InsTech’s Henry Gale speaks to David Hughes, Founder and CEO of Mulberry Risk, an Aventum Group company, about the challenges of capacity relationships for MGAs and a new way for MGAs to access actuarial insights.
Henry: Why did you found Mulberry Risk?
David: I worked for over 25 years across actuarial roles and leadership positions in the insurance industry before I left full-time employment to start my own MGA. At that time, I received a phone call from someone who was running another MGA that had just lost its insurance capacity. His business was in crisis mode; not having insurance capacity meant there was no product to sell any more.
Because I had come across some suitable capacity while working on my own MGA, I managed to help him secure new capacity. In the process, I realised how important an actuarial background is when forming capacity relationships with insurers. Very few MGAs have their own actuaries. They often rely on brokers or insurers to provide actuarial results for them. There was a gap in the market when it came to offering actuarial support to MGAs to help them articulate their business to insurers, so I founded Mulberry Risk to provide efficient actuarial and portfolio management services tailored to MGAs. These services include data cleansing, forecasting loss ratios and discussions with insurance capacity.
Henry: Can you introduce the wider Aventum Group, and why did Mulberry Risk choose to join the group?
David: Aventum is a fast-growing independent specialty insurance group, trading more than $1.5 billion USD in gross written premiums annually, with 14 offices globally. Through its broking arm Consilium, and its global MGA operation, Rokstone, Aventum offers clients a range of specialist and niche solutions in all lines of property & casualty (re)insurance globally.
Mulberry Risk started working with Rokstone in 2020 to help consolidate actuarial numbers across the MGAs in the Rokstone Group. We were looking for investment to grow Mulberry Risk and it became clear that it was strategically useful to be part of a high-performing group. We can conduct research with other Aventum Group companies, develop our product and experiment, to improve what we offer to other MGAs. Mulberry Risk has been part of Aventum Group since 2022.
Henry: How would you describe what an MGA does?
David: To the layperson, I describe an MGA as a virtual insurance company. An MGA does everything that an insurance company does – including underwriting, distribution, contract issuing – with one exception: MGAs do not hold the risk capital. For an MGA to operate successfully, it needs a capacity agreement with an insurer. The insurer assumes risk on the MGA’s behalf for each policy it underwrites. In effect, the insurer is outsourcing some of its underwriting to an MGA, which is often known as delegated underwriting.
In the UK, MGAs are regulated by the Financial Conduct Authority (FCA), the same body that regulates brokers, as opposed to the Prudential Regulation Authority (PRA), which regulates insurers.
Henry: What are the main reasons why insurers work with MGAs?
David: For insurers, delegating underwriting authority to MGAs can allow them to enter a new market with lower upfront costs.
Because MGAs are smaller companies, they are often able to be faster-moving and more agile than insurers. This enables MGAs to better reflect changes in customer needs, changing working practices and innovative technologies in underwriting.
Henry: Can you give some examples of the advantages of MGAs being agile?
David: During Covid-19 lockdowns, because MGAs were less reliant on physical IT infrastructure than insurers, they tended to adapt more quickly to remote working. This enabled many MGAs to maintain a high level of customer service while large insurers were taking longer to adjust.
As I speak to you today on a Monday, we are in the office of an MGA, examining a new pricing model they have developed for their product. Our actuarial team will analyse the pricing model, approve it and the new model will be implemented by the end of the week.
There is a shorter chain of decision-making that enables MGAs to adapt more quickly, whilst they are bound by the contract with their insurance capacity partner to ensure that they are delivering underwriting profits (the amount left over from premium income after claims have been paid and administrative expenses deducted).
Henry: Relationships with insurance capacity providers are essential for MGAs. What are the most common challenges that start-up MGAs face in their initial search for a capacity relationship?
David: A key challenge is data. MGAs need to prove that their approach will deliver an underwriting profit.
If an MGA plans to underwrite a traditional line of insurance business, such as home, motor or business insurance, there is data available that can help as a benchmark. For MGAs that are launching completely new insurance products, where there may not be data available, it is particularly challenging to persuade an insurer that the MGA will deliver an underwriting profit.
