E&S lines and MGAs now overlap

Specialty business models are changing as excess and surplus and managing general agents become more entwined, says Sarah Freitag, Head of US Specialty Distribution, Aon’s Reinsurance Solutions.

Key points:
Business models are overlapping
Alternative capital options beyond property
Limits are still below pre-2018 levels

The roles of specialty insurers operating in the excess and surplus (E&S) space and managing general agents (MGAs) have been moving ever closer for some time in the US. Both areas have expanded; there is overlap on many levels. 

This has also prompted brokers to adjust. In March this year, Aon Re announced that it had brought its MGA and excess and surplus (E&S) practices, along with a new programme-specific carrier segment, under a single umbrella, creating a dedicated US specialty distribution segment.

Aon said the new structure reflects its investment in US specialty distribution as a distinct, growth-focused business segment. A dedicated leadership team was unveiled to oversee the segment. One of those leaders was Sarah Freitag, who was named US specialty distribution leader, which includes the three segments. 

In this role, Freitag was made responsible for setting strategy and growth priorities, shaping investment in capabilities and coordinating with Aon’s Commercial Risk, Reinsurance, Capital Advisory and Analytics teams. She told APCIA Today that the move was made as a reflection of the increasing overlap of the sectors – and that the change would allow the broker to capture the growth in each and better service clients. 

She explained that Aon’s brokers retain specialist expertise for each segment while coordinating advice where clients have common requirements. Freitag also said the sectors have been expanding for more than a decade, with increasing commonalities emerging. “There’s so much overlap because not only is there a lot of E&S distribution in the MGA segment, but it is estimated over 40% of the US MGA market is owned by wholesalers,” she said. 

Fronting arrangements are also changing. Some fronting insurers have evolved into programme-specific carriers that take on more risk. While these carriers have distinct advisory needs, Freitag said they provide MGAs with “a rapid route that also gives them control of their capacity, while prioritising market cycle resiliency”.

“We help clients navigate both the traditional market while also having a strategy for alternative capital.”

MGAs and insurance brokers are exploring underpenetrated classes of business, either through facilitation or underwriting. Technical benchmarking on these classes, especially for E&S, is difficult to find and assess. Freitag said technology and enhanced data ingestion is helping participants analyse niche portfolios and assess prospects for profitable growth in classes where capacity has been underutilised.

Capacity crunchers

Traditional insurers remain core capacity providers to both MGAs and E&S businesses, while alternative investors are increasingly active in both industries. “In the last soft market there was a lot of interest in property coming from alternative capacity. Now, investors are considering multiple lines of business, which is shifting the market dynamic,” she said. 

But not all alternative capacity is equal. Freitag believes it is the broker’s job to advise clients on which forms of capital might suit their needs. “We help clients navigate both the traditional market while also having a strategy for alternative capital,” she said. “It is important for an intermediary to have expertise and access to all capital sources, in order to help clients make better strategic decisions and optimise their risk transfer programmes.” 

Bringing together many disciplines and skill-sets, including capital advisory and analytics, under one roof, is one of Aon’s biggest strengths, she explained. It uses actuarial consulting and risk data to help clients assess those plans.

Managing limits

Given that there is limited statutory data available for E&S and MGA segments, this is an area where Aon provides invaluable insights to clients. Freitag said benchmarking portfolios in these segments is important to compare the current exposure levels to historical profitability, understanding how different changes in terms and conditions can shift capital and profit.

One notable difference is how deployed average limits have changed on insurance polices. “Limits deployed decreased meaningfully post 2018, and although they are increasing in today’s market, they are still well below pre-2018 levels.” 

The increased limits drove model miss, creating a divergence of plan vs. actual results. While limits increase, to counteract volatility, carriers can go to traditional solutions or consider new products such as auto-facultative solutions for shared and layered business.

This is proving useful for both MGAs and E&S carriers in keeping their net limits at reasonable levels.

For more news from the American Property Casualty Insurance Association (APCIA) click here.

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