Specialism over scale: Finding alpha in a softening market

Softening re/insurance rates are a well-established fact, with almost all segments recording rate reductions through mid-year, and Marsh’s primary commercial index recording steepening Q2 declines.

As we head into conference season, falling rates and questions about the sustainability of improvements to terms and conditions gained during the hard market are making re/insurers increasingly cautious.

The market is becoming more competitive and placing greater emphasis on underwriting judgement, portfolio management and the ability to identify areas where expertise can create a genuine advantage.

For MGAs, this creates an interesting point in the market cycle.

Growth across the MGA sector over the last decade has brought a wider range of underwriting businesses, operating models and capacity relationships into the market.

Scale clearly has its place and can offer significant advantages depending on the capacity provider’s ultimate objectives. However, as pricing becomes less supportive, capacity providers cannot rely on the market cycle to do the work for them.

Greater selectivity around where capital is deployed becomes increasingly important, as does the ability to identify underwriting businesses capable of generating differentiated returns.

At Brace, where our focus is on generating underwriting alpha for our capital partners, we believe some of the most attractive opportunities remain highly specialised underwriting businesses with deep knowledge of a particular class, product, distribution channel or geography.

This expertise is often reinforced by focused distribution, strong broker relationships and a detailed understanding of their portfolio performance.

These businesses often benefit from a level of focus that is difficult to replicate. Their teams remain close to the markets they serve, understand the nuances of the risks they write and are able to respond quickly as conditions change. They know where they can add value, and equally importantly where they cannot.

This is not simply a question of size. A smaller underwriting business is not automatically a specialist one, just as larger organisations can possess outstanding expertise in individual segments. What matters is the quality of the underwriting operation, the strength of its market position and the discipline to remain focused on what it does best as the cycle evolves.

Nor should specialisation be confused with concentration. Individual underwriting businesses may deliberately operate within relatively narrow segments, but for an entity like Brace the objective is to combine these specialist capabilities within a thoughtfully constructed and diversified portfolio.

Executed effectively, this can provide access to a differentiated sources of underwriting return whilst managing aggregation and volatility at a portfolio level.

The strongest MGAs have also increasingly embraced the data, technology and reporting capabilities required for active portfolio management. Better access to granular portfolio data allows both MGA and capacity provider to understand performance in greater detail, identify emerging trends and respond more effectively as market conditions change.

Technology can improve the quality, speed and accessibility of information, but its greatest value comes when combined with underwriting expertise and informed decision-making.

For focused, disciplined MGAs, the other critical ingredient is having the right support from long-term capacity partners that are able to provide stable capital and engage actively with the underlying portfolio. Regular communication and the exchange of timely information can create better underwriting insights and allow both parties to react earlier when performance or market conditions begin to change.

The relationship also needs to work through the cycle. Capacity that is readily available when pricing is strong but disappears when conditions become more challenging does little to support an MGA’s long-term development. Equally, capacity providers should expect underwriting partners to demonstrate discipline when competitive pressures make forecast returns less attractive.

Within Brace, we believe the MGAs best placed to generate alpha for their underwriting capacity through the market cycle will be those that stick to their core specialism – they know exactly what they do well, maintain discipline around where they deploy their expertise and execute against that strategy without distraction.

Finding these businesses can require significantly more work but, at Brace, we feel the time and energy spent curating these relationships will pay dividends over time through excess underwriting profit.

In a hard market, scale can carry considerable weight as favourable pricing can provide a degree of protection. However, as conditions become more competitive, underwriting advantage matters more - the ability to understand a niche in detail and respond carefully to changes in risk and pricing becomes increasingly valuable.

For capacity providers, that means becoming increasingly selective about where capital is deployed and identifying businesses with genuine expertise, disciplined distribution and the data to demonstrate where returns are being generated.

The opportunity is therefore not about backing smaller MGAs for the sake of it, but in identifying those with the underwriting expertise, discipline and market position to generate attractive returns through the cycle. That is where we believe Brace adds value: identifying exceptional underwriting businesses and bringing them together with the capital and support to turn specialist expertise into underwriting profit.

By Tom Sambrook, group CUO, Brace Underwriting