AM Best TV: Will Ross, CEO, Federato on the Top 4 Challenges Facing MGAs

At the Target Markets TMPAA 2023 Mid-Year Meeting in Boston, Will Ross, CEO and Co-Founder of Federato sat down with Lori Chordas, Senior Associate Editor, AM Best to discuss ‘the big four’ challenges facing MGAs, and how tighter reinsurance capacity means insurers must optimize risk portfolios to negotiate better terms and pricing.

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Lori: I'm Lori Chordas for AM Best TV, and we're at the Target Markets Mid-Year Meeting in Boston. Joining us now is Will Ross. He's the CEO of Federato. Will, welcome. Thanks so much for joining us.

Will: Thanks for having me.

Lori: So, Will, what are some of the key trends that you're now seeing in P&C and Specialty insurance today?

Will: The key trends or what people are focused on has to do with the underlying risk. And the reality is we've seen this relatively unchanged over the last 18, 24 months. We kind of call it ‘The Big Four’ internally just to keep it cute. But it's really quite simple:

“Natural catastrophe continues to be a very dominant theme on the Property side. On the Casualty side, social inflation continues to plague pretty much every type of product, every line of business. Underlying both of those is actually economic inflation. And if anything, that's really started to increase in the last 12 months, that's maybe more of a new one. And then sitting behind all of this, I think, the reality is the industry is still very confused by cyber.”
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– Will Ross, CEO & Co-Founder, Federato

And so, we continue to see a tremendous amount of activity there, both in traditional products trying to upsell and cross-sell into the cyberspace, as well as, yeah, here at Target Markets, a lot of program innovators trying to figure out what we can really do on that side.

So, it's a really interesting time to be in technology and insurance. We get to see the innovation that's happening within these carriers, within these program businesses. And we're really enjoying it, but it does seem to be around those four main themes.

Lori: Well, improving underwriting performance and productivity is a top priority as the industry faces those concerns and challenges. How can a data-driven underwriting first approach help insurers tackle these emerging challenges?

Will: Yeah, I mean, operational efficiency is always an interesting topic. We have a bit of a saying internally, which is, “If you save an underwriter 30 minutes, they're gonna go eat a sandwich.” It's very easy to tempt yourself into believing that they're going to go write that next deal or be more efficient somehow. And so, what we've really tried to focus our product and our attention on is the reality that underwriting is a unique position, right? Our software really enables the underwriter. But the reason underwriting is unique is because it affects the top and bottom line of the business simultaneously, right?

The focus for us at Federato has always been around how can we be laser-focused on the stuff that really matters: risk selection, underlying pricing, topics like price adequacy, proper use of facultative reinsurance, these sorts of things. And not so much on just the raw inefficiency. We certainly believe our product provides those sorts of benefits, and we're certainly hearing the conversation. 

Oftentimes, when you get into those final meetings with the CFO and leadership of an insurance organization, you get reminded that, at the end of the day, it's originating the right risk faster that matters. And so, we try and focus there rather than just on pure play productivities.

Lori: We're seeing growing uses of AI and machine learning across the industry, often to automate routine processes. But automation, while it's essential, is not the end game. It's just the beginning. Can you share some cases of how your clients are using intelligent human in the loop technologies to improve the underwriting experience and outcomes?

Will: Yeah, yeah. And I always like to separate the names of clients from the really cool innovative stuff they're doing. So, I'll focus on the really cool, innovative stuff we're seeing across the industry. But for me, if you think about the underwriting process, let's break this down into a couple of buckets in line with what an underwriter does. Upfront from a risk selection and risk appetite perspective, some of the most innovative stuff we're seeing is in the Property space. Karen Clark was here yesterday. It was a great privilege to spend a little bit of time with her. My background is in CAT modeling.

What we're seeing on the CAT side and in Property is really a focus on dynamic risk selection. So, as I build up aggregations and accumulations in certain pockets of Florida, for example, we know what kind of hurricane perimeters or wildfire perimeters look like. And we're able to start to think about more dynamic risk selection approaches that really help us de-aggregate the book. 

“As you move deeper into the underwriting process, you start to think about topics like loss control, and price adequacy relative to that lost control. This is where we're seeing a lot of the predictive modeling activity.”
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– Will Ross, CEO & Co-Founder, Federato

So, more optimization modeling on the front end. The predictive modeling on the backend here really has to do with telematics data in the auto space, social data, and publicly available kind of website data across different Casualty lines. That's really, really interesting as well. And then third, this is all about closing the loop back to loss at the end of the day. And so, as you get into the claim space, what we're starting to see is a much more proactive mindset in organizations around how can I collect the data I'm going to need in the future.

So, we're seeing really interesting use cases like starting to collect information around plaintiff's attorneys in the General Liability space because everyone's been tracking what they like to call the judicial hell-holes or tough jurisdictional districts for decades. But we're starting to see that, hey, the plaintiff's attorney point of settlement, this is really interesting data to be collecting in the claims process and then trying to close the loop back up into that risk selection piece. So, if you think about it, that really brings us into this closed loop circle, starting all the way with risk selection down through the claim and the ultimate loss. And so, it's across the spectrum, it's across business lines, but at the end of the day, it's all starting with data. And that's really great for us as a data company.

Lori: Limiting capacity and rising green insurance costs have been a significant challenge for carriers and MGAs. How does the ability to demonstrate strong portfolio management and optimization help insurers get an edge at the reinsurance negotiating table?

Will: Yeah, this is something that we've really seen. All the way at the top of the capital stack, we're seeing less money invested into reinsurance because of results over the last few years. And so, we believe the hard market will continue to perpetuate and all the trends we just talked about, those are going to continue to happen. 

But as you, as a carrier or program business, are looking to justify an investment in technology spend and your margins are being squeezed on commissions from a capacity perspective, or your margins are being squeezed from a return to reinsurance perspective, you're looking for how can I be a more effective negotiator at that table?

“What we find time and time again in that capacity crunch discussion is the focus is really on: you've come to me with a nice pretty PowerPoint deck outlining the rate increases you're going to take, how you're going to think about retention, how you're gonna prune your book and select your way into a better mix of business to protect me, the reinsurer sitting over you. But at the end of the day, the reinsurers heard that same song and dance a million times. And they just heard it from your competitors earlier this week.”
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– Will Ross, CEO & Co-Founder, Federato

And so, what's been really interesting for us to see because of our position in the marketplace, because our software is literally there to help you proactively shape your book and track your accumulations, aggregations, track the way your rate retention dynamic is playing out in real time, we're able to go in actually with our program partners or with carriers to those reinsurance meetings and actually demonstrate how this software is going to make it more likely that their book is going to look the way they say it's going to at the end of the year.

“What we are seeing is better terms for our customers, better prices, lower rate increases – still increases, I think, across the board, but lower than they might otherwise expect, and increases in capacity for program businesses that can demonstrate the ability to scale good risk selection through software.”
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– Will Ross, CEO & Co-Founder, Federato

And so, that's a really unique value proposition. If you think about it, that's a return on investment in a software product in a single meeting with that reinsurance. And so, we've been really, really privileged to get to talk about that value proposition with our clients and then really see it take hold. And it's had a tremendous impact on our growth. So, very much the topic of the moment, and it's been good for us, and hopefully, we've been good for our customers on that front.

Lori: Wonderful. Will, it's been a pleasure. Thank you so much for joining us.

Will: Thanks for your time.