Driving value in the $100mn MGA/programs market

Another month has passed in the programs sector and there appears to be no let-up in activity as buoyant conditions continue to drive new program partnerships, growth investments and M&A.

But a strong theme developing in our coverage during September has been the need for all parties to generate value alongside alignment of interest to maintain momentum and deliver profitable outcomes.

We have written often on the “professionalisation” of the programs space over the last decade or so that has seen increasingly sophisticated MGAs and the new model of hybrid carrier provide ostensibly greater line of sight on performance to capacity providers, including reinsurers.

In a tight insurance and tightening reinsurance market, capacity is not easy to secure, despite what appears to be strong appetite from reinsurers to use the sector as a way to access primary insurance risk and the attractive margins that can be found after compounding price increases in many segments.

Arguably Lloyd’s capacity has been the most challenging for coverholders, including MGAs, in recent years.

“It is critical for MGAs to demonstrate they can bring value to carriers that they are unable to generate themselves”

But as we report from London, which hosted the recent Managing General Agents’ Association (MGAA) event this month, confidence is returning among MGAs about carrier partnerships picking up in 2022.

At the first in-person insurance event held in London since before the start of the pandemic there was optimism about the opportunities available for MGAs, amid strong pricing conditions.

To ensure that they can fully capitalise on the opportunities, panellists at the MGAA event said that it is critical for MGAs to demonstrate they can bring value to carriers that they are unable to generate themselves.

And that theme of value is common on both sides of the Atlantic.

Alignment of interest

In an interview with this publication, Paul Amrose, CUO of property at Accredited’s E&S platform in the US, said hybrid carriers need to effectively act as the chief underwriting officer of the MGAs they partner with to deliver results for their reinsurance panels.

At the same time, the hybrid carrier must bring value to MGAs through its reinsurer relationships.

“As hybrid carriers, if we’re not bringing value to reinsurers and MGAs we’re going to disappear,” he said.

In a contributed piece for our sister title’s #ReinsuranceMonth earlier in September, Transverse also focused on the need for value creation in a symbiotic relationship between the hybrid fronting carrier, MGA and reinsurer.

That could include an MGA or program administrator taking a risk-bearing position in their portfolio with a captive (in addition to commission terms that align interests with the profitability of capacity providers); a participatory role at the hybrid-fronting carrier; and reinsurers ensuring structural alignment by making underwriting guidelines between the fronting carrier and MGA part of the treaty agreement.

”After less than stellar episodes in the past for the sector where capacity providers have been badly burned by lack of underwriting controls at MGAs and PAs, the opportunity is there for the market to demonstrate that it has truly changed”

There have understandably been sceptical voices in the market about the rapid pace that some nascent MGAs and hybrid fronting carriers have been growing at in the marketplace, including the rate at which programs have been onboarded.

Hybrid fronting carriers would contend that they are only writing a small percentage of the deals they are presented, and that the due diligence process in onboarding and the quality, frequency and transparency of data they can share with reinsurers is a game changer from the “old days”.

After less than stellar episodes in the past for the sector where capacity providers have been badly burned by lack of underwriting controls at MGAs and PAs, the opportunity is there for the market to demonstrate that it has truly changed.

That will ultimately be demonstrated in the results of capacity providers and their willingness to continue supporting MGAs and PAs through the cycle.