Why brokers are moving over to underwriting agencies

Insurers see them as vital distribution partners and brokers are increasingly turning to them. Underwriting agencies are riding high in a changing market

By Bernice Han

One word can best sum up the state of the Australian underwriting agency sector: vibrant. The past few months have demonstrated the underwriting agency scene is flourishing in the face of the major mainstream insurers’ present – and in the claims and capital environment understandable – low appetite for risks.

The insurers increasingly prefer to play the role of capacity providers and to let their agency partners take on the business directly.

Brokers, in turn, are seeing underwriting agencies as the logical alternative source of cover for complex niche risks.

Some examples:

Last August Zurich deepened its relationship with Steadfast-backed NM Insurance with an agreement to provide capacity for its underwriting agency, Proteus Marine. The agency specialises in commercial marine cargo, carriers load, commercial hull and marine liability risk solutions.

In February the sector received another vote of confidence when Simon Lightbody, formerly Steadfast Underwriting Agencies chief executive, announced the launch of Rhodian, backed by a major US investor, to support start-up agencies.

And in March newly created SafetyCulture Care launched with capacity from Allianz, after technology company SafetyCulture acquired full ownership of Mitti, a venture it established in 2020 in partnership with QBE Ventures.

Mr Lightbody says the goal of Rhodian is to act as an incubator for new entrants by providing them with the infrastructure they need to grow their agencies. Rhodian has the financial backing of US-based specialty wholesale distributor Amwins, which has a 40% stake in the venture.

The incubator will provide services like data analytics, legal and compliance, marketing and capacity management for newly established agencies. In exchange Rhodian will take equity for providing the support.

“Stepping away from Steadfast allowed me to view the possibilities,” says Mr Lightbody, who is Rhodian’s Chief Executive.

He tells Insurance News the outlook for the agency sector is “very buoyant” due to a variety of reasons. The ongoing hard market conditions, especially in relation to pricing, mean insurers are looking for a “sensible” model to do more business.

“They are looking for different ways to deploy their capital more effectively, and the people who work at underwriting agencies are experts with specialty risks,” Mr Lightbody says. “They see an underwriting agency as being able to do all the work more effectively.

“So I’m very bullish on underwriting agencies and their ability to distribute products to the broker network.”

Working with Rhodian means a new agency “can concentrate on their expertise which is underwriting” and leave the task of overseeing marketing, regulatory compliance and finance to Rhodian, he says.

Preliminary estimates indicate the underwriting agency sector wrote about $8 billion in gross written premium in 2022, according to peak body the Underwriting Agencies Council (UAC).

UAC says the figure represents a considerable increase from 2021.

Chairman Heath Amber, who was elected by underwriting agency members to the role in December after Lion Underwriting Managing Director Kurt Nilsen stepped down, says the sector is well placed to grow further given the changing risk landscape.

It’s not just the growing demand for complicated, complex, niche risk solutions that is turbocharging the sector’s rapid rise in the last few years. It’s also the way risk classification has changed significantly as the insurance market became harder, especially in the small to medium-sized enterprise (SME) client segment.

“Over the past few years the SME to mid-market, which was once perceived as vanilla, has now got some level of complexity in it,” says Mr Amber, who is the Chief Executive of AUB’s Austplacements.

“That business is finding its way to bespoke underwriting agencies, and these agencies are positioning themselves to be the solution.”

Mr Amber sees underwriting agencies having an edge when it comes to non-vanilla risk placements. But that does not mean that they are necessarily competing with insurers for business.

He says insurers have over time “repositioned their business” and that has facilitated the growth of the sector.

“Underwriting agencies have been able to recognise those opportunities and say we know you’re not wanting to leave this space and we can help you be there. We’ve got the expertise and the knowledge, and we’ll do the front of house work, but we need you as our capacity partner.”

He says a number of mainstream insurers prefer to work with the underwriting agencies. “They see us as a distribution point for them.”

Berkley Insurance Australia is one such insurer. The commercial lines specialist has been working with underwriting agencies for more than 10 years, and National Facilities Manager Paul Bleakley says US-based Berkley “has always understood that insurers cannot be everything to the brokers we look after”.

“The underwriting agency channel allows us to support brokers and their clients with the expertise they need on portfolios of business that we can support.”