It is much harder now than it was five to ten years ago for MGAs to secure capacity. Capacity decisions are increasingly data-led, and now actuaries will be involved in most of the process for any MGA that is looking to write more than £0.5 million GBP of premiums.
Henry: What should MGAs do to overcome these challenges?
David: I would advise MGAs not to use the same pitch deck with insurers as they use for investors. Investors value the company’s overall vision and commercial prospects, among other aspects, whilst insurers are principally interested in achieving an underwriting profit.
MGAs should also bear in mind that they are adding an extra cost into the insurance value chain, so they need to have a clear idea of what value they are adding. For example, ManyPets (formerly Bought By Many) is focused on providing a digital customer journey that other pet insurers do not offer. Flock is using telematics to offer fleet insurance customised to its clients’ behaviours. An MGA’s value should be something unique it brings, such as new technology or close relationships with niche regional brokers, that the insurer would struggle to replicate on its own.
Henry: Once they have secured capacity, what challenges do MGAs face managing a capacity relationship?
David: Most start-up MGAs will experience challenging underwriting losses in their early days, especially if they have developed a completely new insurance product. This presents a communication challenge. MGAs need to explain to their insurance capacity provider that although the results have not been great, they have been learning and that they have a plan for improvement in place.
Insurance is a relationship-built business, and regular communication with your capacity provider is key. MGAs with capacity at Lloyd’s often meet with their capacity provider just once a year for renewal. I think the minimum should be once per quarter, and more regularly when possible.
When Mulberry Risk works with MGAs, we use our actuarial perspective to highlight issues that can emerge later. This enables the MGA to communicate those issues with their capacity provider in advance, which builds trust.
Henry: How else does an actuarial perspective help MGAs in their meetings with capacity?
David: Actuarial models produce results based on assumptions, such as how claims will develop, the amount of claims inflation and changes in premium rates. Actuaries focus on defining these assumptions.
Mulberry Risk runs training for MGAs to help them feel confident in understanding how actuarial assumptions are made. Mulberry Risk also joins MGA clients in their meetings with capacity to support them when discussing actuarial models and question insurers’ assumptions where appropriate.
Because Mulberry Risk has participated in hundreds of capacity meetings, we also have developed expertise in communication with capacity. We can help MGAs identify the key value they bring to insurers and how to pitch their business.
Henry: What is Mulberry Risk’s Artificial Digital Actuary and why did you build it?
David: The actuary that an MGA needs has a lot of experience, is expensive to employ and might not enjoy working solely on one MGA because of the amount of manual data processing involved. Some MGAs work with traditional actuarial consultancies, but these are also expensive because of the number of hours involved in data cleansing and the timeliness of the work.
Mulberry Risk built Ada, our Artificial Digital Actuary, to provide actuarial services on a platform that would scale. The platform supports all lines of business and is supported by Mulberry Risk’s actuarial and data science team. It ingests bordereaux data and runs actuarial calculations to produce a range of dashboards and forecast outputs for MGAs.
It would usually take two to six weeks to produce an actuarial report. For one of our clients, that is now possible within two hours using Ada. Ada can run actuarial reports regularly, so that MGAs can access updates on their actuarial results every month and analyse emerging trends.
Henry: What MGAs is Mulberry Risk working with that you can name?
David: The MGAs Mulberry Risk has worked with range from small to scale-up MGAs, from personal lines insurance to multimillion-pound commercial lines policies. Companies we can name include Rokstone, Flock, Scratch and Patch, Pukka and MX Underwriting. Mulberry Risk also worked with ManyPets in the past and helped the company build up its own actuarial team.
Henry: Why has Aventum joined InsTech as a corporate member?
David: Aventum is looking to embrace technology as it continues to scale its business. Our main reason to join InsTech is to learn more about innovation in the insurance market, become more involved and support the development of new technology in insurance.
Henry: What sort of companies would Aventum like to connect with?
David: Aventum’s operations area is interested to connect with companies providing technology to improve underwriting efficiency or augment underwriting data. You can contact Aventum at www.aventumgroup.com/contact-us.
Mulberry Risk would like to connect with MGAs, including companies that want to grow their MGA portfolio or people with an idea that are considering starting an MGA. You can get in touch with Mulberry Risk at www.mulberryrisk.com/contact.