UMA, scaling obstacles

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With consolidation across the industry and regulation posing an increasing problem, we check in at ground level on the state of the UMA in South Africa.

SVEN HUGO

While the UMA industry is by no means in dire straights, it has of late been met with challenges from various corners. The same can be said of the rest of the insurance industry, but UMAs being smaller and one could argue not as robust as the larger insurers, we contacted UMAs and other South African insurers to get their insights on the major challenges that lie ahead, and yes, the positives for the industry.

 

Chris Charlton
claims manager at Consort Technical Underwriters

The health of the UMA industry? 

The UMA industry in South Africa continues to mature. However, due to the depressed economic growth, price, brand and access to the market have become the major drivers of value in the UMA businesses. Price sensitivity, in particular, is worrying as it is one aspect that will remain with us long after the economic growth issue has been rectified. UMAs are currently honing their inherent skills and striving to provide the best possible service to the intermediaries and, in turn, the end clients. Innovation, however, has been a positive spin-off of the low growth phase we find ourselves in. UMAs are applying themselves to finding innovative solutions to meet the clients’ changing needs. The current situation, therefore, is maintaining the main status quo but addressing the smaller areas of change as well as bracing for the anticipated large changes in the insurance market in general.

Major challenges?

A major challenge at the moment is that the overall market mood remains depressed. This is due mainly to current economic uncertainty. South Africa has also experienced a few major losses during the last financial year. This has had its effect on the appetite of the risk carriers: both insurers and reinsurers. These losses along with the price sensitivities previously mentioned have added to the pressure the industry is feeling in making certain that the industry remains sustainable. We are approaching the current challenges by sticking to what a specialist UMA does best to add value; offering expertise and service in finding solutions to the needs of the market and embracing the challenges as potential opportunities.

Is consolidation good or bad?

Consolidation is inevitable in a period of slow economic growth. With top-line pressures, smaller or more vulnerable players will have difficulty in maintaining viable businesses with increasing operational and compliance costs. Consolidation, if done correctly, should allow the consolidated entity to expand its market offering and grow its value as well as create the ability to utilise technology more widely due to the increased capability.

However, with consolidation, the expected value may be offset by the fragmenting of the acquired talent pool, especially if there is discord in the new entity’s merged culture. The market, therefore, stands the chance of losing valuable expertise through the consolidation process. Another disadvantage of consolidation is that as a result of the decreased number of product providers there is a decrease in choice for the customer. From a specialist UMA point of view, the fewer the number of entities assessing a risk exposes the market to a larger threat of a mispriced risk.   

Predictions for the next few years? 

Traditionally, not much would happen in two years in a fairly stable industry like the UMA industry but, in today’s terms, change is happening at the fastest rate ever and we are now in a situation where a lot can change in two years. There does, however, need to be a catalyst for this change to happen. In the next two years, we expect the UMA industry to continue to add value through the expertise that they bring to the market but, with the catalyst set to be the development of technology, the UMAs will have to remain agile and innovate quickly to embrace the opportunities that arise to continue bringing their expertise and being relevant, or face the risk of being left behind. 

 

Cornel Schoeman
commercial executive, and 
Stuart Forbes, chief underwriting manager at Genric Insurance

The current state of the UMA industry?

As a general statement, I would say the UMA industry is stable. Our partners continue to show positive growth and, for the large majority, sustainable profitability as well. One of our main focuses (as many other insurers I would imagine) is on the management, consolidation and integration of data. In addition to this, one of the major points is to ensure that the integrity of the data is also of a suitable standard. From a regulatory perspective, our UMA partners have needed to make a few changes in terms of their distribution models; however, this remains a space which, for the time being, is well understood and there are no major adjustments in approach required.

The challenges?

The major challenge we are contending with is, as mentioned above, the management, consolidation and integration of data. To give a little more detail, we are an insurer that primarily operates on the outsourcing model in partnership with a mix of wholly owned subsidiaries, partially owned subsidiaries, and completely independent UMAs. This results in a large variety of policy management and financial systems to integrate in addition to ensuring the outputs of these systems are in alignment with the regulatory requirements. We have been actively addressing this issue for the past 24 months and have developed some unique solutions. But this is a continuous challenge and, in light of reporting and data access requirements, something that remains a top priority for Genric.

