also ongoing and evolving economic challenges, whether inflation is impacting internal operations and costs or commission compression, Williams said. Core and social inflation could impact underwriting and reserve margins of the DUAE, then perhaps spill over into contingency commissions.
MGAs can be highly attractive M&A targets while gaining efficiency, Kothavale said. They will continue to be an area of interest due to their specializations and the strategic value they bring to carriers and brokers.
Kothavale said MGAs have proved they’re resilient and flexible amid soft and hard market conditions, making them compelling targets.
They provide growth in the excess and surplus market with harder to place classes. There are more carriers and capital in the E&S market with rising demand for coverage and the flexibility, all of which may become very attractive to carriers.
“We see this as a thriving market and MGAs will continue to play a critical role in the broader insurance industry,” Kothavale said.
Private equity has expanded into the MGA space, Walker said. These investment firms were drawn by potential returns offered by MGAs, which serve as intermediaries between insurers and clients.
She said private equity firms view MGAs as lucrative, given their ability to generate stable cash flows through commissions and fees on insurance policies.
While the delegated business model is seen as an efficient growth model for private equity, there is concern about unbridled growth, Walker said.
Conning will soon release its 11th annual review of the MGA market, in which it will discuss estimates of the market size, some key trends, key players and M&A activity, among other items, Kothavale said.
“Our outlook for the MGA market in 2024 appears to be positive,” she said.
Kothavale said factors supporting continued growth and opportunities within the sector include market stabilization.
“We have the significant reset and the market has reached an equilibrium that seems fairly balanced,” she said. “There’s adequate capacity and plenty of discipline by reinsurers.”
MGAs are also leveraging technology to gain a competitive advantage and improve their operations, Kothavale said. Some of the ways they are doing this are standardization and AI integration, in which they are creating standardized underwriting processes while preserving the need for human judgment.
The market is attracting talent as individuals move from traditional insurance carriers to MGAs, Kothavale said.
She noted MGAs are using recruiters to find specialized talent. Factors of attraction include an entrepreneurial appeal and ownership opportunities, as well as a more dynamic work environment, “essentially the upside of a startup.”
MGAs have the ability to get more creative with compensation packages related to equity incentives, Kothavale said. They also offer greater flexibility, allowing employees to work remotely.