The heightened risk perception due to cyber-attacks, the climate, pandemics and even inflation are just some of the volatile factors driving the need for more specialized coverage approaches on the demand side, underlining the premium growth outlook for the general manager (MGA) segment.
AM Best estimates that total premium written through the MGA market in the United States reached $60 billion in 2021, compared to $51 billion in 2020. This followed the growth story for the economy in 2021, when lockdowns were lifted. and eased monetary policy, contributing to real GDP growth of 5.7 percent. As businesses reopened, trading resumed and the insurance sector saw premium growth of 9.5 percent, due to hardening market conditions and prices.
AM Best estimates that the premium that has passed through the MGA market has doubled in the past decade. Acquisitions and consolidations of insurance distributors have led to a decrease in the number of brokers, while the number of MGAs has increased. Specialized brokers switched to MGA business, giving insurers a more cost-effective entry into new markets. Some MGAs took advantage of established affinity group relationships and their ability to pool risk to give insurers access to niche business opportunities.
One such niche opportunity is cyber insurance, which is being challenged by increasingly sophisticated ransomware criminals. Another example is the increased frequency and severity of weather-related events in the recent period, along with the impact and challenges arising from secondary hazards. Inflation has also led to an increase in asset value – companies, consumers and their agents are increasingly confronted with an insurance market with a very cautious risk appetite.
MGAs play a critical role in matching these risks with insurers. There are some new entrants in markets such as directors and officers and cyber as these lines have attracted capital and talent.
AM Best includes MGAs in the category of delegated underwriting authorized companies (DUAEs), which group the general underwriters, cover holders, program administrators, program underwriters, insurance agencies, direct agents and appointed representatives.
Appetite of reinsurers and the boom in front-end companies
In recent years, the interest of global reinsurers to participate in DUAE’s business has increased significantly, with a corresponding increase in the capacity deployed by reinsurers in this segment. Reinsurers have long looked for ways to get closer to the original risks insured, and DUAEs are one way to achieve this. By providing capacity for DUAE-placed risks, reinsurers can gain access to more primary-like business, which can provide valuable diversification from their traditional reinsurance exposures.
For example, a reinsurer providing capacity to a specialized MGA may gain access to a certain type of risk profile or portfolio of activities that simply never reach the reinsurance market through traditional risk transfer.
Despite the appeal of access to more primary-oriented risks, developing and managing direct DUAE relationships can be a complex, costly and time-consuming undertaking for reinsurers. In particular, the process of selecting DUAEs that will receive capacity, establishing relationships that provide the desired levels of diversification, ensuring profitability and business scale, as well as ongoing monitoring, can be a minefield for reinsurers.
These push and pull factors for reinsurers to join the DUAE space are seen as the key drivers for the significant expansion of DUAE-fronting companies in recent years, which in many cases have successfully positioned themselves as a important channel for reinsurers to access DUAE business.
Fronting agreements are contracts between a licensed, authorized (or sometimes redundant lines) carrier and a company that has the ability to generate insurance business, but may not have the authority or desire to write the insurance policy.
The frontend insurance company can prepare an insurance policy. The acquiring company and the primary insurer have an indemnity agreement so that the risk-bearing company is still responsible for the contracts. At other times, the insurer may act as a pass-through or front company for the business, which is then reinsured to a specialist reinsurer established by the producer or an unaffiliated reinsurer, making the reinsurer the party that bears the economic risk to the business. company takes on written. The number of US fronting companies and the associated premium volumes processed through these companies have grown rapidly in recent years.
Expansion in the fronting area continues to provide reinsurers with better access to participate in the DUAE space. Reinsurers can access a diversified business directory of multiple DUAEs and a chance to get closer to the original insured through frontend companies. Pure fronting companies, such as Markel Corp.’s State National, reinsure 100 percent with third-party reinsurers. By contrast, hybrid fronting companies will often retain 10-20 percent of the risk and also participate in sliding commission structures.
This acceptance of risk by the lead company supports the alignment of interests and also aids in process embedding, partnerships, underwriting capabilities, claims handling and reinsurance management. The concept of “skin in the game” by leading companies is likely to remain an important consideration for reinsurers, and over time we could see greater pressure on companies at the lower end of the retention spectrum to increase their participation. increase in order to retain interests sufficiently coordinated with capacity providers.
Market conditions and capacity observations
Most industries, albeit to varying degrees, have been subject to price increases and generally hardening market conditions over the past 12 months. Nevertheless, capacity has remained available and sufficient for most DUAEs. Notable exceptions to this include new DUAE entrants and products, which may have been subject to tighter capacity, and some industries where appetite has declined in recent periods, such as exposure to peak real estate risks. However, for the DUAE market in general, capacity has generally remained free flowing and viable for DUAEs.
Part of this continued supply of capacity appears to stem from the aforementioned reinsurance capacity influx, aided by the fronting model that opens the door to easier access for global reinsurers. In addition, following Lloyd’s withdrawal of capacity in 2020 as part of its broader program to reduce its exposure to underperforming activities, this market increased capacity for DUAEs in 2021.
Capacity provision by the insurance-related securities (ILS) market is also expected to remain a growing area for DUAEs over time. ILS capital seeks to support DUAEs that are considered to have a strong track record, but for whom the traditional reinsurance market is proving more difficult at the moment. As DUAEs increasingly seek efficient reinsurance capital, this trend is likely to continue this year and into the next. Businesses focused on casualty and reinsurance could become increasingly attractive to ILS investors over time, given the cash-positive nature of the structure.
This article was first published in Insurance Journal’s sister publication, Carrier Management.
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