MGAs: solving the conundrum of tentative capital providers

“At the risk of being controversial I would suggest to you that the tentative risk capital comes from the traditional providers right now.”

That was the view of James Gerry (pictured, left), chairman of MX Underwriting, as he discussed the issue of tentative risk capital providers with a panel of managing general agent (MGA) leaders.

“I don’t care how you slice it, most MGAs are approaching traditional risk capital for support,” he said.

“The reason for that is twofold: first, it’s not enough just to secure underwriting capacity, MGAs by definition also require access to licensed paper. If you don’t have the paper it doesn’t really matter about the capital.

“Even if you have the paper—and most of us need A-rated paper depending on the classes of business—a number of those traditional insurers may be tentative about supporting an MGA,” he said.

With non-traditional or alternative risk capital providers, if they are nervous about backing MGAs then “perhaps it’s because this is something new”, he said.

Gerry was speaking as part of an Intelligent Insurer panel titled “MGAs: attracting tentative risk capital providers into the market”. His fellow panel members were Danny Maleary (pictured, centre), chief executive officer of Pro MGA Global Solutions; and Chris Brown (pictured, right), executive vice president at Mosaic Insurance Company; with Claire Churchard, senior editor at Intelligent Insurer, as moderator.

Gerry described this reluctance on the part of traditional providers as “a conundrum”.

“I would suggest to you that most of them are best positioned to support the MGAs because they understand the business, the business model, and the classes of business that are being underwritten, but at the same time it may present to them what looks like a potential conflict, or a competitive situation, or a struggle to make a demarcation between delegated underwriters and their straight line underwriters.

“Very often it’s perceived as being a clash,” he explained.

Gerry said that MGAs are often approached because the carrier feels they can do something uniquely different from what they’re doing. The MGA might have specialist underwriting skills, or a distribution platform or specialist technology—it could be any number of things that distinguishes the MGA from what the carrier is doing.

“On the surface that sounds like an attractive play but if the MGA itself is struggling to make a distinctive play in the market that separates it from the capacity provider they’re going to be quite tentative to support that MGA because they’re not seeing any appreciable gain through that support,” Gerry said.

Reinsurance capacity

Brown said that from his perspective most of the capital providers in the MGA space are other insurers, whether they’re Lloyd’s syndicates, other insurance companies, or reinsurers.

“I’ve seen a lot more interest from reinsurance capacity in recent years where reinsurers are very attracted to the opportunity to get a proportional share of an insurance portfolio,” he said.

Brown said that from the London, and the Lloyd’s, markets’ perspective in specialty lines most MGAs buy reinsurance as excess of loss reinsurance. “The reinsurers have a craving for that proportional share of a specialty portfolio with a low frequency, high severity risk profile.”

He agreed with Gerry that licensing is a very important factor, but commented: “The single most important factor I’ve witnessed in the last couple of years at least is all around alignment of interests.

“When the capital provider is presented with an otherwise attractive proposition, the final piece of the jigsaw and the thing that makes them tentative if they cannot see it clearly is alignment of interest.”

Profit commission is the traditional way to align interests. But Brown said that it is “quite a one-dimensional carrot” that the agency is chasing.

“While there are many examples of some fabulous agency businesses, there have also been some horror stories around multi-product multi-sectioned MGAs with ring-fenced profit commissions, which can end up with a situation where a disappointed capital provider who has had a poor financial result can nevertheless end up having to cut a quite significant profit commission cheque despite a loss overall for themselves,” he said.

Maleary flagged up another stumbling block for traditional risk capital providers looking to back MGAs.

“Tentativeness, in terms of who is worried about dipping their toe in the water on their growth ambition using the concept of the MGA, is around the oversight and the regulatory framework to ensure that the guys they are delegating their authority to are operating in a compliant and regulatory manner,” he said.

“It is confidence in the area of compliance that gives them the comfort to be able to delegate their authority in the first instance.”

Maleary’s firm specialises in MGA incubation and facilitation. It prides itself on offering an entrepreneurial environment, a strong compliance framework and access to specialist business services to incubate, grow or invest capital in an MGA.

“Over the last 20-plus years, and the last 10 years in particular, the concept of what we as a business do from an incubation perspective gives that level of comfort to enable insurers to be able to dip their toe in the water knowing that from a regulatory and oversight perspective that the business is being managed and conducted the way it needs to be done,” he said.

With this in mind, Maleary said that this partnership approach is, for him, “where the tentativeness is starting to be eroded in terms of enabling the traditional insurer to grow, perhaps in a different way”.

Gerry commented: “I don’t think that the capacity is tentative because of concerns over the regulatory and compliance issues. They begin with asking: ‘Is there sufficient scale and is the book going to be profitable?’.

“The bump in the road comes when they say: ‘We love all that, now show us where you guys stand in terms of your compliance framework, your regulatory reporting and data capture’, because it’ll all fall over then, won’t it.

“Just having a good book of business will not be enough if you’re going to embarrass the capacity partner because you don’t have the compliance or regulatory infrastructure to support that.”

For more on MGAs and identifying and allaying capital providers’ concerns watch the full panel discussion on the  video here.