Has the consolidation of  the industry affected your business?

While there may be some consolidation of UMAs into divisions of insurance companies or similar structures, we as Genric have yet to be affected in any way by this. We have very specialised or tailored distribution networks that align with all regulatory requirements, so the need to consolidate has yet to become a problem. In fact, it has presented various opportunities to work with UMAs which prefer not to consolidate and remain independent. We look to create sustainable partnerships working with a variety of structures; we are not limited by a decision to consolidate or not.

There are notable pros and cons of consolidation.

Pros:

Distribution opportunities (direct dealing with customers)

• Cost saving through economies of scale

• Expertise and financial stability of larger insurance group

• Transparency

Cons:

• Lack of independency

Profit sharing and how this is compensated for

• Access to other insurance networks can be limited to UMAs wishing to underwrite on behalf of more than one insurer

Do you think the niche UMAs are more impervious to the repercussions of insurtech on broker business?

Yes, I would agree these types of UMAs are more impervious to insurtech business as, due to their unique offering, consumers who are actively looking for these types of policies will most likely follow any distribution method required and not limit themselves to sourcing only through insurtech. This trend will undoubtedly have an effect on niche players in the long term and it is a trend that is here to stay.

Last word to end on a positive note?

Data, data, data! It really is one of the major discussion and development points right now. It is the backbone on which all insurance companies need to operate from exposure awareness to policy management and everything in between. We are working on it and, from what we can see, so is everyone else. I am of the strong opinion that it will ultimately result in a better-governed insurance industry and a better place within which to operate.

 

Sean Jones
senior manager of distribution of Hollard Broker Market

How would you describe the current state of the UMA industry?

The current situation in the UMA industry is greatly varied. Despite tough times, there are market players that are succeeding and there are those that are feeling the strain. We’re going through challenging times in South Africa and the insurance industry, as well as the UMA sector, is feeling the pressure. An economic recession, a chaotic and deteriorating political landscape coupled with increasing levels of regulatory complexity make for a challenging environment in which to do business.

In addition, the market is highly competitive and UMAs operating in non-niche segments, or those UMAs that do not have a unique selling proposition, are typically forced to compete in terms of service and price. Competing across these dimensions places immense pressure on margins and, as a result, non-specialised or non-differentiated UMA businesses that do not have the requisite scale are struggling to survive.

How do UMAs deal with these challenges?

Aside from trading in an environment characterised by increasing levels of political and economic uncertainty, UMAs are also dealing with much change from a social, technological and regulatory perspective. To deal with these external challenges, UMAs must remain attentive and nimble, and be able to adapt their business models as required.

Furthermore, succession planning and attaining transformation objectives are key internal challenges. In this regard, UMAs struggle to compete for, and retain, talent. This is because, in many cases, they are simply unable to match the salary levels and opportunities for career growth provided by the larger insurers. To counter this, UMAs should prioritise talent identification, training and transparent succession mapping. It is an opportunity for the carriers to provide support through access to training as well as the funding mechanisms required to underpin such succession plans.

At Hollard Broker Markets, we have strategically positioned certain UMAs alongside our divisional Centres of Excellence (COE). This allows our UMAs and internal COEs to take full advantage of each other’s distribution networks, create product packaging opportunities and also drive efficiency through shared infrastructural support. This one-stop shop approach is advantageous to the brokers we service and delivers key support to our UMAs.

It is essential that we create an environment that allows us to capitalise on these benefits while ensuring our UMAs retain their identity and independence.

What is your take on the increasing consolidation of the industry?

In recent years the industry has been very active. It has seen many UMAs absorbed into and becoming divisions of insurance companies as well as others being merged to form larger, more robust UMA businesses. Given the various challenges the industry faces, this trend looks set to continue.

That being said, and despite this consolidation, the industry still represents an opportunity for entrepreneurship and as such will continue to attract new market entrants. In this regard, those entrants offering new products or innovative ways of accessing and servicing the market are most likely to succeed.

