Reinsurance MGAs may be the next step in the intermediary market

While most of the operations focus on primary insurance, the reinsurance side may be an overlooked area. It has, however, attracted some attention recently as a new player is being formed, and there could be opportunities for more.

Former Aspen Re underwriters are said to be working on a new reinsurance MGA, backed by specialty insurer Neon. The move has raised eyebrows in the scene, with some commenting that an insurer like Neon could well be able to employ excess of loss underwriters itself.

But there are reasons why the MGA industry is flourishing.

In many cases it’s cheaper for carriers to outsource the underwriting on an MGA basis and it might fit their capital model better.

And MGA’s exist because they have access to business others cannot get hold of either geographically or on a relationship basis. In addition, many underwriters find the idea attractive to work in an independent MGA instead of a larger carrier organisation. Entrepreneurially-minded underwriters are therefore often looking for an  opportunity to create a new intermediary business.

Focusing an MGA on the reinsurance side of the business has been fairly rare so far in the London Market.

“They probably are at this stage, relatively limited, but as things develop, we may get some more within the market,” says Peter Staddon, managing director at the Managing General Agents' Association (MGAA).

“MGAs are growing in all varieties of sectors so it would seem logical that the reinsurance sector would be another ripe for MGAs.”

“A lot of MGAs are starting to buy their own reinsurance portfolios. Whether they would go to like-minded MGAs or to the reinsurance brokers for the markets I am not sure. But it would be quite an interesting concept.”

Among the reinsurance MGAs operating in the London Market is Tempo Underwriting, an MGA writing treaty reinsurance. It was founded in 2012,  driven by an ever-increasing number of underwriters seeking better work environments. Another trend motivating the founders to create Tempo was that carriers were becoming more open to a wider range of delegated authority underwriting opportunities as profitability in core businesses was under increasing pressure. In addition, ever-growing regulatory requirements, investment requirements, timescales and risks of setting up new insurance entities made MGAs appear a more attractive alternative.

Tempo operates as a multi-line underwriting agency focused on specialty lines business. The underwriting focus lies in marine, energy and aviation in Africa&Asia, Middle East and Europe. It underwrites on behalf of RSA, China Re and Korean Re among others, and is a coverholder at Lloyd’s.

But it is not an easy market reinsurance MGAs operates in: “You have to have a differentiator. It’s not enough to be a good underwriter,” says an executive who prefers not to be named.

“Differentiating yourself in the wholesale space is tough. You either have to have a  different philosophy and a different targeted business or you have to be much better than your peers.”

Another established reinsurance MGA is Tamesis Dual, a multi-class specialty excess of loss treaty reinsurance business which is part of the Hyperion group.

Tamesis Dual commenced operations in January 2012 and aims for a selective deployment of capital in classes where conditions are stronger, while  facilitating a rapid response to changes in market conditions and proper cycle management. It operates in the London market writing 100 percent non-proportional business, specialising in marine, offshore energy, onshore energy/property, aerospace, terrorism and war & political risks.

The MGA is backed by Kiln Syndicate 510 and TMK Syndicate 1880, AIG and Ironshore.

Capacity providers may come to  MGA’s like Temesis Dual if they are not yet operating in that space and if they like the underwriters. The MGA promises to write a portfolio so that it becomes more balanced and less volatile by applying the principles of insurance and reinsurance, dispersing the risk geographically and by class.

But reinsurance MGAs currently face similar challenges as traditional reinsurers.

“There is overcapacity in the market and generally the market is not in a good place,” says the executive who prefers not to be named. “Some might be doing well just standing still,” he notes.

Tamesis DUAL, for example, reported pre-tax profit of £4.0 million for the 2016 financial year, down from £5.0 million in the previous year, according to Companies House data.

The turnover decreased to £7.1 million from £7.7 million over the period.

Nevertheless, the number of new MGAs, not least in the reinsurance space, may rise further.

“In the same way as you look at the retail market and the small ticket SME, the MGAs are setting up and they are being of a huge benefit to the capacity providers in their distribution models and their cost ratios. Reinsurance is the next step,” Staddon says.

The MGAA currently counts a total of 129 full members underwriting in excess of £3.7 billion gross written premium, according to the 2017 annual report.

“MGAs are very en vogue, whether it is insurance or reinsurance,” the executive who prefers not to be quoted says.

“I don’t think there’s an underwriter out there who wouldn’t want to have their own MGA.”