Stef Theofanidis, managing directors of Hollard Insurance Partners, says this hurt the insured, as to some degree conflict of interest arose when the agent of the insured (the broker) was replacing the function of the UMA (the agent of the insurer).

“Binder regulations put brokers in a position where they could ask for additional fees from insurers alike for the functions they carry out on behalf of the UMAs and risk carriers, thereby squeezing the margins of the UMAs,” explains Isaac Chindotana, portfolio manager at Lireas Holdings.

Martin Le Roux, managing executive at Centriq Insurance, says one of the hardest hit segments of the industry has been that of the underwriting managers, who have come under pressure from a multitude of angles. “These include the pressure associated with being price takers in a softer market whilst not having the scale required to weather the claims increases; losing out on, in some cases, a significant portion of their income with the demise of the so-called ‘above the line’ (debit order type) fees a few years ago and the proliferation, in recent years, of broker binder facilities that have either caused them to lose that business entirely or be prepared to sacrifice some of their own earnings to pay the broker a binder fee in order to meet deal terms that brokers are being presented with,” he adds.

“Attracted by higher binder fees, we have seen brokers in the market moving books of business from their existing risk carriers to an insurer that has offered them higher fees, impacting the margins and, in some cases, the sustainability of some business. The lack of clarity and time to implantation has also hampered and/or delayed a number of strategic decisions that some businesses needed to make around mergers and acquisitions, restructured business models and product development,” says Chindotana.

“ The Retail Distribution Review (RDR) is now coming into play, which we see as a very positive move towards demarcating, again, what the true function of a broker is versus that of a UMA,” points out Theofanidis.

“RDR, in contrast to prior regulation, strengthens the business model, especially for commercial UMAs,” affirms Chindotana.

Tersia Davey, chairperson of the Soth African Underwritting Managers Association (SAUMA) explains that the body recently met with the SAUMA board, together with the Financial Services Board (FSB), and they again re-emphasised their member’s support for the proposal of RDR, specifically with regards to binders and outsource agreements. The FSB has assessed all commentary from the industry and they are working towards rectifying these unintended consequences and conflicts of interest by putting binders into right spaces, according to Davey.

“We expect RDR to be a game changer that potentially brings some equity to the ‘position of influence’ on policyholders as well as curb some of the practices that were not equitable and made medium-term planning difficult. We also believe that it will change the economic flows and responsibilities in the insurance value chain. Of special concern to us is the potential negative impact that RDR may have in our broker distribution network. As a UMA, we see RDR as a positive, while we remain conscious for some brokers,” cautions Chindotana. He adds that nevertheless regulations continue to place pressure, in various ways and to different extents, on role players in the insurance value chain, including UMAs.

Andre de Waal, managing director of Commercial Industries Acceptances (CIA), explains that in his view it is important to stress that there is no conflict of interest with the UMA, which exists to contribute to the wellbeing of the short-term industry by providing specialist expertise and knowledge. They also offer broker training which in turn helps brokers grow and respond to their customer needs. Therefore, a bright future for the UMA equates to a stronger industry landscape.

Bright future, but…

However, the future of the UMA depends on a few issues, says Theofanisdis. “We need to consider the availability of experts with specialist skills, which is really what the UMAs bring.

“The second consideration is the business risk of the specialist who wants to be an entrepreneur and run his own business. There is no doubt that business risk appetite has changed visibly since 2008, as people require a lot more security around income streams.

“The third consideration is the ability of specialists to bring a first to market innovation, as well as particular distribution networks that the insurer may not have.

“And then finally, the ability of that same specialist to attract and retain clients better than the insurer can achieve on their own, and, of course, at a very competitive cost. If these four elements are met, then I don’t believe UMAs will be a thing of the past,” explains Theofanidis.

“The issue for us is to have a sustainable model. At Stalker Hutchison Admiral (SHA) and other Santam-owned UMAs, we must have a value proposition as opposed to a price proposition. The rates are getting softer as capacity is becoming more abundant; which means that if you are only providing a product based on price it is possible that you don’t have a sustainable future. However, if you are producing a product based on value then you will not only survive, you will flourish,” says Gary Corke, CEO of SHA, explaining that he expects to see some new UMA entrants, arising due to niche opportunities in the market and not only from consolidation.

Lireas, who Chindotana describes as a pioneer of the agency model in South Africa, has seen UMAs come and go, but they believe nonetheless that UMAs will continue to be an important part of the short-term insurance industry where, from their experiences in the Lireas portfolio of the UMAs, the specialised, innovative and well-run UMAs have adapted, embraced the challenges and opportunities of the market and have, thus, continued to do well and grow profitable.

“There are many benefits that independent specialist product providers bring to the market, such as superior product knowledge, speed, innovative and customer centricity that larger, integrated in-house models have struggled to deliver to consumers for a long time. Brokers and policyholders alike enjoy the speed and superior product knowledge that experienced specialists bring to the market, and if anything the industry should be doing more to retain and transfer the skills and expertise of these specialists,” he explains.

According to Doug Laburn of Lambard Partnerships, the future of the UMA should also be considered on a case-by-case basis, with many aspects relating to retaining your competitive advantage (being better than the rest) in order to prosper from a financial point of view.

Firstly, you need to look at differentiation, which goes back to the original value proposition of the UMA. If you are able to do something differently in a way you underwrite and distribute, your value may increase even further- as we are seeing with specialist classes that are retaining their competitiveness while those in personal lines are starting to struggle to remain sustainable, according to Laburn. “Having said that, an environment where a UMA is highly skilled and innovative engenders success in itself.”