What do you make of insurtech?

In this day and age of rapid technological development, I don’t think anyone can rest on their laurels. It may be true that much of the focus, from an insurtech perspective, seems to be on the substantial opportunities that the larger market segments represent and, as a result, the niche players are somewhat less affected. However, all UMA operators, regardless of how niche they may be, need to pay attention to technological developments to defend against potential threats and capitalise on the opportunities created.

What do you foresee for the UMA industry in the next two years? 

Given the economic and political outlook, I see a difficult few years ahead for both insurers and their UMAs. I believe that, in non-niche segments, underwriting margins will remain under pressure in a model that, by its very nature, is an expensive means of reaching these markets.

To end on a positive?

Despite the difficult times, there have been some inspiring success stories and a number of UMAs have performed incredibly well. More often than not this success is largely attributable to the energy, expertise and business acumen of the UMAs’ leadership team together with the level of support received from their carrier.

Sharon Paterson
CEO of Infiniti Insurance

What’s the current situation in the UMA industry?

The Retail Distribution Review (RDR), as proposed, does not impact the way UMAs do business and there is no real imperative for change. Whether UMAs should be incorporated into insurers as part of a branch structure or whether they should operate as separate entities depends very much on if they wish to access business only via the broker market or they wish to deal directly with clients; it is to a large degree dependent on the individual of the principal in the business.

Specialist lines of business are built on the competence and user-friendliness of individuals; their clients tend to follow those individuals, regardless of whether they are operating as a UMA or employed by an insurer.

What are the major challenges to contend with?

Legislative changes, whether good or bad for the industry, always lead to uncertainty and we certainly have had a lot of legislative uncertainty to cope with over the last while. To ensure compliance with increasingly rigid legislation – without compromising the flexibility that makes us special – is a challenge. It will involve increased documentation, but at a partner level so as to be able to cater for the needs of differing client bases. Infiniti is not a ‘one size fits all’ and I guess we will all be working a bit harder!

Your take on the increasing consolidation of the industry?

Consolidation takes away choices and that is never good. Competition breeds inventiveness and disruption in an industry, so I see very little pros in the consolidation of companies or brokerages, other than cost saving for the entity consolidating. I also struggle to see that cost saving being passed onto the client.

What do you foresee for the UMA industry in the next two years?

The UMAs that provide expertise and service will thrive. Those that are writing merely for fees will not.

The glass is half-full angle?

Ultimately, we all want happy clients; if we can focus on client service and providing products that are simple and easy to understand, we will do well in any market. People need and will continue to purchase insurance; UMAs and brokers need to make sure that they are the distribution channel of choice.

 

Stuart Sinclair
director at Leppard Underwriting

The major challenges in the industry?

We are facing a significant skills shortage within our industry. We must invest in staff through training to make sure that we can provide an efficient and professional service to our brokers, but also retain staff. The regulatory environment is changing and we need to make sure we comply. Data now plays a large part in our industry and as a business we must make sure that information is gathered and captured correctly.

The upsides of consolidation?

The upside of consolidation is building larger and stronger UMAs. Efficiencies through scale are created and hopefully this is to the benefit of the consumer by being able to provide competitive, sustainable pricing and wider wordings. With growth comes the increased chance of losing touch with your brokers and it is crucial that this doesn’t happen.

I would expect to see further consolidation along with existing UMAs venturing into lines of business that complement their existing business.

 

Doug Laburn
executive manager of partnerships at Lombard Insurance Company

Challenges for UMAs today?

Systems integration and operational alignment. We work very closely with each UMA to progressively improve this and are fortunate to have strong working relationships with each of our partners, which goes a long way to getting this right. The competitive environment remains tough, with a market under pressure, along with quality players and different distribution models emerging. Our focus has, and will, remain on valuing quality of product and service.

Is consolidation inevitable?

Consolidation is inevitable in a low growth, increasing cost environment challenged by distribution innovation and changing customer needs. Scale and the right underlying efficiencies are valuable at a broker, UMA or insurer level. It can take many players off the market but I think we are still a long way off from this happening. 

