The Software House Tax

We've recently been speaking with brokers, MGAs and technology providers about the challenges and opportunities they’re seeing in broker-distributed products.

A little background, at Swallow we're working with brokers doing real-time pricing on top of software houses, and on the other side of the table, MGAs who are working on direct distribution via brokers.

I’d like to caveat this post - I come from a technology and not insurance background, so my take is a mixture of what I've read, heard and understood. It gives me a certain lens on the topics discussed. I’m always open to feedback so please do reach out to discuss!

The broker market in the UK

The UK insurance broker market is projected to grow to over ￡19 billion in 2024, nearly a 10% increase from the previous year. A big driver of this growth has been a rising demand for healthcare, accidental insurance, and SMEs products.

A significant trend within the industry is the consolidation of smaller brokers by larger firms. With rising operational costs, regulatory pressures, and increased competition in the space, brokers are looking to consolidate to achieve cost savings, enhance service offerings, and use their scale to leverage new technologies for greater efficiency and profitability.

Broker distribution

Insurance brokers either contact underwriters directly to get quotes on behalf of their clients, or use software houses to get automatically get quotes from MGAs and carriers. On the latter, brokers "rekey" their client's information, and the software sends it to various carriers, who then return quotes. This allows brokers to compare and choose the best options quickly. The software houses play a powerful role in this process, as they streamline the entire quoting and policy management system for brokers and MGAs.

The “software house tax”

Whilst the software houses were the first step towards digitisation of the broker-insurer relationship, they have know grown into industry behemoths, representing huge spend on both the broker, MGA and carrier P&Ls.

Over years of dominant market positions, these software houses are increasingly becoming a barrier to innovation, with high implementation costs preventing new entrants and even new products with costly change management and data integration fees.

With these businesses are now reaching ￡100s million in revenues whilst reducing the consumer choice by restricting who can innovate in the market, there must be an alternative?

One could argue that the role of the software house is an outdated paradigm that needs to change, with the power put in back in the hands of the MGAs and carriers, those taking on risk, and brokers, those working hard for the customer’s best interest.

Where are the opportunities for innovation?

• Disintermediation: MGAs distributing through brokers often are using software houses to distribute and manage their products, but some are looking to build relationships more directly with brokers, saving both parties on the high costs of the software houses.
• Speed to market: By automating part of the underwriting process, MGAs can get prices to brokers faster, putting them at the top of the pile and improving broker experience of working with them, a surefire way to get more business coming the MGA’s way.
• Launch fast: Capacity is hard to come by, so working closely with MGAs as a new broker gives the opportunity to enter a market with a targeted proposition, learn quickly and amass data on new products.
• Realtime Pricing: Once live, brokers can start with one insurer providing net rates and begin to add more underwriting partners, and begin to test pricing to better understand the needs of their customer base.

A brighter future

We believe there is an opportunity here for MGAs and brokers to build stronger direct relationships, utilising the latest technologies in the market to ultimately improve profitability and give customers better prices and greater choice.

Fortunately, there are several companies innovating in this space, building new broker management tools and policy administration systems designed for the broker distribution channel.

At Swallow, we're working with brokers, MGAs and these new technologies to build the modern pricing platform, making it quick and easy for anyone to manage, build, test and deploy rules and rates to market.

If you're interested to hear more about our platform, please reach out to me or book a demo on our website - swallow.app