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Do you have the appetite or not?

27 October 2009 Compass
Angela Mhlanga, managing director, Compass

Angela Mhlanga, managing director, Compass

When should an entrepreneur consider starting an underwriting agency in the insurance market, asks Angela Mhlanga, managing director of specialist short–term insurer Compass, because as an entrepreneur will tell you, the initial start up of a business is always risky especially in a recession.

Mhlanga manages an insurance company that provides risk capital to underwriting managers. Before answering the question Mhlanga explains how the insurance industry is impacted by the recession. Insurance, although very essential, suffers forms of the grudge purchase. So when times are tough people assess this spend very critically, always looking for cheaper options. This impacts on demand and could put pressure on margins.

“Also what often tends to happen during the recession is that there are more fraudulent claims as people tend to look to insurance to augment their income.” So an underwriting manager wanting to establish a business in a recession would be faced with these issues from inception.

So should an entrepreneur look to start an underwriting agency in a recession? The answer is, it depends.

It depends on the following key issues. Firstly there is the question of availability of working capital. The business start-up depends on whether the entrepreneur has adequate start-up working capital or not. If an individual has start-up capital to cover at least a year’s costs, then the ability and willingness to assume start-up risk will be enhanced. If the individual has no start up working capital it will be difficult to operate the business. “On the other hand, many of the owner managers have started with just a fax machine, telephone and computer, so it does really depend on the passion and drive to push the business.”

Secondly, the expertise in the area that an entrepreneur wishes to underwrite. It makes it easier to start a business in an area one is most familiar to. In this case the underwriter would be most familiar with the brokers that operate in that space and therefore it should allow for easier dealings with these brokers. Mhlanga explains that the underwriter would also know the elasticity of the market in which he or she wants to operate. For example the personal lines area is more elastic than the commercial lines business especially during a recession.

Then there is the availability of risk capital for the area the underwriter wishes to enter into. There is currently a sufficient level of capital in the market, however certain types of products are very competitive and the barriers to entry are low. The competitiveness drives the rates lower and thus impacts on the margins to be made. Entering into the personal lines space would be a lot more competitive than entering into a specialized area like the marine sector or engineering.

“So in essence the availability of capital to support the business would be determined by the type of business to be underwritten.” says Mhlanga.

Having said that, the current year has been tough for short-term insurers generally, and most of their books have not run well. So there is some aversion for new business in certain types of business in the market. However good underwriters are always in demand and with a good area of specialization, they will always be attractive to a risk carrier especially during a recessionary period.

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