Liberty Mutual Re’s Uwe Haug provides his perspective on the increasingly prominent role MGAs are playing in the credit and political risk space…

Trade credit

I have seen commentary in the media about investors preferring to put their equity behind MGAs rather than insurance companies. Certainly, we are seeing an increasing number of new MGA proposals in the single risk market which focus on medium- to long-term credit and political risks transactions.  

Admittedly, MGAs are not new to the market, and they cover a range of activities from $1bn+ multiline portfolios down to $10mn monoline niche products. 

MGAs are an established part of surety markets such as Italy, Norway and South Africa. And trade credit MGAs have been active for many years in the UK, Australia and Canada. Reinsurers apply an additional layer of diligence driven by some scepticism around the MGA concept. But why is that and what does it mean for MGA business cases looking for reinsurance capacity?

Key areas to consider for a reinsurer

Trade credit and surety MGAs have shown higher results volatility than their peer group of insurance underwriters, including cases of complete portfolio meltdowns with loss ratios that would not normally be seen from an insurer.

An MGA is an additional link in the underwriting chain with the need for cost compensation and a portion of the profit. In a non-proportional reinsurance market this would not be a concern, but the majority of credit risk-related reinsurance programs are proportional where the cost structure of the reinsured business is one of the essential parameters. 

Does an MGA have the potential to write its specific credit-related business at a lower loss ratio through the economic cycle versus the peer insurance group to allow reinsurers the same margin despite the higher cost? 

“Reinsurers apply an additional layer of diligence driven by some scepticism around the MGA concept”

What might make a lot of sense for an insurer from a combined ratio perspective doesn’t work for a reinsurer anymore after adding the overrider to compensate the insurer for its own cost.

Let’s look at the insurance market as no MGA can issue a policy without the capacity of a licensed insurance carrier. In trade credit, surety and single risk the insureds/beneficiaries are mainly large corporates, banks, public entities and multilateral institutions. 

For most of them a very strong credit rating is key when selecting the counterparty to insure with. An MGA, especially in the single risk market, will need access to at least A rated insurance paper to be considered by the insureds. However, as most A and better rated insurers are already writing these product lines in-house, the available pool of insurers that could qualify from a rating perspective while writing one of these lines through an MGA is very limited.

Reinsurers will usually not consider the MGA as the sole counterparty and look at the insurance carrier purely as an exchangeable fronting entity. Ideally, the insurer is an existing client with the reinsurer already having a deep knowledge of the insurer’s underwriting culture. 

Credit risk-related insurance business needs to perform well through an economic cycle and for this reason reinsurers usually commit proportional capacity in these classes under the assumption of a long-term relationship as exiting the treaty after one or two years will leave them with tail risk averaging four to five years in surety and single risk, with some policies running off over 10-15 years.

Liberty Mutual Re supports MGA activities in the segment of trade credit, surety and single risk business subject to a high confidence level that the insurer/MGA partnership is for the long term, with the insurer retaining a substantial portion of the risk and having full risk oversight supported by its own credit know-how. 

The MGA business plan needs to be realistic, as aggressive growth quickly drags you down the credit curve.

Uwe Haug is head of business development and underwriting strategy – financial risks reinsurance at Liberty Mutual Reinsurance