Markel will selectively participate on programs written on the paper of its subsidiary State National where reinsurers are looking for the fronting carrier and its owner to demonstrate alignment of interest through risk sharing, The Insurer can reveal.

State National and Markel

State National has historically operated solely as a pure fronting carrier, charging a 5 percent fee for its services but not retaining any risk on the programs it fronts for reinsurers.

However, earlier this year sources told this publication that after three years of Markel ownership there had been a shift in State National’s position away from a pure fronting only model.

And in an interview with this publication for the latest in our series of The Best Policy podcasts, Markel co-CEO Richie Whitt confirmed the change.

“They were a pure fronting model when State National was a standalone organization. Immediately after we bought State National, we kept that in place just to allow time for their partners to become comfortable with the fact that they were part of a large organization.

“And, honestly, we didn’t want anyone to feel that potentially Markel was cherry picking business from State National,” he explained.

However, the stance on participation will change going forward on a case-by-case basis, depending on the requirements of reinsurers.

“There are some programs where the reinsurance partners would like to see alignment with State National or Markel on those programs and we will consider that going forward.

“That adds another capability to the State National platform as they wouldn’t do that or couldn’t do that before, given the size of their balance sheet,” Whitt suggested.

Richie Whitt, Co-Chief Executive  Officer Markel Corporation

Markel paid $919mn in 2017 to buy State National, which has been the dominant force in the program fronting arena. It wrote $2.3bn in premium volume last year and is understood to have quadrupled its book over the last decade.

Total revenues generated from State National’s program services business were $108.8mn in 2019.

Previously its only exposure to underwriting risk on programs it fronts had been deals that have limits on reinsurers’ obligations including loss ratio caps, aggregate reinsurance limits, or exclusion of the credit risk of producers.

In the last few years it has begun to see an increasing number of competitors in the space with the launch of several start-ups looking to tap into growing demand for fronting services.

The newer companies – some of which are only getting up-and-running this year – have deployed a range of different models from pure fronts to hybrid, risk-sharing entities that will retain up to 20 percent of the business, in some cases.

Theoretically there are several ways Markel could participate on State National fronted programs.

It could participate on a program alongside its subsidiary as an insurer or join a panel of reinsurers behind State National such as Markel Re.

Growth opportunities

Whitt said Markel’s fronting platform is seeing a strong increase in activity in 2020.

He highlighted the hard market as a driver, as participants seek to access fronting solutions to gain quicker access to write lines of business that are seeing strongly improving underwriting conditions.

“As we’re all aware, there are a number of entities trying to get up-and-running to take advantage of the market and fronting solutions are a way to do that in a quick fashion,” said the executive.

Meanwhile there are potential users – especially MGAs – of State National’s services that are beginning to realize the benefits of fronting solutions that have been demonstrated by some of the challenges faced as traditional carriers have retrenched from segments of the market in the last couple of years.

“It gives you the ability to disconnect your paper and your filings from the capital. If you have changes in your panel you don’t have to go and refile.

“That provides a safety net for MGAs that have those programs and allows them to more seamlessly interchange capital providers without disrupting their business,” said Whitt.

State National is led by Matt Freeman following the retirement of founder Terry Ledbetter.

It offers access to ratings and licenses through its admitted and non-admitted subsidiaries and pitches itself as providing much of the regulatory and process expertise that enables MGAs to deploy insurance solutions efficiently.