MGAs enjoying a ‘golden age’ for accessing capital: Target Markets panel
Program administrators’ options for accessing underwriting capacity have never been better, but carriers have raised their expectations of MGAs, according to executives speaking on an industry panel.
“We're in the Golden Age of this program carrier option right now,” said Brian Cohen, who is the founder of Florida-based MGA Arden Insurance Services.
He was speaking on a panel at the Target Markets Program Administrators Association annual conference in Scottsdale, Arizona, on Wednesday.
Cohen was referring specifically to the cohort of fronting companies that have proliferated in recent years and expanded MGAs’ options for sourcing capacity. Fronting companies have distinguished themselves from traditional program carriers in that the bulk of their underwriting risk is passed on to the reinsurance market.
The executive said more efficient capital costs – in the form of reinsurance buying – were among the main factors that drove his company to explore a fronted paper deal, expressing frustration over the lack of transparency in how traditional carriers allocated to program administrators their portion of the carrier’s reinsurance costs.
“If you have a program that's very profitable [and] performs well year in year out,” Cohen said, “you don't get a benefit with a larger carrier, in some circumstances, from that performance on the reinsurance side”.
Cohen also said that taking on greater responsibility over all aspects of his company’s programs added to the appeal of going the fronting route.
Administrators using fronting companies are responsible for securing reinsurance and assume greater responsibility for claims handling practices, pricing, and product design.
“You have to have all of that figured out and ready to go coming to this market, with all those questions from A to Z answered and figured out.”
Fronts eye MGAs operating as insurers ‘without a balance sheet’
Jerome Breslin, the former AmTrust and AIG executive who launched fronting company Clear Blue in 2015, said the growing technological sophistication of MGAs played a key role in the development of the booming fronting market.
“It used to be that somebody who had a retail or wholesale book [and who] got the pen from a carrier would develop themselves into an MGA,” Breslin said. Now, perhaps due to a surge in valuations, the businesses have become more sophisticated, he said.
“We look for that really professional organization that is essentially an insurance company without a balance sheet, who has all of the capabilities,” Breslin explained.
There's no excuse anymore for not being able to produce your own data, or to manage and own it, and be able to report it every month on a timely basis
Breslin also said that major advances and the wider availability of data management software had improved MGAs’ sophistication, and that an MGA’s data quality was a top factor Clear Blue uses in evaluating potential program partners.
“There's no excuse anymore for not being able to produce your own data, or to manage and own it, and be able to report it every month on a timely basis,” Breslin said.
Lee Brenner, who is the head of broker, regional, and national client markets at Swiss Re and oversees a $1.5bn premium portfolio, agreed.
Brenner said that having “all of the classic functions of a carrier” – underwriting, actuarial and claims controls – were critical components to any program Swiss Re would consider backing.
“Most reinsurers, ourselves included, are not staffed to be insurance underwriters, and do the day-to-day insurance due diligence,” he said. “So having those resources at the carrier is important.”
Several of the panelists – on the administrator, carrier and reinsurance sides alike – pointed to “underwriting the people” as amongst the most critical factors in program underwriting due diligence.
“As sophisticated as we can get from a technology perspective,” Breslin said, “this is still a people business.” The Clear Blue CEO said a program administrator’s management history mattered as much as anything.
“This is a small marketplace,” he added. “It takes three phone calls to find out somebody's history, and whether, if they've been with somebody before, have they done the right thing? Do they know what they're doing? It's not very difficult to figure it out.”
In addition, reinsurers are increasingly insisting fronting carriers have “skin in the game” when backing programs, though the Clear Blue CEO said its criteria for selecting program partners was the same, either way.
Breslin said using the term “front” as opposed to “carrier” doesn’t do these businesses justice, saying his company takes the underwriting of its MGA partners very seriously, regardless of the amount of risk on a deal it ultimately retains.
“If we don't do our job correctly, our reinsurance partners aren't going to make money,” Breslin said. “And therefore, we don't exist in my mind.”
“We don't behave any differently, whether [we] take zero risk, 10%, 20%, it doesn't matter,” he continued.
A phenomenon that has also picked up recently has been MGAs forming captives to take on more risk from their own underwriting. Breslin said that the formation of captives for risk-taking by MGAs has been critical to getting start-up programs off the ground.
Such a move, according to Breslin, builds credibility.
“And it builds data that you can then turn to the reinsurance markets and say, I've proven my concept, I can show you that it works. And I and I believed in it, because I took the risk to do it.