More insurers are converting to MGAs
The increased regulatory burden that has been imposed on insurers in recent years, exacerbated by Solvency II, has continued to prompt many smaller players to convert from being fully fledged insurers to become managing general agents (MGAs).
That is one of the trends that Martin Davies, chief executive of AHJ Capital Markets, told Monte Carlo Today he has identified in the past year. He explained that such a move relieves these players of their regulatory obligations while also allowing them to work with bigger capacity providers, many of which have a keen appetite to work with MGAs.
“We have seen a lot of insurers especially from smaller economies, for example in central and eastern Europe, go through that,” Davies said.
“We are seeing it less so in the UK but there has been a certain amount of activity in Gibraltar. The situation has been helped by a proliferation of turnkey facilities and MGA platforms in London who are very good at managing insurance operations.”
He added that for a capacity provider, backing an MGA can also be a very efficient way to expand.
“As long as these facilities are well managed, it gives them distribution and a very efficient way of putting capital to work. If someone has developed a new technology or something unique which can be embedded into an MGA, it can also be a good way of trying new technologies.”
AHJ Capital Markets acts as the facilitator, matching capital with MGAs with robust business plans and a need for capacity. It has also worked alongside management teams of MGAs to achieve management buyouts.
“It is a question of matching people with the capital so they can move in the right direction,” Davies said.
He stressed that capacity providers, while keen to partner with MGAs, are also increasingly mindful of their responsibilities to maintain underwriting discipline and also, especially where policies are being sold to consumers, that the highest standards of conduct are followed.
“The way the regulatory landscape is now, there is always a case it could come back on the capacity provider,” he said.
He added that some larger players are open to investing in an MGA by supplying working capital in exchange for equity in addition to supplying capacity.
“These companies will be seeking a return on investment and a direct return on the underwriting as well. There are then two means by which they can make a profit, which on the right deal can work for all parties.”
Davies added that AHJ Capital Markets is also seeing an increase in enquiries from companies wishing to improve the efficiency of the collateral structures they use—including funds at Lloyd’s. He said that availability of structures tightened after the financial crisis but providers are now becoming more innovative.
“There is a growing number of ways to improve these structures by looking more closely at things such as the way investments are held, charges around capital charges, liquidity and volatility. It comes back to the same thing: capital efficiency. Every company is looking for ways of improving this. In the current market, every little helps.”
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