The “capacity is king” trope is widely used in the MGA and programs space, and for good reason.
As David Howden reminded delegates at the Target Markets Annual Summit in Scottsdale, Arizona earlier this month, without capacity an MGA is “nothing”.
And that is why there were doubtless a few stressed-looking reinsurance brokers, MGAs and fronting carriers wandering the Westin Kierland.
Because if reinsurance capacity – as BMS Re North America CEO Peter Chandler recently put it – has been the backbone of growth in the US programs sector in recent years, then those relying on catastrophe capacity from reinsurers could be in need of some major surgery.
Together with our sister publication The Insurer, we have written ad infinitum about the property cat capacity crunch in reinsurance both before Hurricane Ian and since.
“If reinsurance capacity has been the backbone of growth in the US programs sector in recent years, then those relying on catastrophe capacity from reinsurers could be in need of some major surgery”
A huge demand-supply imbalance existed already as the industry gathered in Monte Carlo in September, driven by $20bn or more of additional limit required by insurers to cover inflation, and a retrenchment from reinsurers – especially lower down cat towers – amid frequency and severity of losses and climate change concerns, exacerbated by balance sheet erosion from investment write downs and the impact of currency movements.
At that point our thesis was that the sector was teetering on the edge of a true hard market.
Now, after Ian, hard market conditions are all but guaranteed for 1 January and beyond in the US cat treaty space, and the question is whether placements can be filled at an affordable price for some.
An already tight retro market may be almost non-existent in some areas given the uncertainty around Ian losses and the implications for trapped ILS capital.
Although during earnings season so far there have been plenty of reinsurers talking about the opportunity in cat, few if any are indicating they are willing to take on additional exposure.
They see an opportunity to grow their books on a premium basis without adding to PMLs – or even as they reduce PMLs – allowing them to get paid more for less risk, in simple terms.
They are also seeing an opportunity to improve their books in other ways, by significantly tightening terms and conditions, restricting coverage and deploying capacity only to what they view as better quality risks.
With so much additional demand coming from major blue-chip national and global players, there may be an opportunity to write more premium there while trimming from the fringes of their portfolios.
Back to what is implied by the point made by BMS Re’s Chandler: there has been a huge amount of demand from reinsurers to write US programs business, and that appetite has supported the sector’s stellar growth of recent years.
Much has been made of the maturation of the MGA space and the increasing sophistication of its operators.
But the growth in appetite from reinsurers came at a time when arguably there were less attractive opportunities to expand in treaty.
Could reinsurers with restricted capital and true hard market opportunities in property treaty look to deploy PML there first before considering delegated authority business?
The answer at this stage is unknown, but there are understandably fears that for some MGAs capacity will be very hard to find – despite commitment to the sector from players like RenaissanceRe that have been big supporters of E&S property in recent years.
“Could reinsurers with restricted capital and true hard market opportunities in property treaty look to deploy PML there first before considering delegated authority business?”
That raises the prospect of a flight to quality. Those that are able to attract capacity to support premium growth – even if they have to cut exposure – should benefit. MGAs are after all paid commission on premium, so if top line grows then so do they.
It also has implications for fronting carriers. Those that front for programs with cat exposure are likely to face the same issues as their own ability to buy cat protection for their retention or tail risk comes into question.
And could the capacity crunch in property cat reinsurance spill over to other lines of business?
For now, views are divided. Reinsurers appear to be showing a strong appetite for casualty treaty even as they argue that the economics of quota shares need to move in their favour.
A shrinking reinsurance industry balance sheet will make capital deployment decisions increasingly important.
The MGA sector must show that it continues to provide attractive enough opportunities for reinsurers to profitably grow or risk hitting the ceiling of its own growth trajectory sooner rather than later…