Lexicon's William Pitt: Capital inefficiencies holding back insurance sector growth

Data management deficiencies and slow capacity deployment to MGAs are among the primary issues preventing the industry from efficiently allocating capital, according to Lexicon Associates’ partner William Pitt.

Speaking to The Insurer TV, Pitt said a mismatch between investor expectations and MGA growth was another factor holding back sector growth, as explored in his most recent installment of Undercurrents.

He highlighted that reinsurers often receive incomplete or low-quality data, which leads to uncertainty and is reflected in higher premiums. These premiums are then passed down the value chain, ultimately reducing the affordability of insurance for consumers.

"Data flows down the chain from brokers, through the initial carriers or MGAs, to reinsurers, and potentially even to the retrocession market," he said.

"This process has not historically been as efficient as it could be. As a result, reinsurers apply an 'uncertainty loading' to premiums to account for the data's poor quality," said Pitt.

Regarding slow capacity deployment to MGAs, Pitt focused on how MGAs are often established to serve markets that are underserved by traditional insurers. However, MGAs struggle to provide insurance to these markets in a timely manner due to the slow rate at which capacity is allocated to them.

"It can take a year in the US, and sometimes even longer in Europe, to assemble capacity for MGAs," he said. "This delay means you can’t capitalise on market opportunities as quickly as needed.”

Pitt also pointed to the disparity between private equity investors’ growth expectations and the more conservative approach of capacity providers.

"There’s sometimes a mismatch between the growth expectations of equity investors, particularly private equity, and the capacity providers," Pitt said.

Undercurrents

The article is the eighth in The Insurer's Undercurrents series of deep-dive analyses.

Look out for next month's edition of Undercurrents, one of several new features set for launch by The Insurer in 2024.