From the actions at Lloyd’s that began with its Decile 10 directive, to widespread retrenchment from domestic US carriers across segments of their business, there has been a tightening of capacity marketwide – and the program insurance sector has not been spared.
Access to paper has had a direct impact on some MGAs and PAs writing in segments like coastal property and commercial auto, for example, leading to isolated withdrawals.
For an MGA or PA, maintaining capacity is an existential issue.
And that imperative is proving to be a driver of recent moves in the sector to secure more permanent access to rated balance sheets.
As we report in this month’s Program Manager, insurtech MGA Hippo has already indicated that access to paper and a rated balance sheet was the driving force in its acquisition of fronting carrier Spinnaker – as well as the additional stream of fee income it will deliver.
And the transaction that closed earlier this month that sees recently launched ReAlign Insurance Holdings take over National Lloyds and American Summit appears to also fit the trend.
The carriers had initially been bought by Align Financial Holdings (AFH) before being moved into the new holding company that was set up by ReAlign Capital Strategies.
PE-backed program and MGA platform AFH will manage program underwriting and claims admin services for the new carrier platform.
In other words, the MGA secures access to two A rated balance sheets, which it will use to broaden product offerings beyond the personal property business they currently write.
Access to a carrier balance sheet to expand into a new segment also looks to be behind the move by coastal MGA Orchid to team up with Homesite in a JV to create a reciprocal exchange insurer initially writing Florida homeowners business on an admitted basis.
Meanwhile, there is no let up in the use of fronting carriers backed by reinsurer panels to provide capacity to MGAs and PAs.
Some of the wave of fronting carriers that have entered in recent years have made their reinsurance relationships a key selling point to their underwriting clients: they argue that, rather than have a single program carrier partner, MGAs can mitigate the risk of losing capacity by diversifying their relationships across a panel of several reinsurers.
At the same time, there is a growing move by MGAs and fronting carriers to demonstrate alignment with their capacity providers to reassure them that both sides are committed to long-term relationships.
For Hippo, owning Spinnaker means it can say to reinsurers that it has greater alignment of interest with them over the performance of a program, with the fronting carrier typically retaining a percentage of the risk.
A number of the recently minted fronting carriers also have risk sharing as part of their operating model.
AFH can likely make that claim too as an MGA, because it shares ownership with the newly established carrier platform.
And there are other examples emerging of MGAs and PAs looking at innovative ways to “eat their own cooking” and align interests with capacity providers beyond profit commissions.
The Insurer revealed late last month that specialist non-standard auto MGA Bluefire Insurance has completed an alternative capital transaction that sees it assume risk in its personal auto business through a collateralized reinsurance agreement with Axa XL.
Of course, risk sharing between MGAs and carriers is not a completely new phenomenon. Bluefire itself retained some risk through a captive structure prior to its Axa XL deal.
But the need for MGAs and PAs to demonstrate that they share interests with their capacity providers is undoubtedly greater now than it has been for some time, and that is likely to influence their strategies as they navigate an increasingly hard (re)insurance market into 2021.