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After this astronomical level of growth, the MGA market must now tread carefully

“It’s looking quite bubbly at the moment, is it not?” Robert Hiscox asked an audience of MGA executives during his keynote speech at the Managing General Agents Association’s (MGAA’s) annual conference last week.

“The sun is shining very much in your area… I’m just not sure if you’re the angels or the devils of the market.”

The London market veteran hit the nail on the head with his wide-ranging and entertaining speech on Thursday.

It’s true that the MGA market is having a renaissance at the moment, with the creation and growth of vehicles at a real high.

It’s also true that, for the most part, the carriers and brokers still don’t quite know what to think of it all.

As Hiscox implied, opinion on the value of London market MGAs is still divided, although you can argue that the stigma of loose underwriting standards is falling away.

But what opinion is really divided on is how long this phenomenon will continue.

After this astronomical level of growth, the MGA market must now tread carefully. It will come under intense scrutiny in the coming months, as paper providers examine the real value they are getting from this distribution channel.

As Willis Re noted in its recent renewals report, the shift in emphasis from pursuing top-line growth to pure underwriting profit could prompt some carriers to dial back their exposure to MGAs.

MGAs must prove that there is true value creation there to justify adding another link in an already over-extended value chain, otherwise underwriters will decide that they are better taking their underwriting back in-house.

And all the while, they must ensure that their credibility remains intact.

As Graeme Chilton pointed out at the same MGAA conference, you only need a few rogue MGAs to bring down the success of the model “like a pack of cards”.

And when you talk to the CEOs of the largest MGAs, their biggest fear isn’t market conditions or maintaining commissions. It’s the failure of one of their peers.

For the “bubble” to burst, it may require little more than for capacity providers to pull their paper from an MGA, and for no one else to step in to save it.

MGAs fighting for the falling amount of available capital can demonstrate their value through top-flight, profitable underwriting or by operating a far lower operating expense base than their paper providers. Or ideally, a combination of the two.

If they manage to do this successfully, they can ensure that their bubble doesn’t burst. But don’t count on it.

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