And in an environment where segments of the reinsurance market are becoming increasingly capacity constrained, alignment of interest between MGAs and their paper providers and reinsurers is becoming ever more critical.

Speaking to this publication as part of The Insurer TV platform’s coverage of the industry event last week, BMS Re North America CEO Pete Chandler highlighted the “vast appetite” of reinsurers to support entrepreneurial underwriters leaving carriers for MGAs.

“Reinsurance has been the backbone of the growth of this space, I believe. There are a lot of reinsurers that supported these underwriters in their prior lives when they were at these bricks-and-mortar type insurance companies.

“As they see them become entrepreneurial and venture out … the reinsurers are absolutely showing a vast appetite to support that and give them that opportunity to go out and practice their craft,” he said.

As previously reported, the US MGA sector grew double digits last year to more than $70bn of premium in the US, and is on course for similar growth in 2022 fuelled by its close relationship with the booming E&S market.

Pete Chandler PQ

Along with sustained hard market conditions in many lines and segments, the sector growth has also been fuelled by a secular shift of underwriting talent from traditional carriers to MGAs, drawing record investor interest.

But Chandler said it was the appetite of reinsurers to support the business and back those underwriters that has proved to be a real engine of growth.

“This boom in the MGA space would not happen without the support of the reinsurance community,” he claimed.

Dan Malloy, who has been serving as interim CEO at SiriusPoint, said that strong reinsurance support provides validation of business plans when his company is deciding whether to partner with an MGA by providing paper or making an investment.

“When somebody comes to me and says, ‘I am the best in class X, Y or Z’, my first question is, ‘okay, who is your following, who is reinsuring you?’

“If someone shows up with three or four reinsurers, who they partnered with over the last five, 10, or 20 years, that’s a real validation. They’re bringing capital with them,” he commented.

The executive said that when there are strong reinsurer relationships it can add an element of tension, with the program insurer vying to retain more of the program business while the MGA wants to pass more to its longstanding reinsurance panel to reward their support.

Fronting carrier conduit

According to Accredited America’s CEO Pat Rastiello, reinsurers have also been the backbone of the hybrid fronting explosion of recent years, which has seen the number of players in the participatory space swell to more than 20.

The executive suggested that growing demand from reinsurers to access MGA and program business through fronting carriers had coincided with a reduction in the amount of reinsurance being purchased by traditional insurance carriers.

With retentions at hybrid fronting carriers often below 10 percent, almost all of the business is ceded through to reinsurers.

Pat Rastiello PQ

“So there is a lot of dependency there. And the model is see-through, you have your original costs for the retail agency, your MGA, your TPA costs, the front fee and claims, and that’s really it … that brings reinsurers.

“They like the model and as long as their front partner is looking after that original business, I think they feel pretty safe and we’ll see more and more reinsurers working in our market as it grows,” he predicted.

Rastiello said the hybrid fronting model brings capital to risk in a much more transparent fashion.

He also said reinsurers looking to diversify their portfolios are being drawn to the specialist products in the MGA sector, as well as middle market business and the access to distribution that is not necessarily afforded to them in the traditional carrier space.

Chandler said he sees no let up in the growth trajectory of the sector and reinsurer appetite for it, “as long as the MGAs continue to produce profitable underwriting results”.

After a downturn?

But while there are secular shifts driving the growth in the MGA sector, there are also cyclical drivers, including the E&S boom.

Although there is no sign that an inflection point is close in the E&S market, Malloy said when the inevitable downturn in the sector does come it will likely test the appetite of reinsurers and challenge some of the dynamics around the way MGAs operate.

That could include reinsurers looking for MGAs to align interests through different structures, or retrenchment by some from the space.

The panel agreed that even in the current environment, alignment of interest between MGAs, fronting carriers and reinsurers is critical.

Chandler described alignment of interest as “of paramount importance” and noted that it is not only hybrid fronting carriers that are taking more risk.

“We are seeing folks on the MGA side that do have the financial wherewithal and start to establish capital and find ways to stand behind their underwriting, and that makes for a very different conversation.

“I think those MGAs that are willing to go one step further and consider a captive and take real risk on their portfolio are going to stand head and shoulders above their peers,” he said.

The BMS Re North America CEO added that over time he believes the reinsurance community and the fronting community will be more “in tune and more open minded” to MGAs that are standing shoulder to shoulder on underwriting results.

“If we want to keep the angle of the slope steep on the growth of this business, I think that’s going to be one of the next steps that’s going to have to be taken,” said the executive.

Dan Malloy PQ

But Malloy questioned the strategy of some MGAs to move beyond a captive or other risk-retaining structure to make the transition to a full-stack carrier, when many traditional insurers are struggling to trade above book value.

That is in stark contrast to the Ebitda multiples in the high teens that MGAs are being valued at.

“My message to MGAs is focus on making us money and you won’t have to worry about where your capacity is coming from. And if you aren’t making money, I don’t know if you want your own capital behind you,” he concluded.

ILS influx raises tail question

The trio of Program Manager panellists agreed that ILS capacity in the sector is becoming increasingly relevant and is here to stay, but there were questions about how the market will need to evolve new approaches to utilise it, especially on longer-tail business.

BMS Re’s Chandler said: “There’s no doubt ILS is coming, it’s here, and I think it’s going to be sticky. The question is what does it look like in three or five years, because there’s going to be mandatory commutations in there and what do those calculations look like?”

He suggested that executing initial transactions is the “easy part”, but that issues like commutations clauses and credit risk around who owns the exposure years down the line on casualty business would have to be addressed.

Malloy said that his company is being approached by traditional reinsurers and alternative capital as it helps grow its MGA partners.

“The reality is that ILS as they move into casualty are not trading on an unlimited basis … that means someone has got to take back tail risk, and someone needs to price for that and then you need to have a mechanism for releasing capital,” he observed.

Rastiello questioned whether ILS supporting long-tail business is a good match of capital with risk, noting the longevity of historic exposures in areas like asbestos and tobacco that continue to generate claims.

“How do we cater to that and make sure it’s paid off, or do we have the next level of coverage that helps those that need it?” he asked.

Malloy suggested the right provider of capital for the right solution might vary along the life of a portfolio of business, while Chandler highlighted the potential role of legacy markets in assuming tail risk and allowing ILS capacity to move in and out of long-tail risk. 

Watch the full debate on The Insurer TV, recorded from our pop-up studio at Monte Carlo’s iconic Hôtel de Paris, and hear from the panellists on:

  • Key drivers of the strong growth in the programs sector
  • The role of fronting carriers
  • Alignment of interest between MGAs, fronting carriers and reinsurers
  • ILS capital in the MGA space
  • Choosing program partners