Hurricane losses should worry MGAs
Some executives running managing general agents (MGAs) should be prepared for the potential effect on their own businesses of losses from the series of hurricanes that have hit the US and the Caribbean—even if they have no direct exposure to the area.
That is the view of John Holm, head of MGA Investments at Lloyd’s managing agent Asta. Holm stressed that, especially in the context of the recent proliferation of MGAs in the London Market, many executives will not have experienced the aftermath of big losses of this nature before.
To think that because they have no direct exposure they will be unaffected is possibly overly optimistic, he argued.
This is because many MGAs rely on a single or small number of capacity providers. If the company supplying their source of capital has been hit, there will be a knock-on effect.
“On the face of it, they might think that this is happening in the US and does not affect them. But if their capacity provider has been hammered, that is a different story,” Holm said.
This can become a problem in several ways, he explained. First, if their losses are heavy and their own reinsurance programme has been exhausted, they may simply lack the capital to maintain the same level of support to an MGA.
Second, even if this is not the case, in the aftermath of a large loss, rates in catastrophe reinsurance and the retrocession market can often skyrocket. This could mean that the capacity provider suddenly has much more lucrative options for putting their money to work.
“That happened after 9/11. Capacity withdrew from the market, prices spiked and suddenly that was the best return around, but if you are an MGA reliant on that same capacity you could find yourself missing out,” Holm said.
The losses do not necessarily need to be direct. Many Lloyd’s managing agents, for instance, now run both MGAs and syndicates. The latter could be exposed to severe losses and need recapitalising in the aftermath of big losses—potentially at the MGA’s expense.
Finally, a knock-on effect of the second scenario could be that a capacity provider, aware of a hardening market in other lines of business, puts pressure on an MGA also to put its rates up. This may be unrealistic in the specific market segment the MGA is operating in, leading to tension between the two.
A better way for an MGA to mitigate such risks is to seek diversification in terms of where its capacity comes from and become as independent as possible, Holm advised.
“If an MGA is tied to one carrier it has all its eggs in one basket—they need diversification,” he added.
“They need a fallback plan. My advice would be to find a good broker and get them to seek alternative or additional capital providers, preferably from carriers with little exposure to US cat risk.”
He stressed that Asta does not have this problem. The business is truly independent and not reliant on any single corporate. Not only does independence benefit businesses in the aftermath of large losses when capacity might constrict, it also makes them more appealing when it comes to exit strategies and selling the business.
But he repeated how few executives in MGAs will have been in this scenario before.
“It might be only around 10 percent of management teams in MGAs who have experienced this before,” he said.
“If losses are big, that means they are moving into the unknown and things could get messy. They need a fallback plan—quickly.”
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