Global reinsurers are looking at the current rise of managing general agencies (MGAs) with a critical eye, questioning whether the phenomenon will be long-lasting, or simply a fad rooted in a hard-market demand for capacity.
“At the risk of sounding trite, I think I’ve seen this movie before,” Dick Sanford, CEO of Toa Reinsurance, commented during a global leaders’ panel at the NICC Conference held in Halifax Sept. 20. “And I know how it ends because the reinsurers, typically in the MGA food chain, are the people at the bottom of the hill, and that’s kind of where it all ends up in the end.
“But I also know the MGA business is very much on the [rise] in the Canadian market today. I think there’s probably 60 or 65 MGAs of any consequence active in any market today. I think from a reinsurer’s perspective, it’s really important to find that alignment of interests. How do you get the MGA to give you a result, rather than maximize their income from [market] conditions?”
Reinsurers both trade with and trade against MGAs, the NICC panelists noted. On the one hand, reinsurers compete with MGAs in that they are looking to provide capacity in the same way MGAs offer it in specialized areas of insurance, like cyber, where capacity is difficult to find.
On the other hand, reinsurers also work with MGAs, providing claims-handling capabilities and backstop capital for policies underwritten by MGAs in the event of long-tail claims catastrophes. For this reason, reinsurers are more interested in working with MGA partners that are built for the long haul.
David McElroy, executive vice president and CEO of general insurance at AIG, cast some doubt on MGAs backed by private equity capital – what he called ‘transient capital’ – and merely provided ‘front paper,’ meaning the MGA’s underwriting activities were merely a way for the private equity firm to invest its capital short-term, with reinsurers left holding the bag if anything went truly sideways. McElroy lumped insurtechs into this category as well.
“Are they sustainable?” he asked of the model. “Are they credit-worthy? Are they handling claims right so that the front or the reinsurer’s going to be there for the extended long claim? Remember, five to seven years on third-party claims, that’s your gestation period. So the structure of them matters, the transient capital matters. A lot of them are pretty PE (private equity)-based. So, the [PE] firms are going to be selling [the MGAs] or exiting [the market] at some point. And that is, in my definition, a little bit unstable.”
Panellists agreed global MGAs that act merely as fronts for private equity backers are generally not the MGA partners they seek. Such MGAs, said Sanford, are built to make a short-term gain by profiting on sales where capacity is needed, only to exit the market when the claims experience gets tough.
“I won’t do business with a pure front,” Sanford said. “I need a participatory front. I need somebody who’s got enough skin in the game so that they’re going to pay attention to what’s going on in that portfolio. Not just getting a fee for front end. So I think, with the right controls and the right alignment of interests, the MGA space can be very interesting.”
Juan C. Andrade, president and CEO of Everest Re Group Ltd., said he had no issue with MGAs that ‘stay in their lanes’ of specialization.
“There’s been a significant growth of MGAs around the world,” Andrade said “It’s somewhere…between 17% and 20% for MGAs. The way we think about it is, not all of them are created equally. At the end of the day, what’s important when we look at whether we partner with an MGA or not is the value proposition. I think the more specialized — in cyber, for example, where you see some very good engineers providing some very good risk-management capabilities, or where you see distribution, where you are starting to get into some niches, creating a footprint that you don’t have — those are very valuable.”
Panellists agreed cyber was a particular area of opportunity for MGAs looking to provide capital in areas of specialization.
“Some of these MGAs are developing risk-management capabilities that are a lot easier for them to develop outside of the firewall,” Andrade said. “But again, you have to have a specific value proposition, a specific niche that there really needs to be evaluated. Otherwise, this would be a flash in the pan.”
Feature image by iStock.com/brazzo