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
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
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
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
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:
Freddie Schlesinger ACII - Vice President
Product Recall & Reputational Risk
M: +44 (0) 7769248552 |E: email@example.com (opens a new window)