MGAs benefit as capacity steps back from property cat: AM Best

The Delegated Underwriting Authority (DUA) market is growing “more rapidly” than the traditional non life business as reinsurers switch their capacity focus, according to Stefan Holzberger, senior managing director and chief rating officer at AM Best.

He said that DUA enterprises, a blanket term for managing general agents (MGAs) and managing general underwriters (MGUs), among other things, are seeing an increase in the amount of business across multiple markets as demand strengthens.

“In most of those markets [MGAs and MGUs], there is much more rapid growth than we see in the traditional non life, so there is more and more premium flowing through those markets,” he told Intelligent Insurer

Holzberger said re/insurance appetite for MGA/MGUs across the insurance supply chain is strong as global reinsurers step back from providing capacity for catastrophe exposed property business.

“That's something that we know has been going on,” he said. “It was very much part of the conversation before Hurricane Ian hit the west coast of Florida. And we feel that going into next year, reinsurers will very actively be pulling back their cat capacity, so where to put that capital to work?

“The returns around specialty and programme business are very strong. So it's as a result of that, that there's keen interest by the reinsurance community to gain access to that profitable business.”

The main attraction of DUAEs, and MGAs and MGUs more specifically, is the risk expertise they offer across a geographic footprint or more often a certain profile of insureds, he said.

“MGAs bring programmes, they bring a kind of homogeneous policyholder, insureds, to the insurer or the reinsurer and a level of underwriting expertise that would be difficult to replicate.”

Holzberger said another trend he has seen is insurtechs, and niche or specialist startup organisations, often prefer to launch as an MGA rather than a risk bearing entity.

“They're leveraging technology, they're leveraging perhaps even a new class of business like cyber, but they don't have the balance sheet to write that on. But they've developed great tools and techniques for underwriting that business. It becomes a great relationship to the re/insurer to access that business, but then also [for the MGA to] rely on the insurer for their balance sheet to to take it from that.”

He said there is still “potential for growth in the existing regions”, where DUAEs already have a strong foothold. For example, the US, the UK, Australia and New Zealand.

But he added: “We definitely see strong aspects for growth in Latin America, for example, as well as continental Europe. So there's definitely some markets where we expect those intermediaries to grow their presence.”

In Asia, the very active markets for MGAs are Australia and New Zealand, but Holzberger said “it will be more of a challenge for the MGAs to break into some of the other markets [in Asia]”.

However, he added: “One of our newly rated MGAs, Delta, is active in Singapore as well. They're based in New Zealand, but they have branches and legal entities based in Singapore.”

It is this rapid and sustained growth into existing and new areas that prompted AM Best to introduce its performance assessment in February this year.

With more value comes the need for more due diligence, but the credit rating agency is clear that its evaluations for DUAEs are performance assessments not financial strength ratings.

Holzberger said the agency’s financial strength ratings are for entities that bear risk, “the ones that are on the hook to pay the claim, ultimately”.

“An MGA by definition, doesn't have the requirement to pay claims. They're not the risk bearing entity. So those will always be separated,” he added.

While the performance assessment is clearly not a credit rating, it does offer potentially valuable insight into MGA/MGUs as global re/insurers’ appetite for this business increases.

Holzberger said the performance assessment looks at the services that that organisation provides to its insurance and reinsurance partners and how well it manages the programmes. The assessment also examines what the techniques and capabilities are that a particular MGA brings to its underwriting risk selection.

“We are also looking for an MGA to be a valued partner to a reinsurer, so it has to be on strong financial footing. So we do an evaluation of the financials of the organisation and whether the MGA is able to manage a profitable programme across a cycle.

“We really look at the underwriting capabilities, but also the financial condition, the risk management and the breadth and depth of relationships, because for an MGA to be successful, it has to continue to attract capacity. And so those relationships, of course, are hugely important.”