News - Optio

Benefits of a diverse portfolio – London Delegated Authority Broker's perspective: - Optio

Written by Henry Spratt | Apr 23, 2020 9:14:00 AM

As the insurance market evolves into the new decade, it is evident all companies in the value chain must adapt, change and consistently add value to business partners. MGAs, and the brokers that place MGA binding authorities are no exception in this ever-changing marketplace. Key to surviving and thriving is having product specialism, expertise and embracing technology to enhance, augment and refine the approach to underwriting and portfolio management.

 

Building a diverse portfolio creates underwriting balance, which is key to the success of most carriers writing MGA business. A diverse portfolio reduces risk by allocating capacity to a cross-section of industries, territories and lines of business. A cogent underwriting strategy aims to maximise underwriting profits by investing in different areas to minimise aggregation exposures to particular perils or loss scenarios, be they economic, political or weather related. Ultimately, this will reduce the probability of sustaining systemic losses due to a single market event or cycle.

 

This can also have a positive impact on the amount of capital a carrier needs to hold in reserve to support its writings. For example, Lloyd’s gives a healthy diversification credit through its Risk Based Capital model. As a result, a Lloyd’s syndicate with diverse writings can gain a strategic advantage over monoline competitors in terms of capital requirement.

 

With this underwriting philosophy in mind, a delegated authority broker should ensure it represents a diverse portfolio to help navigate and balance hard and soft market cycles and large loss events. This enables enhanced predictability in broker revenues and less spikes in the profitability of the facilities it handles.

 

Diversity doesn’t only insulate risk takers but it can also benefit intermediaries. Representing a diverse portfolio of clients also reduces the risk factors associated with handling a monoline portfolio of business.

 

Intermediary and ultimate risk carrier alignment is strengthened by placing a diverse portfolio and acting as the conduit between the clients that make up the portfolio. This consultant style approach represents a meaningful and strategic partnership, which is intended to stand the broker in good stead and increase the longevity of the partnership.

 

By making diversity a core strategic objective, the intermediary creates opportunity and often attracts specialist clients who have unique products or distribution. By consciously creating a diversified portfolio, intermediaries can advocate, manage and monitor numerous lines of business by attracting agile people, embracing technology and constantly innovating.

 

Key Benefits of Diverse Portfolio

1. Managing a diverse portfolio on a daily basis fosters creative thinking that can facilitate product development for clients, adding significant broker value by becoming a trusted advisor as opposed to another “mouth to feed” in the transaction.

2. Handling a diversified portfolio of business tends to lead to a diverse workforce with varying professional backgrounds, which is healthy for organisational culture.

3. Placing and handling a portfolio of short, medium and long tail exposures dictates when premium is earned which can aid the longevity of trading relationships with both your client and client’s supporting markets.

4. Handling a diversified portfolio of business is likely to raise the profile of a broker and can attract the attention of capital markets, large reinsurers and prospective clients.