Are niche UMAs better able to withstand the effects of insurtech on broker business? 

It depends on what you mean by insurtech and which areas of the market are under consideration. If we’re talking about distribution-orientated tech businesses focused on the personal lines markets, we believe UMAs in that environment will face pressure. The majority of distribution innovation happens first in the personal lines environment and UMAs are inherently limited in how they can distribute.

However, if we consider the full array of insurance-related technology and how it can be applied to enhancing a specialist UMA, there are significant advantages insurtech brings in playing a role in building a stronger business. Many UMAs are already well down the line in investing on this path.

What can we expect for the UMA industry in the next year or two? 

Continued consolidation. The trend will continue to be driven by a combination of driving business value and the fact that many original UMA founders are getting to the point where they want to take some money off the table.

A few interesting start-ups will emerge, but not nearly as many as in the past. UMA and insurer alignment will continue to increase. If this is avoided, the operating model becomes very expensive to run, both for the UMA and insurer.

We firmly believe a UMA is the best operating model for highly effective and focused specialist class operations. The combination of concentrated specialist skill, ownership and responsibility for your own destiny and a like-minded insurer partner will continue to be a successful recipe for high-quality, market-leading businesses.   

Jonathan Rosenberg
CEO of Renasa Insurance

What is the current state of the UMA industry?

The UMA industry seems to be simultaneously experiencing consolidation and expansion. We hear that some insurers are acquiring increased shareholdings in, and often outright ownership of, developed UMAs which are then internalised as divisions. At the same time, our experience is that the consolidation in the industry among insurers and intermediaries alike has yielded a crop of experienced underwriters who, having been employees in the past, are now intent on becoming self-employed (often sponsored by the effect on them of consolidation) by establishing their own UMAs. These underwriters, we find, are both experienced and have established relationships across the spectrum from reinsurers to brokers. This positions them well to exploit the opportunity to provide a personal service by an owner-managed business, which is often preferred by brokers who, in the main, are themselves owner-managed.

What are the major challenges and how do we deal with them?

The major challenges to underwriters that seek to launch a new UMA centre around the establishment and financing of the required infrastructure during the period of initial growth, while sufficient scale is being developed to support that infrastructure. The infrastructural prerequisites include the meeting of regulatory requirements, the engaging of an IT system, the establishment of an office (which often necessitates the conclusion of a lease) and the employment of staff.

Is consolidation in the industry increasing and what are the pros and cons of this?

From what we hear, it is the larger, more established UMAs that are currently being consolidated into insurers. We would, accordingly, expect a fall in the total contribution of independent UMAs to written premium in the market. That said, the flurry of new UMAs we see springing up will, in the medium term, replace and ultimately result in the UMA share of the market being maintained.

Regarding the positive aspects of these developments, we believe ‘new blood’ and the competition this generates is good for the market. The only potentially negative aspect of these developments concerns the establishment of UMAs where the infrastructure may be compromised so that, provided new UMAs are well established with a sound infrastructure, this risk should be mitigated.

Are the niche UMAs impervious to the onslaught of insurtech on broker business?

We do not believe that any business participating in our market, and least of all UMAs, is impervious to the onslaught of insurtech on the market as a whole, not brokers alone. Real-time data exchange is an imperative for so many reasons; principally good governance and a safe industry. Our systems provide Renasa with that real-time access but leave the UMA free to bind cover and to settle claims swiftly within the confines of the agreed mandate. Because the system is cloud-based, access by brokers is seamless. This combination permits UMAs on the system to provide rapid service which, in turn, allows the UMAs’ brokers to deliver swifter service to their insured clients than their competitors.

Furthermore, developments in the cloud environment will broaden and accelerate access to the UMAs’ products so that UMAs not able to distribute through the cloud environment will be seriously disadvantaged. In short, embracing technological development is a non-negotiable for anyone intent on surviving in our market.

What do you foresee for the UMA industry in the next two years?

We believe that the consolidation of UMAs will continue as insurers move to control better the binders they issue and as the imperative of real-time data exchange between insurer and UMA becomes a foundation of UMA operation.

