MGAs embrace the product recall insurance space

While many companies prefer the security of buying protection from a global insurance giant, in niche areas such as product recall, managing general agents (MGAs) are ably filling the gaps, and may even offer superior solutions.

MGAs are entities that act as an agent of an insurer and manage the underwriting function on its behalf. They provide access to specialist markets such as product recall, where MGAs like Axon, Perigon or DUAL are replacing large players that are exiting the segment, including household names such as Allianz, Liberty and Zurich. Nevertheless, clients often react with suspicion when brokers suggest an MGA to secure their product recall risks. While this initial reaction may be understandable, it is undeserved.

Brokers do perform an arduous and lengthy due diligence process before approving an MGA to ensure it offers a solid and adequate protection. This includes a thorough assessment of the MGA structure, the financial capacity provider behind it as well as a review of its technical framework.

Perigon, for example, is fortunate to be 100% backed by the growing strength of Fidelis, which has raised the possible line size per product recall risk to $50m, enabling the MGA to offer large-limit deals.

Another area of focus is claims handling which does not always reside within the MGA but with the capacity provider, potentially adding complexity to the claims resolution process.

Once specialist brokers feel comfortable with the quality of the insurance capacity (often from multiple capacity providers), as well as the claims and decision-making process of an MGA, it can be a better long-term partner to brokers and clients than a global and less specialised player.

The struggle of large insurers

Zurich had entered the product recall insurance market to enhance its offering for food and drink manufacturers but loss activity across this sector made the insurer retreat from the sector, including product recall. Zurich’s risk evaluation was whether they had or wanted a business ‘relationship’ with the risk around food and drink production instead of evaluating the specific opportunities in product recall separately.

Allianz considered product recall a vital enhancement to winning global manufacturing risks as it was seeking premium growth. However, after suffering extensive combined recall and liability losses on single risks, the insurer decided to reduce its offered capacity, withdraw from certain countries and, more recently, to pull out of the product recall market completely following 5 years of aggressive growth.

Such cross-class linkage can lead to sudden shifts of appetite that are unrelated to the profitability of a specific product and cause severe tensions in a sector.

Liberty pulled out of product recall as part of a reshuffle in its capital allocation, while Novae exited the segment citing a lack of ‘critical mass’ of recall premium income. If a niche class such as product recall does not develop adequate income to justify the time and resource required, large insurers are likely to drop the risk.

The benefits of specialisation

The specialist focus on the actual product recall risk has allowed MGAs to develop niche products and wording enhancements more rapidly.

CFC for example has been successful in developing an appetite for UK small food producers that is below most corporate minimum premium requirements. CFC’s historical success and growth has allowed it to become a fully-fledged Lloyd’s syndicate and other MGAs may follow the same route.

MGAs’ relatively low cost base and flexibility enables them to remain profitable where large insurers may struggle. As long as MGAs can grow profitably, they can rely on plenty of additional market capacity. Insurers will appreciate the opportunity to benefit from a strong business proposition without the need for major investments.

MGAs are generally more flexible and agile and can adjust the cover and wording as needed without extensive sign-off by corporate legal teams. Within smaller teams, the decision-making process is generally quicker, allowing brokers to provide timely responses to clients.

State of the market

As the line size of MGAs tends to be smaller, the binding process is likely to require greater syndication or risk sharing between underwriters. At their peak, Allianz could and did commit to risks up to $50m. Currently, such risks are commonly split among at least five insurers. As a result, brokers need to invest more time and effort to build the best capacity structure and ensure efficient claims handling.

Despite a generally hardening market, rates for product recall risks have remained stable. Loss activity has been moderate after insurers increase self-insured loss retention levels, which has had a marked impact on loss frequency.

Overall, the product recall market has grown steadily over the past five years towards an estimated specialist (standalone) premium income of around $500m, shared between around 25 markets centred on London, Bermuda and the US. This growth is likely to continue: Generally stabilising insurance rates are set to take off some pressure from insurance buyers, enabling more of them to consider the value of protecting against product recall risks.

For further information, please contact:

Ian Harrison, Partner, Global Head of Recall Practice Group

E ian.harrison@uk.lockton.com (opens a new window)

T +44 (0)20 7933 2297

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