Dynamic duo serenades customers and insurers
Insurance brokers and underwriting managers are the dynamic duo driving innovation in specialised risk management solutions in South Africa, unlocking growth in niche markets that traditional insurers often struggle to service. Intermediaries and UMAs were under the spotlight during the opening presentation to the South African Underwriting Management Association (SAUMA) 2024 Conference, given by Sory Diomande, CEO of Santam Re & International. The CEO offered a reinsurance perspective on both UMAs and cell captives.
Broker plus UMA for the ‘win’
Before diving into the ‘dark art’ of reinsurance, it is worth revisiting some of the introductory remarks made to the conference by SAUMA chair, Steve von Roretz. He was full of praise for insurance brokers plying their trade locally, saying they were under “enormous pressure to perform and deliver great service to customers in a complex world”. He was equally enthusiastic about the role played by UMAs in an uncompromising risk environment, commending SAUMA members for always being ready and willing to help. “I challenge any [broker] to get better service and assistance for their customers than by using the true industry experts, our members,” he said.
The ‘reinsurance perspective’ discussion started with some basics which most FAnews readers will be comfortable with. First and foremost, the expert reminded the 2000-plus insurance industry stakeholders in attendance that UMAs only operate through insurance brokers whereas policyholders had the option to go via brokers or directly to an insurer. Diomande commented that UMAs provide underwriting capabilities and policy administration while the risk sits at the insurer or reinsurer level. “UMAs play a significant role in the South African insurance industry, usually focusing on a single class of business,” he said.
It is common practice for UMAs to focus on niche, specialist classes of insurance business such as aviation, engineering, marine or liability, thereby creating opportunities for insurers to diversify risk exposures; to tap into previously uninsured markets; and hopefully grow their premium and profit. It has not all been plain sailing for the country’s 50 to 60 UMAs. On one hand, they face stiff competition from broker binders; on the other they face the possibility of being reintegrated back into the very insurers that they serve. Case in point, SHA Risk Specialists became a division of Santam from 1 January 2021. Engineering insurance specialist, Mirabilis, went the same way.
Blurred regulatory lines
Compliance and regulation impact all the business entities referenced during the discussion. Diomande opined that cell captives, binder holders and UMAs faced a highly complex and uncertain regulatory environment following the country’s adoption of a twin peaks framework for financial sector regulation. “There is a blurred line between broker binders and the UMA that has to be clarified,” he said, before commenting on the difference in ‘value added’ by each of these stakeholders. Both add value; but there is a definite difference in the nature of that value. The presenter observed that from a reinsurer perspective, UMAs had ‘no skin in the game’ due to not carrying any risk exposure.
The presentation included a useful comparison between South African UMAs and international UMAs, usually called managing general agents (MGAs). Local UMAs fare better under the heading ‘deductions’ because they have just one additional ‘link in the chain’ whereas international MGAs tend to be costly due to a combination of international broker and fronting fees.
“What we have observed is that MGAs on the international market impose very significant deductions for costs such as commissions, administrative expenses and marketing; in South Africa, UMAs tend to have more reasonable deductions, meaning a larger portion of premium is passed to insurers / reinsurers,” the CEO said. Deduction refers to the portion of the premium allocated by the UMA to cover operational and administrative costs before the remaining amount is passed on up through the insurer / reinsurer value chain.
Locally, UMAs focus on niche lines of insurance business that are typically excluded from reinsurance treaties as well as emerging risks such as flood, grid failure and political violence. Internationally, MGAs focus on the niche class of business underwritten by the parent underwriter such as marine, with a broad range of emerging risks in areas like technology and ring-fenced markets such as South Korea. In respect to the latter trend, UK-based broker market Lloyd’s has previously highlighted concerns over MGAs’ exposure to losses in the semiconductor industry. Such concerns could be validated following a 4.8 magnitude earthquake that struck near Buan-gun, North Jeolla Province, South Korea, on 11 June this year.
Introducing cell captive insurers
UMAs are not alone in transferring niche risks. “From the reinsurance perspective, we consider cell captives to have skin in the game, because they have to engage [or put up] some capital … unlike UMAs that operate directly under the mother company’s paper,” Diomande said.
He noted that cell captives shared accounting, claims and underwriting systems with a cell captive insurer with the aim to achieve efficiencies and save costs. The amount of risk ‘onboarded’ turns out to be the key difference between UMAs and cell captives, with the former having no risk exposure, and the latter taking on all the risk. Under the ‘purpose’ heading, UMAs ‘provide specialised underwriting services’ while cell captives ‘provide risk management and insurance solutions’.
The presentation shifted to the international reinsurance market and the intersection of that sector with UMAs and cell captives. According to Diomande, 2023 was a very good year for reinsurers following a handful of years during which they struggled to even cover the cost of capital. “Global reinsurers achieved a combined ratio of around 90 last year and an average return on equity of 18%,” he said. Per the Aon Reinsurance Market Dynamics Report, global deployed reinsurance capital topped USD670 billion in 2023, rising to USD700 billion early in 2024. Global reinsurers’ risk appetites are BREAK growing, with more capacity on offer, though pricing remains tough.
A competitive and dynamic market
“All things being equal, reinsurers are [still] putting pressure on pricing because they have lost a lot of money in recent years,” Diomande said. In recognition of this, Aon plc described the reinsurance market as ‘competitive but dynamic’ early in 2024, with global reinsurers paying close attention to rising volatility in secondary perils and so-called retention levels. Retention refers to the amount of risk that an insurer or reinsurer retains on their own balance sheet versus that taken on by the insured.
“UMAs play a very important role in the insurance industry and should be supported provided they have strong risk management, the necessary underwriting expertise and specialised and experienced teams,” concluded Diomande. He said those operating in niche markets were more likely to attract reinsurers’ support.
Writer’s thoughts:
It appears that UMAs offer an edge in finding insurance or risk transfer solutions for commercial clients operating in niche sectors. Agree or disagree. And how do you go about leveraging their specialised underwriting capabilities in your risk advice business? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.
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