The underwriting agency sector could face a round of consolidation with the introduction of a resilience prudential standard requiring insurers to have business continuity plans, according to Macquarie Equity Research.

Macquarie says 45 privately held underwriting agencies with capacity provided by insurers are “most at risk” of being merger and acquisition targets as the industry prepares for the start of CPS 230 Operational Risk Management on July 1 next year.

CPS 230 applies to Australian Prudential Regulation Authority-regulated insurers and is aimed at strengthening operational risks and responses to business disruption. The standard also requires insurers to enhance third-party risk management, which includes underwriting agency partners.

“We believe [CPS 230] will be the catalyst for consolidation of the Australian underwriting agency market,” Macquarie says in a report. “Importantly, this regulation does not extend to Lloyd’s, which could create a competitive advantage for offshore capacity to take further market share.”

Macquarie says the Australian underwriting agencies market has grown by about 470% since 2014-15, and last financial year it grew 12.3%.

There are 301 underwriting agencies operating in Australia, with a combined gross written premium of $10.8 billion last financial year, up from $5.9 billion in 2019-20.

The report says 162 agencies underwrite with capacity entirely provided by Lloyd’s, and 112 with APRA-regulated insurers.

“Of those [112], 45 were privately held ... that is not by a broker or insurer, and we would consider these to be most at risk from the new CPS 230 regulations ... given limited access to capital.”

The report says the 45 are at risk “due to scale and ownership structure”.

About $10.8 billion of GWP, or 20% of the Australian general insurance market, passes through underwriting agencies. About 66% of agency capacity is provided by APRA-licensed insurers.

The report says intermediary group Steadfast has shown M&A interest in personal lines, marine and aviation agencies, while AUB appears keen on personal lines and specialty agencies such as cyber, financial lines and marine.

Macquarie says its analysis suggests Steadfast owns 12.5% of the underwriting agencies in Australia, accounting for 21% of GWP. AUB is the next largest individual owner of agencies, with about 9% by count and 11% by GWP.

The report says it has identified 41 underwriting agencies that meet Steadfast’s M&A appetite and 105 that meet AUB’s.

“There is no rule of thumb for an agency structure, but we believe personal lines underwriting agencies are best owned by brokers, while commercial lines agencies are best owned by insurers.”