We also feel that the simultaneous expansion of the UMA market through the entry of new underwriters will continue, but that these new UMAs will have to embrace from the outset the technology that will permit:

i. real-time data exchange;

ii. cloud-based access to their product by brokers so that they are positioned to provide brokers with the swift service needed to keep the brokers competitive.

In our view, while the continued evolution of the UMA market is inevitable, the change will be for the better and will result in a safer and more efficient market.

 

Quinten Matthew
executive head of specialist business at Santam

Your take on the increasing consolidation of the industry?

Increased automation and stronger analytical capabilities will be a big part of the future success. The underwriter’s role will be transformed from risk managers to a holistic business manager who is experienced across a wide variety of disciplines and would be able to add value throughout the life cycle of a policy or client.

Across business segments, sales-focused underwriters can assist to evaluate lead quality and participate in cross-selling/upselling opportunities. The most successful underwriters will be those who reorganise their underwriting departments and start developing future skills now.

What does the future hold for UMAs? 

Tomorrow’s top performers in the insurance industry will have underwriters that play considerably different, and higher-value, roles than those present today. Underwriters have to increasingly take on more expansive roles; assuming greater responsibilities in the areas of sales, customer advocacy and will be under pressure to be more innovative in the provision of their products and services if they are to succeed in the future environment.

Moving forward, the focus of underwriting will shift away from internal processes and specific transactions and is expected to shift more towards market-facing relationships and sales. Cultivating the right talent will be as important as deploying the right tool sets. For practical and strategic reasons alike, underwriters have a clear opportunity to build their own future and shape the future of the industry as a whole.

Last word?

As the customer experience takes on new importance, tomorrow’s underwriters will be in a better position to help shape the solutions across the network of relationships required to meet consumer expectations. Being a customer advocate requires a focus on delivering a better experience for brokers and customers, and seeking opportunities to mitigate risk exposures to the benefit of the customer.

The attention will be on building and enabling a ‘team approach’ towards account servicing, incorporating collaborative tools to achieve synergies. When managed effectively, this holistic environment will lead to increased customer loyalty through better solutions and will ultimately contribute to better account retention.

 

Gareth Beaver
CEO of SHA Specialist Underwriters

Health check on the UMA industry?

The rate of new UMAs starting up in the market has certainly slowed in the last three to five years, most notably in the last two years. The days of setting up a UMA, getting treaty capacity and making money quickly have disappeared. It takes a minimum of five to seven years of essentially funding a new UMA before there is a prospect of return for shareholders; this is out of reach for most private individuals who would rather stay employed in their corporate jobs with a greater degree of financial certainty.

The major challenges?

The top three challenges include:

Underwriting profitability: Making underwriting turn a profit in any line of business is extremely difficult as there is little differentiation other than price and this, coupled with an oversupply of reinsurance capacity, has led to a dramatic reduction in margins, even to the extent of battling to make any underwriting profit in some classes. This is where size matters. Gaining the advantages of scale is critical in this type of market cycle.

Regulatory compliance and provision of data: The increased regulatory requirements imposed on UMAs (considered an outsource business relationship) is a growing challenge and an expensive one. Investment in technology and system requirements is the only way to meet the new laws as well as the risk and governance requirements of the carriers.

HR skills – underwriting and claims skills: These two skills are critical for any UMA to be successful. Typically, UMAs – being smaller to mid-sized businesses – are not as attractive to the young, up-and-coming generation of talent. These individuals want exposure to potential global opportunities and UMAs are financially attractive only to the shareholder participants. This represents a major challenge and UMA owners have to find innovative ways to attract and retain talent to remain sustainable.

What do you make of the consolidation of the industry?

Due to the points noted above, consolidation is the only way for UMAs to remain viable businesses into the future. The cons of consolidation include the obvious loss of choice and options available in the market; the pros, however, being that without creating the advantage of size, UMAs will not survive into the next 10 years or so.

What do you foresee for the UMA industry in the next two years?

More consolidation among UMAs and integration back into carriers. UMAs have the ability to adapt to changes and even if they don’t have all the answers to the challenges now, agility is key to staying in business, especially when the future has so many different variables.