MGAs turn to reinsurers for capacity in hardening market

Reinsurers are taking advantage of the hardening insurance market by forging partnerships with managing general agencies (MGAs) in the primary market.

Charles Manchester, chairman of the Managing General Agent Association, told Insurance Times that while reinsurers providing MGAs with capacity was not a new phenomenon, the state of the current primary market was making the proposition more attractive.

“Reinsurers might be looking for more quality MGA business in a harder market when prices are going up, and that’s the case at the moment,” he said.

Amid shrinking capacity for MGAs from primary insurers having their wings clipped at Lloyd’s, several have found themselves seeking capacity elsewhere. As prices rise and pressure builds on MGAs to generate profitability, reinsurers have been attracted to provide capacity.

And while margins are thin in the reinsurance market there is added incentive for reinsurers to look towards MGAs in the primary market.

“One of the rationales for doing it is to cut out frictional costs, because if at the end of the day the underwriting is going to be done within an MGA rather than within an insurance company then why would you pay a fronting fee for the insurance company, which is effectively what you’d be doing,” Manchester said. “You’d be doing it at a lower cost. You’re also cutting down the duplicity of multiple buyers looking at the same underwriting.”

MGA benefits

One venture that got off the ground this year with capacity provided by Munich Re Digital Partners is UK motor MGA Ticker, founded by serial tech entrepreneur Richard King.

King knew Digital Partners chief executive Andy Rear through being on the board of smart-home insurtech Neos together, and he was aware Munich Re was looking for start-ups to support. Linking with Digital Partners in particular was a key factor in King proceeding with Ticker.

With the backing, King said Ticker has far more capacity than any of the broker players in the same field, and enough to ensure it is not limited on volume.

“Digital Partners is this entrepreneurial front end to Munich Re, and it has got long-term plans,” King said. “We are delighted to be part of those long-term plans.”

And Manchester said there were other reasons why MGAs might prefer to partner with a reinsurer.

He said: “Reinsurers are not going to be competing with an MGA because by definition they are reinsurers and their business is not to set up and compete against you – it does make some sense.

“But whether it’s a primary insurer or reinsurer the MGA has to add value and if they do there will be plenty of capacity out there looking to underwrite their business.”

Profitability

For the reinsurer, the MGA presents a diversifier in terms of distribution and also presents an opportunity to sell reinsurance through the account. The only concern is whether the MGA can remain profitable.

Manchester added: “It helps the reinsurers top line and it helps their bottom line if it’s profitable, but the thing to be wary of is just focussing on the top line.

“There are dangers because reinsurers tend to be staffed by reinsurance experts rather than by primary market underwriters, so they’re not necessarily going to have the expertise. But you’d have thought a company the size of Munich Re or Hannover Re would have the expertise lurking somewhere within.”