“UMAs that provide commodity products and services, predominately in the personal lines, motor and commercial lines, may find it difficult to complete,” affirms Theofanidis. “In this case they will end up becoming bundled into insurers. We’ve seen some of that already; for example, Hollard has brought Aquarius in-house, which has since gone from strength to strength. We’ve also seen the likes of MUA Insurance Acceptances joining forces with Auto & General, which, I am led to believe, has been beneficial to UMA.”

Corke says that it is actually quite simple: for any UMA that truly adds value and can differentiate itself from other traditional insurers, the UMA model still remains completely viable.

The true specialist always has a future, bundled or unbundled

Corke doesn’t believe mergers and acquisitions activity in the UMA space is driven by regulation but rather by market forces such as changes in technology, changes to shareholders and economies of scale.

“I think that insurers will always make opportunistic decision when the time is right to engage with specialist in the form of the UMA, or try to bring specialist in-house,” elaborates Theofanidis, adding that in addition to the need for independent advice, strong and extensive partnerships are, and have always been, a cornerstone of the industry.

“UMAs have been playing a significant role in areas such as innovation and employment creation in the industry for close to 30 years now. Naturally, consolidating and ‘divisionalising’ some of the UMAs will take away some of this value and other attributes like entrepreneurship, which UMAs bring to the industry. We always expected a consolidation of businesses in the UMA space to occur at some stage,” says Chindotana.

Corke adds that even if there is to be a fewer UMAs in future, he thinks that product development and pricing will remain unchanged, owing to the abundance of insurance capacity out there.

“If a specialist is performing as strong as it is has been in the past and it wants to be more independent, the insurer would then look at a partnership; but if that specialist wants to work more closely with the insurer, they can continue to bring the skills and services to the market, but in a different setting,” Theofanidis explains.

“All the large insurers, including Hollard, have done abit of both. Santam, for example, has a range of wholly-owned UMAs (divisions) and then they have some partly-owned UMAs. Hollard, on the other hand, has moved to a model we term ‘centres of excellence’. These may take the form of in-house product houses and administrators, or independent UMAs, with varying degrees of ownership by Hollard.

“If we look at ourselves and the Santams of the world, the broker experience and feedback is very positive, whether the brokers are dealing with a wholly-owned Santam UMA or a Hollard centre of excellence or UMA, elaborates Theofanidis.

“In fact, part of Hollard’s founding strategy as a then small unknown insurer was to provide a licence, some working capital, bring strong business acumen and private equity methodologies, and partner with experts in their chosen field who could open up distribution and provide specialist products and services to the market. This model has stood us in good stead for many years and we are confident it will continue to do so in the future.

“Up until today, we still have a network of roughly 100 partnerships. They are not all UMAs of course; we partner with insurance companies, UMAs, brokers, banks, retailers and various entities right across the insurance value chain. Partnership continues to be a fundamental corner stone of the Hollard business model, despite the fact that we have become a large and competent composite insurer in our own right,” says Theofanidis. He explains that when Hollard entered the market in Australia and set up some very strong partnerships in niche lines of insurance, the broker market bought from these guys as happily as they did from composite insurers.

Laburn says that UMAs’ attitude towards partnership with the insurer has to be one of working together towards a common goal and not just trying to get the deal.

According to Theofanidis, the UMA is really about a business model and how two partners can engage with each other symbiotically, rather than what each can extract from one another for individual benefit only.

From the viewpoint of the independent UMA Chindotana adds that some specialists enjoy the entrepreneurial and operational autonomy that a large in-house operation does not always provide unbundling in future may thus be a possibility.

However, within a fast-changing legal and economic environment, the focused involvement and knowledge in the niche area of the UMA enables faster identification of potential new risks; allowing for timely introduction of suitable, relevant covers that provides the client with better protection, while unbundling defeats all of this and will make the offering less focused, in CIA’s opinion.

In their current form, UMAs have the ability to outperform the traditional insurers as it is more cost-effective for the end customer and not as expensive as an internal insurer’s division, according to De Waal.

All shapes and sizes but economies of scale count

According to Laburn, the smaller UMA is going to find it tougher than its larger counterparts in terms of operational efficiencies.

“There are benefits to scaling up to a certain point, including effective systems in place, well-managed compliance and having the necessary underwriting skills under one roof, as well as the capacity to leverage technology. As a result, we have seen some mergers and acquisitions activity in the industry,” explains Laburn.

Moreover, when you commoditise these areas, it is all about efficiency, according to Theofanidis, where business with large scale are normally (but not always) able to take advantage of operational efficiencies, and squeeze out margins, whereas others without scale logically can’t.

“There are insures out there who not only have the benefit of scale, but are also very heavily invested in technology and digital solutions, the design of innovative products (disruptor products), and, of course, a huge focus on optimising operations – obviously to satisfy and enhance the customer’s needs and experience. The investment in these key areas is not only a current trend in South Africa where we have lagged behind international insurers,” explains Theofanidis, echoing Laburn’s sentiments.

Corke says that the only true difference between the mall and large UMA is that the large UMA has been around for longer and usually has more experience, having experienced numerous market cycles.

“This doesn’t mean that a small UMA doesn’t have a future. If a small UMA has a unique selling a proposition, such as its products, the calibre of its staff, or the right distribution channel, they would remain pretty viable,” he says.

“To be successful in the underwriting space, you have to be sure that you are a true underwriter and specialist by operating in niche market that requires your unique skills. If you are not, and you play in an administrative capacity then the future might not look too good,” says Davey.

According to De Waal, the future of the UMA is what you make of it. If your business is specifically designed for the specialty concerned and you always remain focused on your core business, you will succeed.

Davey also ends with a positive message for the UMA fraternity and the clients they serve, explaining that the industry is seeing a lot of new underwriting managers emerging, which shows that new creative products are blossoming.