MGAs continue to trump rival structures as market looks to Monte Carlo

MGAs continue to trump rival structures as market looks to Monte Carlo 1000 668 Davies Group

Standfirst: As delegates gather in Monaco amid talk of ongoing rating pressure, Chris Butcher CEO – Intermediary Services at Davies Group says reinsurers continue to see the benefits that MGAs can still deliver.

There is little on the face of it that has changed for the reinsurance sector in the past 12 months.

We gathered for the Monte Carlo rendezvous last September in the middle of the 2017 North American Hurricane season with Hurricane Harvey already having hit the southern United States and with two more significant landfalling storms yet to come. This year the costs of the earthquake which hit the Japanese city of Sapporo and the damage wrought by Typhoon Jebi are still being established but the market has yet to see any real threat in the Gulf of Mexico.

Despite the almost record-breaking insured losses of 2017, the rating agencies are reporting that rates for claims free renewals this year have been flat with loss affected risks seeing rises of between 5% to 10%.

It leaves reinsurers continuing to look at ways in which they can deploy their capital and the appetite for investment within MGA structures continues to be palpable.

Munich Re’s Insurtech MGA platform on which we have worked is seen as an example of how reinsurers can deliver on the use of MGAs and there is already interest from other major reinsurers keen to replicate that model.

Despite the best efforts of the UK Government to create an environment to encourage the establishment of an ILS and sidecar market it has yet to take off. However, the combination of the regulatory environment, international capital and the concentration of re/insurance talent has seen London remain as an attractive home for MGAs.

That is particularly true in the speciality lines where a bespoke approach to reinsurance business alongside the necessity for experienced and knowledgeable underwriters make London a natural venue for the establishment and operation of re/insurance MGAs.

What we have been seeing is a growing number of examples where reinsurance MGAs have been formed to access specific risk sectors and deploy focused levels of capacity to emerging and niche risks where there is an expectation that above average returns will be delivered.

It is testament to this attraction that this year my Monte Carlo diary as been full for some weeks and the majority of meetings are with reinsurers seeking to explore how to access MGAs for several reasons.

Some are looking at the wholesale speciality risk primary markets. There is clearly an attraction for some reinsurers to look to reduce the layers between the reinsurer’s capital and the client.

The view is that if they can go directly to the client via the MGA they are removing a degree of intermediation costs from the transaction and at a time when rates are still under increasing competitive pressure, driven by high level capitalisation, and with it capacity, is seen as a real bonus to the reinsurer’s bottom line performance.

We are seeing the creation of MGAs which are being attached to major entities’ captive operations to deliver additional benefit and there looks likely to be little let up in terms of the hunt for innovative approaches that MGAs can deliver.

Reinsurers see MGAs allowing them to deliver complementary capacity and a degree of diversity at a time when the claims environment remains challenging but the ability to adjust rates continues to be impaired.

Fundamentally the major benefit for reinsurers in the MGA sector is the almost win-win when it comes to the allocation of underwriting capacity.

A quick and nimble access to specific classes with the potential, at present, to offer above average returns is also offset with the ability to move that capital in 12 months should the class fail to deliver the expected performance.

It removes a great deal of risk, cuts down on the cost of market access and provides the platform to be more opportunistic as the market dynamics continue to shift in response to claims and market conditions.

We are also in a position where as Lloyd’s continues to undertake its review if operations there are opportunities to fill the capacity gaps which have been created with the decision by some syndicates to withdraw from participation in some already established MGAs.

The desire to access new risks continues to be a driver for many reinsurers and the discussion in Monte Carlo are certain to revolve around how best that access can be achieved.

The MGA market has had its problems in the recent past but in the speciality classes there is still a number of conversations that continue to take place as to how the MGA model can best deliver.

London has been able to retain its unique operating model which creates a concentration of capacity and re/insurance talent and as such it remains the natural home for the MGA model.

The level of interest has secured the near term attraction for MGAs and the pipeline of new launches is already healthy and the expectation is that as we return from Monaco there will be reinsurers who believe that committing capacity to innovative MGA structures cannot be seen as a gamble as the increased fluidity they can deliver allow them quickly to cash in their chips if the MGA’s performance fails to come up trumps.

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