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InsurTech MGA capacity – No more ‘FOMO’ amid firming rates

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Paper providers and reinsurers are tightening up on capital provision to InsurTech MGAs, as an earlier attitude characterized by “fear of missing out” on growth from the new kids on the block gives way to an emphasis on profitability, sources told Inside P&C.

Yet, according to broking and carrier executives, a potential capacity shortage for certain lines – such as cyber – could open more avenues for alternative capacity sources, amid a continued ‘red hot’ market for equity capital.

In other instances, several InsurTechs that began as MGAs, such as Pie and Embroker, have transitioned at least partially to full-stack insurers, as they seek greater control over their capacity. As the market hardens and capacity tightens, this trend could be further accelerated, sources indicated.

Rates in the P&C market have continued to rise in Q3, with outsized increases for cyber insurance driving up the average change, according to data revealed in third-quarter conference calls.

For instance, Chubb CEO Evan Greenberg told analysts during the carrier’s Q3 2021 call that the “tone” of the market indicated that rate increases would remain above loss trends for “quite some time”.

Case in point, US commercial insurance prices climbed by 13.6% in Q3, a 180-bps sequential increase after two quarters of slowing. The driving force behind the increased hardening was cyber rates which climbed 96%, up 40 percentage points on Q2.

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Property pricing rose 10%, a slight uptick from last quarter’s 9%, driven by fewer renewals than generally seen in Q3, while casualty pricing increased by 7%, though when excluding workers’ compensation, rates went up 11%.

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As such, paper-seeking InsurTech MGAs are now finding themselves under greater pressure to deliver results, as reinsurance panels become increasingly more selective in their capacity amid rising rates, according to Max Aronchick, managing director and InsurTech Center of Excellence leader at Guy Carpenter.

The higher level of scrutiny marks a departure from the somewhat ‘relaxed’ attitude previously adopted by some capacity providers, who early on had experienced a “fear of missing out” with new InsurTech opportunities, Aronchick explained.

The earlier capacity bonanza, when paired with a soft reinsurance market, may have handed an oversupply of risk capital to a “handful of immature businesses”, he noted.

Yet, the prolonged firming cycle in the primary insurance market – and latterly in reinsurance – means a more detailed scrutiny of potential InsurTech MGA underperformance and the need to demonstrate a path to profitability in addition to substantial pro-forma growth.

“It is just not good enough to say, well, we’re [going to] double [growth], we need to really walk reinsurers as to how to get there.”

He continued: “As an example, if we were to sit down with a new client today, we’re going to have very frank and forward-looking conversations about how they intend to use their venture capital for technology, versus risk-taking.”

‘Abandonment issues’

SiriusPoint president and COO Prashanth Gangu said that, during the pandemic, there have been shocks to capacity as some reinsurers were “very quick to walk out of partnerships”.

In June, this publication reported that InsurTech MGA Corvus hit the premium cap on its capacity deal with provider Hudson Insurance. The InsurTech then secured new underwriting capacity from SiriusPoint.

In reference to the ‘first wave’ of InsurTechs, Gangu argued that the relationship between the ‘MGA-style’ InsurTech and traditional insurance and reinsurance companies “just was not set up properly”.

“The issue from an MGA perspective [was] – these guys are not stable, they are friendly one day, and then they walk away the next day. They are not reliable and stable, so I need to raise my own capital and be full stack,” Gangu explained.

From the carrier side, Gangu pointed out that relationships fell apart due to a misalignment of interests.

“When the InsurTech did not perform well, and they have losses, the insurance company takes the downside and the InsurTechs move fine because they switch capacity to the next one, their valuations keep going up,” he said.

Gangu noted that going full-stack to have more control over capacity is a “false choice”.

“What you need is stable capacity, and you can achieve that through partnerships with insurance companies where incentives truly align, or you can go to the public markets, and you’re just getting reamed there because there is a lot of scrutiny.”

The VC gold rush

As some risk-takers retrench on the underwriting side, others will take their space, sources said.

Nationwide senior director Brian Anderson noted that, as traditional sources of capacity dry up, you can expect to see InsurTechs tap other sources of capital, whether that is ILS or non-traditional capital providers.

“There is a whole host of areas of capacity that could show up when some of this [traditional capacity] goes away,” Anderson pointed out.

“All of a sudden you see hedge fund investors, or sovereign wealth funds, providing capacity because they feel like the all-in internal rate of return on providing capacity is high enough that it makes sense for them to be there – because they are going to get more out of that then being on a government bond, or whatever,” he continued.

Further, despite the challenges faced by the public InsurTechs this year, equity capital remains abundantly available to these businesses.

The latest Willis Towers Watson InsurTech briefing found that InsurTechs raised a record-breaking $10.5bn in investments during the first three quarters of 2021, a year in which firms are poised to secure more than the combined total for both 2018 and 2019.

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The number of large private funding rounds from 2021 include InsurTechs Coalition, Ethos, Next and Clearcover.

