Successful broker underwriting: strategy over structure

Over the past few years there has been a growing interest from brokers wanting to increase their involvement in underwriting results, whether through underwriting management agencies (UMAs), cell structures or other participation models. Many of these conversations start with the same question: 'When does it make sense to move beyond distribution and become more directly involved in underwriting?'

The answer to that question is not as cut and dried as one might expect. While every business is different, the increasing interest in this topic reflects a broader trend towards businesses looking for new ways to create value, deepen client relationships and participate more meaningfully in the performance of the portfolios they generate.

The move into underwriting can be rewarding, but it also brings with it a different set of responsibilities and considerations that brokers need to be aware of when deliberating this approach, and decisions should be made accordingly.

Understanding the nuance of the role

To this end, it is useful to first understand the traditional broker role and how this changes when brokers participate directly in underwriting. Traditionally, brokers focus on advice, distribution and client service. Their role is to understand client needs and place business with appropriate insurers. Participating in underwriting changes this dynamic, with the focus shifting from effectively placing risk to effectively managing risk.

This introduces new considerations around underwriting performance, claims experience, governance, capital, portfolio management and long-term sustainability. For some businesses this evolution is a natural next step. For others it may not be the right path or may require further preparation before such a transition is made.

When to make the shift?

There are certain occasions when evolving the broker approach towards a more participatory one are appropriate. These include:

• When a business has developed a stable and growing portfolio. Such businesses are better positioned to consider underwriting participation than those that are still highly dependent on new business production. Scale allows risk to be more effectively assessed and managed.
• When a business has developed specialist knowledge that consistently differentiates it in the market. Many successful underwriting businesses are built around deep expertise in a particular class of business, sector or niche market. Brokers with specialist knowledge have an opportunity to participate more directly in the value being created.

There are also two key considerations for these businesses to be aware of that could impact their capacity to make the transition. These include:

• Underwriting results are measured over time. Businesses considering this approach need to be comfortable with a longer-term view and recognise that performance may vary from year to year.
• The transition requires more than technical expertise. Data quality, governance, reporting, underwriting discipline, claims oversight and financial controls become increasingly important as participation grows. This is often one of the most underestimated aspects of the transition. While structures can often be established relatively quickly, developing the operational disciplines required to support sustainable underwriting participation typically takes longer and requires ongoing investment.

A complex process

While the merits of the participatory approach for the right broker are clear, businesses often misjudge the complexity of the transition.

Conversations might begin with structures and opportunities, but they quickly shift to the critical issues around governance, discipline and business management - all of which determine the long-term success of the venture.

Brokers are inherently proficient in client relationships, distribution and market dynamics. However, participating in underwriting introduces additional responsibilities that extend beyond traditional broking activities.

Governance, financial oversight, portfolio management, claims performance, risk appetite, operational management and long-term business planning as well as regulatory and conflict management considerations, all become increasingly important, and require the necessary attention and skills.

In our experience, the most successful transitions occur where businesses recognise these specific needs early on, and invest in building the capabilities required to support their next stage of growth.

This highlights one of the most important considerations of this transition: it is not a case of whether or not a business can access a structure such as a UMA or cell captive, but whether it is ready to manage the broader responsibilities that come with directly participating in managing risk.

The appropriate structure will depend on the circumstances of the business and should always be considered within the applicable regulatory framework. As with any strategic decision, understanding these implications upfront is an important part of ensuring that growth is both sustainable and appropriately managed.

Common misconceptions

As interest in this approach has grown in recent years, so have misperceptions around it. Probably one of the biggest misunderstandings is that participating in underwriting automatically increases profitability.

Without doubt, there is a beneficial upside for brokers considering this route. But being directly involved in the underwriting increases businesses' exposure to risk and performance volatility. These factors can 'cost' a business in other ways, and should form part of the considerations on the table when looking at the numbers around shifting to this approach.

Another idea that has taken root that is not necessarily accurate is that successful brokers must become underwriting businesses, that this is a natural progression for all brokers.

This is not true. Many highly successful brokers continue to thrive by focusing on sound advice, client relationships and distribution. In fact, some of the most successful underwriting businesses we encounter are those that have been deliberate in building solid operational foundations to support sustainable growth, as opposed to chasing ambitious growth plans for the sake of it.

Ultimately, brokers must be well informed of the actual facts surrounding the participatory approach, ensuring that any decisions made are rooted in truth and aligned with the strengths, ambitions and capabilities of the business.

Tools vs strategies

That being said, a mistake we occasionally see is businesses becoming focused on structures before having clearly defined their objectives and understood the broader operational, governance and regulatory implications of the transition. Cell captives, UMAs and other participation models all play a role in the new approach, but these are tools, not strategies. Before brokers consider any structure, it is worth asking the following key questions:

• What are we trying to achieve?
• What value are we creating today?
• What capabilities do we already possess?
• What additional responsibilities are we willing to assume?
• What gaps do we need to address before taking on risk?

The answers to these questions provide greater clarity around a broker's ability to successfully adopt this approach rather than the structure itself. This is part of the fundamental groundwork that must be done before any movements towards underwriting can even be considered.

Where does reinsurance fit in?

With brokers increasingly pursuing underwriting participation, so the need for sound reinsurance becomes even more important. Beyond providing capacity, reinsurance helps support growth, manage volatility and create a more sustainable platform for long-term development.

The right structure will vary from one business to another, but thoughtful planning at an early stage can make a significant difference to future outcomes.

Not a trend, a strategic decision

For those businesses where underwriting participation is the best next step, success is often determined less by the structure chosen and more by the quality of the underlying business, its expertise, its discipline and its long-term strategy. The latter is extremely important, and such a decision should adhere closely to the broker's long-term ambitions as opposed to following a trend or the well-meaning advice of colleagues pursuing this approach in their own businesses.

In our experience, the most successful transitions occur when businesses give as much careful consideration to how they will operate as they do the structure they ultimately choose. A cell, UMA or participation arrangement can provide the framework, but sustainable success is built on strong fundamentals, disciplined execution and a clear understanding of the responsibilities that come with participating in risk.

Reinsurance Solutions is a reinsurance brokerage focused on supporting insurers, UMAs and cell captive clients with structuring, placement and strategic advisory across South Africa and selected African markets.