The value of MGAs in a hardening market

New You can now listen to Insurance Journal articles!

AM Best estimates that total premiums written through the MGA market in the United States reached $60 billion in 2021, compared to $51 billion in 2020. This followed the economy’s growth story in 2021, as the Lockdowns were lifted and monetary policy eased, contributing to real gross domestic product growth of 5.7 percent. As shops reopened, trading resumed and the insurance industry recorded premium growth of 9.5 per cent, reflecting tightening market conditions and pricing.

AM Best estimates that the premium moving through the MGA market has doubled in the past decade. Acquisitions and consolidations of insurance distribution have led to a decrease in the number of brokers while the number of MGAs has increased. Specialized brokers switched to MGA operations, offering insurers cheaper access to new markets. Some MGAs leveraged established relationships with affinity groups and their ability to pool risk to give insurers access to niche business opportunities.

One of these niche areas is cyber insurance, which is being challenged by increasingly sophisticated ransomware criminals. Another reason is the increasing frequency and severity of weather-related events in recent periods, as well as the impact and challenges arising from secondary hazards. Inflation has also boosted asset values ​​- businesses, consumers and their representatives are increasingly confronted with an insurance market with very cautious risk appetite.

MGAs play a critical role in matching these risks with insurers. There have been a number of new entrants into markets such as directors & officers and cyber as these sectors have attracted capital and talent.

AM Best includes MGAs in the Delegated Underwriting Authority Enterprises (DUAEs) category, which includes lead underwriters, coverholders, program administrators, program underwriters, underwriting agencies, direct authorizations and appointed agents.

The appetite of reinsurers and the boom of fronting companies

In recent years, the willingness of global reinsurers to engage in DUAE business has increased significantly, with a corresponding increase in the capacity deployed by reinsurers in this segment. Reinsurers have long sought ways to get closer to the risks originally insured, and DUAEs are one way to achieve this. Providing capacity for DUAE-placed risks can give reinsurers access to more primary-like business, which can provide valuable diversification from their traditional reinsurance exposures.

For example, a reinsurer providing capacity for a specialized MGA may have access to a certain type of risk profile or business portfolio that simply never makes it into the reinsurance market through traditional risk transfer.

Notwithstanding the appeal of accessing primarily oriented risks, developing and managing direct DUAE relationships for reinsurers can be a complex, costly and time-consuming endeavor. In particular, the process of selecting DUAEs that receive capacity, building relationships that provide the desired level of diversification, underwriting profitability and business size, and ongoing monitoring can be a minefield for reinsurers.

These push and pull factors for reinsurers to engage in the DUAE space are seen as key factors in the significant expansion of DUAE fronting companies in recent years, which in many cases have successfully emerged as a key channel for reinsurers to enter the DUAE space Access to DUAE could position business.

Fronting agreements are contracts between a licensed, approved (or occasionally surplus lines) carrier and a company that has the ability to generate insurance business but may not have the authority or desire to write the insurance policy.

The insurance company can create an insurance policy. The accepting company and the primary insurer have an indemnification agreement, so that the risk-bearing company remains responsible for the contracts. At other times, the insurer may act as a pass-through or fronting company for the business, which is then reinsured with a manufacturer-established specialty reinsurer or an unaffiliated reinsurer, making the reinsurer the party bearing the economic risk written for the business takes over. The number of US fronting companies and the associated premium volumes that are processed through these companies have grown significantly in recent years.

The expansion in fronting continues to offer reinsurers better access to participate in the DUAE space. Reinsurers gain access to a diversified ledger of multiple DUAEs and the ability to get closer to the original insured through fronting companies. Pure fronting companies like State National owned by Markel Corp. are insured 100 percent with third-party reinsurers. In contrast, hybrid fronting companies often retain 10-20 percent of the risk and also participate in tiered commission structures.

This underwriting by the fronting company helps align interests and also aids in embedding in process, partnerships, underwriting skills, claims processing and reinsurance management. The concept of ‘skin in the game’ by fronting companies is likely to remain an important consideration for reinsurers and over time we could see increased pressure on fronting companies at the lower end of the retention spectrum to increase their involvement to protect interests sufficient to keep matched with capacity providers.

Market conditions and capacity observations

Most businesses, albeit to varying degrees, have been exposed to price increases and generally tougher market conditions over the past 12 months. However, for most DUAEs, capacity has remained available and sufficient. Notable exceptions to this are new DUAE entrants and products, which may have faced tighter capacity, and some lines of business where appetites have waned in recent periods, such as: However, for the DUAE market as a whole, capacity has generally remained free flowing and profitable for DUAEs.

Part of this continued capacity supply is likely to be due to the reinsurance capacity inflow mentioned above, aided by the fronting model, which opens the door to easier access for global reinsurers. Additionally, following Lloyd’s capacity reduction in 2020 as part of its broader program to reduce its risk of underperforming businesses, this market increased capacity for DUAEs in 2021.

Capacity provisioning through the insurance-linked securities (ILS) market is also expected to remain a growing area for DUAEs over time. ILS Capital seeks to support DUAEs who are believed to have a strong track record but for whom the traditional reinsurance market is currently proving tougher. As DUAEs increasingly seek efficient reinsurance capital, this trend is likely to continue this year and next. Business focused on casualty insurance and reinsurance lines could prove increasingly attractive to ILS investors over time given the cash positive nature of the structure.

This article was first published in Insurance Journal’s sister publication, Carrier Management.

subjects
Price trends insurance wholesale AM ​​Best

Leave a Comment