Berkley Insurance Australia expects the underwriting agency segment of its business will continue to grow over time. Mr Bleakley says the insurer continues to meet with prospective agencies with a view to supporting their portfolios.

Mr Amber says the feedback he’s getting from brokers who have approached underwriting agencies is that they do so with the confidence that even if their clients don’t tick all the boxes in the initial risk assessment phase, every effort will be made to find a fit-for-purpose solution.

“Our member agencies always find a way to meet that that challenge, to meet that limitation with new ways of thinking,” Mr Amber says.

An insurer may find a particular client does not meet its risk appetite criteria and decline the business. But an underwriting agency will go the extra mile to work out a solution, even if it means having to co-arrange a facility with other underwriting agencies.

And the added bonus? Mr Amber says personal engagement with an underwriting agency is another drawcard for brokers.

“It’s about being able to get hold of someone and being able to talk about their clients’ needs,” Mr Amber says. “Brokers like the fact that they’re engaging with the decision-maker at the underwriting agency. Brokers love that more often than not when the phone rings it gets answered. And the broker will usually work with the same person from beginning of the transaction to the end.”

Are there any potential speedbumps that may slow the sector’s development?

Mr Amber says how the insurance cycle plays out and its impact on the appetite of capacity providers are key things to watch out for.

“Capacity constraints have always been front of mind for all operators of agency businesses,” he says.

A few years ago Lloyd’s, a key capacity provider to UAC members, reviewed its portfolio and took action to strengthen its books. The process led to a change in how Lloyd’s viewed certain lines of risk.

“It is never a certainty that capacity will be with you forever, because market trends and events can influence a capacity provider’s outlook,” Mr Amber says, referring to the Lloyd’s review.

“The provider may say they no longer want to be in that space. It’s a crucial risk factor and we have to make sure we have got support from our capacity partners to continue doing business.”

Lloyd’s, which is indisputably the leading capacity provider to Australian underwriting agencies, is all set to further entrench its position after another year of “exceptional” growth last year.

Australia and New Zealand Regional Head Chris Mackinnon says total gross signed premium in the Australian market is expected to exceed $4 billion for the first time, which would be up from $3.4 billion in 2021.

“We’re always looking to continue to grow and build the market, but with a sustainable and profitable mindset,” Mr Mackinnon tells Insurance News.

He says Lloyd’s is now “looking to support its agency partners” after going through a two-year program to remediate some “underperforming” areas.

Even during the remediation in 2017 and 2018, Lloyd’s did not withdraw from a single class of business in Australia, Mr Mackinnon says.

“Like every insurer, we went through a short period of time where we had to do the right thing and worked on the underperforming businesses,” he says. “So we’re now back where we want to be and we’re here to stay.”

Lloyd’s bullish view on the Australian market – its fourth largest – is shaped by what it has seen taking place in the sector in the past few years.

Mr Mackinnon says underwriting agencies remain flexible and nimble – strengths that are highly prized by brokers who now see agencies as the default solution provider for complex, unusual risks.

“They are simply moving faster to bring a product to market and I think that that’s been a big driving point.

“The other thing we’re hearing quite clearly is that brokers really enjoy the ease of dealing with agencies and the service levels that they get from agencies.”

He says most brokers have in the past approached insurers directly, but the traffic has reversed somewhat in the past few years as the insurance market became more difficult.

“What we’re seeing is a constant increase in enthusiasm by brokers to engage with the Lloyd’s market and our coverholders,” Mr Mackinnon says.

The recent UAC expo in Sydney is another demonstration of Lloyd’s resolve to grow its Australian business. The UAC/Lloyd’s expo event on February 16 marked the first time the peak body has offered naming rights for one of its expos.

Mr Mackinnon says the presence of more than 500 brokers at the expo on a Thursday morning “is a really, really good sign” for the underwriting agency sector.

GT Insurance Brokers Director Glenn Thomas, who is based in the Victorian regional city of Bendigo, says he regularly checks the UAC website for underwriting agencies who may have the solutions for his clients. It’s something he has been doing more often recently because of the ongoing hard market conditions.

“Insurers are now unwilling to take on risks that don’t fit their box,” Mr Thomas tells Insurance News. “It has got to the stage where I just go straight to an underwriting agency.”