The rapid expansion of the MGA/program market in the US and parts of Europe is a symptom of the “unbundling” of the insurance ecosystem which is seeing industry leaders experiment with alternative distribution and capital structures, the executive chairman of Randall & Quilter William Spiegel said this week.
Speaking at the Accredited European MGA Forum in Zurich, the Pine Brook private equity founder highlighted the movement within the industry to separate origination and underwriting on the one hand from capital, thereby enabling lower cost forms of capital to be applied.
He noted this is a trend already seen within other areas of financial services that (re)insurers were increasingly embracing with vigour.
“While many other parts of the financial services markets have been unbundling for some time, insurance has been behind, but it’s catching up and the result is the growing MGA marketplace,” he told the audience.
Although citing mainly US data to demonstrate this, Spiegel asserted it was an analogy for what was also going on in the European market.
“Since 2014, the number of MGAs in the US market has grown by 40 percent and it’s occurring because of this unbundling – it’s growing much quicker than the traditional market,” he said.
Program management in the US currently makes up $62bn of insurance business, and is showing no signs of slowing down.
There are several factors contributing to this trend, Spiegel told attendees, including the well-documented benefits of specialisation, growing venture capital funding, advances in technology, low-cost technology, access to data to do deeper analytical work and the growing entrepreneurial spirit.
“MGAs are increasingly becoming the go-to originators for specialised, entrepreneurial underwriting talent and insureds are looking for specialisation. So, what we’ve got is a growing supply of risk and the demand for this risk is there and we expect that to grow too.”
Spiegel commented that growth in the alternative capital portion of the market had stalled slightly, but anticipates this won’t last.
“The market is just being quiet at the moment,” he said. “It’s been hit by a lot of cat losses and it needs to figure out how it moves on from that.”
But for all of this capital to meet this “thriving” specialised MGA market, all these companies need to be connected.
“And they are connected by program managers,” said Spiegel.
“This market is unbundling because of specialisation and program managers become the glue in the middle of this ecosystem. We are the transformers and securitisers of risk,” he said.
“Our current and future value has to be about working very closely with MGAs and analysing these MGAs – looking at their governance structures/operating models, technology and helping them with an ESG strategy, looking at cyber security so that everyone can feel better about the environment.
“We play a role that is not going to go away, it’s going to be more and more important. That role should not just be about licences and not just about ratings – it should be far beyond that in terms of partnership.”
Under his leadership, Randall & Quilter has itself become increasingly reliant on third-party capital through its sidecar Gibson Re, which enables the firm to generate origination fees and profit commission but reduce its balance sheet exposures.
The London-listed firm is, however, facing a rush to raise $100mn of capital to avoid banking covenants issues after a recommended buy-out by its largest shareholder Brickell was suddenly withdrawn earlier today.