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“From my read of the market, I don’t think that the investment community is backing off from InsurTech. If anything, there are more and more VCs raising InsurTech funds,” explained Pranav Pasricha, global head of P&C solutions at Swiss Re.

The contrast between abundant venture capital and dwindling underwriting capacity is a function of divergent risk and return profiles, noted Roman Itskovich, chief risk officer at cyber MGA At-Bay.

“A venture capitalist is willing to lose his money seven out of 10 times, because out of those three that they didn’t lose money on, they will have one or two home runs that will make many times the money they lost,” Itskovich pointed out.

He went on to say that, on the reinsurance side, carriers will never make up to 10 times the capital in any one program, “so it is a mindset that is a lot more conservative because you can’t afford to lose”.

The 'right' MGA

For the “right MGA” however, “capacity is never a problem”, Swiss Re’s Pasricha argued.

While he recognized that the industry at large has had some “bad experiences” with InsurTech MGAs, those that have a “differentiated proposition”, where the product is very innovative, offering either very advanced technology or data, “are definitely going to get support, from both a venture point of view and an underwriting point of view,” he said.

“If anybody wants to talk to us and they say that ‘we are an MGA with a unique proposition’, [yes], sure come and talk to us,” Pasricha stated.

Nationwide’s Anderson noted that capacity availability is “100% driven by the risk class”.

“The cyber markets obviously hardened a ton, so it is making the product very difficult to sell [to customers]. Not only is the capacity drying up, but the ability to sell for a [competitive] price is going down.”

“If you are in that world, I think it is really challenging,” he added.

Anderson went on to say that underwriting capacity is going to be more abundant in ‘very specialized places’, as carriers look for MGAs who offer a unique approach to the market, a differentiated underwriting model and strong customer acquisition strategy.

Cyber drought

Amid a sharp uptick in ransomware attacks, rising cyber rates and a higher demand for cover, cyber-MGAs have had to scour the market for additional underwriting support. Cyber loss ratios jumped to 67.8% in 2020 – and higher for many carriers – from 44.8% in 2019, according to a recent report by RPS.

On that point, At-Bay's Itskovich agreed that there is still some skepticism surrounding the cyber InsurTech MGA model from a capacity standpoint.

“You have some InsurTechs in cyber [that] have issues with capacity, like Corvus for example,” he pointed out.

Itskovich argued that the inconsistency of the cyber line concerns carriers, as it is still difficult to predict, or quantify the magnitude of a potential loss.

“Everyone is a bit more cautious about what is going to happen, how much loss, and there are a few companies that are doing a very good job of getting reinsurers into believing that something really bad is going to happen,” he explained.

“Again, they have been just surprised by losing money in cyber. It was a very profitable line until 2020, and they don’t know what else is coming,” he added.

Despite the challenges faced by cyber on the underwriting side, two of the three largest deals during Q3 were agreed by At-Bay ($185mn) and InsurTech MGA Coalition ($205mn).

At-Bay counts on Munich Re as its sole paper provider, and has raised $292mn to date, with its latest pegging the valuation at $1.35bn.

Questioned about whether At-Bay is seeking more sources of underwriting capacity, Itskovich said they are looking for additional underwriting capital, not because they are worried that Munich Re will drop, but because they need other partners to continue growing and “keep up with the market demand”.

“We have this one provider, we’re very happy with it, [but] this is going to be too big for them to take on themselves. So, we’re working together with them to add more folks to the program so that we can continue. It’s more of a positive type of relationship,” he said.

Separating the ‘good’ from the ‘bad’

Even though the hardening market has elevated the standards MGAs have to hit, sources noted that there is still a home for ‘best in class' ideas.

Verisk Analytics’ president of global underwriting, Maroun Mourad, said there has been a “rapprochement” between the balance-sheet side and the technology, data and analytics side.

“If you look at five or six years ago, InsurTechs were seen as a threat, almost, to the insurance industry. You had insurance on one side, InsurTech on the other,” he noted.

I think collaboration has increased, you can see a lot of insurers acquire InsurTechs, a lot of insurers and reinsurers invest either directly or indirectly as partners in VCPE firms in the InsurTech space.”

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On the carrier side, Guy Carpenter’s Aronchick pointed out that (re)insurers are looking for C-Suites at InsurTechs that have “gray hair with insurance experience”, as well as deep underwriting and claims capabilities that complement the technological advancement or differentiator that is being brought to the table.

“They've learned from the mistakes of perhaps a few experiments that weren't fully mature,” Aronchick said.

Further, SiriusPoint’s Gangu noted that carriers are getting more comfortable with evaluating who is a “good” InsurTech and who is “not a good” Insurtech.

“Even if interests are aligned, if the InsurTech is not credible and has bad leaders, bad technology, and bad pricing, or is in the wrong part of the market with the wrong products, the whole thing can fail,” Gangu said.

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