Over a year into his tenure as Chief Underwriting Officer for AXA XL’s North America Programs business, Simon Rees says the space continues to deliver. The lower barriers to entry for MGUs, driven in part by technology advances and solid capacity, has created a strong, more competitive market.
Yet changes are afoot. We sat down with Simon recently to discuss the mid-year state of the market and what may be in store for the future.
What are you seeing in the Programs space right now that is interesting?
SR: There are more MGUs than ever before. The barriers to entry are lower than in the past, and it has become easier to establish an MGU over the last few years. That is due to a combination of technology, capacity, capital, and an increase in underwriters looking for entrepreneurial opportunities.
Underwriters wanting to become more entrepreneurial have moved out of the carrier space and set up in or put equity in the MGU space themselves. As the market grows, so do the opportunities for MGU activities. Technology is allowing MGUs to be set up, and the business model itself is in vogue. These things are really driving that kind of ecosystem that is geared toward the MGU in a valuable way.
What do MGUs and brokers needs to know about the market?
SR: Three themes are prevalent in the market right now. First, technology is changing the game. We are in the third wave of the technology/AI evolution. In 2015/16, technology was expected to disrupt carrier operations. However, with carrier operations being incredibly complex, that didn’t go to plan. There were some small disruptions, but technology did not really change the game.
The second wave during 2018-2021, technology started to take over low-value automation that carriers were doing, such as converting a PDF to a structured database. There was some value-add, but nothing terribly disruptive.
In this third phase, there is more value add in terms of the underwriting process. We now have submission triage becoming quite popular. This is technology and AI prioritizing opportunities that fit the underwriting appetite. For example, AI can triage an underwriter’s inbox or submission portal to surface the opportunities that best match their underwriting criteria. Technology and AI also align well with high-volume lines of business and certain distribution channels.
That gives carriers and MGUs critical value creation drivers: pipeline management where they are finding opportunities, going to market faster, interacting with brokers more efficiently, and cutting through the noise so that you can build relationships; prioritizing the right submissions enhances the productivity of underwriters.
The key from our standpoint, is that technology can make good underwriters more efficient, but the underwriting expertise still needs to be there. Good technology without underwriting expertise behind it can lead to challenging outcomes.
It sounds like technology is streamlining operations.
SR: It does. But it also comes at a time when macroeconomic conditions are becoming more challenging for MGUs over the next few years. Having the business on the books is one thing, but how do you actively manage it? Today, we have social inflation, tariffs, economic inflation and the macroeconomic environment putting pressure on everything. Operational efficiency is the overarching concern that technology needs to address.
In the near future, I see AI really coming into that underwriting efficiency arena. Currently, it is making inroads in the pipeline stage through submission triage. In the next five years, I look for how it will come more into the underwriting process itself.
Today, we have social inflation, tariffs, economic inflation and the macroeconomic environment putting pressure on everything. Operational efficiency is the overarching concern that technology needs to address.
It sounds like technology and AI are really at the core of industry change. Is it also influencing a better economic environment?
SR: That’s a good question. A lot of companies at this stage are spending money on AI, almost because they cannot risk being left behind. Yet we are only starting to find out if that expenditure is actually creating value. That is the real question. Ultimately, are carriers and MGUs creating enterprise value because they are leveraging AI? I don’t think we’ve necessarily seen that completely come true yet, but I do think we will see that happening in the future for those companies deploying it appropriately.
What are some of the challenges in the market from your perspective?
SR: There are some headwinds to pay attention to. As times become more challenging, we will see the best MGUs do well while the underperformers will struggle. With so many MGUs, there is a lot of competition for business, which again, the strong will navigate well.
Likewise, the rate environment – the price per unit of exposure – is becoming challenged. On the supply side, there’s an outpacing of supply versus demand, meaning the price then reduces. In particular, the rate environment in property is going through this, but now it is starting to come through in other lines vs. loss trend, as well. That will challenge MGUs a lot over the next couple of years.
If that weren’t enough, private equity was quite active in this space from 2016 through 2020. This will likely lead to the 5-7 year sell window in the coming years where firms may start to realize their equity investments and position to sell. That being said, there will be some great opportunities to acquire in the coming years especially for turnarounds.
What does that mean for the insured?
SR: This all becomes an issue for the insureds, particularly if their business is with an MGU that is struggling in a more challenging market. Nuclear verdicts and social inflation are driving people to the MGU market. Should the MGU not be prepared to grow and thrive in a tightening market, they could find themselves without an MGU. With so many MGUs in the market now, insureds can get a competitive price. Insureds and brokers should be asking themselves who is ultimately backing the risk whether it’s through an MGU, fronting carrier, carrier or reinsurer, the financial strength will matter more than ever in the coming years. We will see a flight to quality, which makes sense for those needing stable support, long-term support.
That is where AXA XL shines. We can partner with MGUs to add financial credibility to the story. We have an A+ rating. We have a history in this space; our longest MGU partnership has been 38 years. We have supported programs for a long time and we have deep expertise in the programs space. We bring financial strength, a strong balance sheet, and a deep bench of expertise from all areas – claims, actuarial, legal, compliance, underwriting, and other functions, all supporting the MGU. Not least the capacity to significantly ramp up growth.
The right MGU business can thrive in any rate environment and within tightened markets. It takes a commitment to the business, but also the right partner. We hope to be that partner and support a vital, strong market through whatever opportunities and challenges arise.
