Threatened reinsurers look to MGAs
Smaller reinsurers are working more directly with MGAs and brokers to add value as challenging market conditions continue.
That is the opinion of Marco Del Carlo, managing director at Tempo Underwriting, speaking toIntelligent Insurer.
“Traditional reinsurers are under threat on every front. In turn, many reinsurers are looking for new, profitable sources of premium – one of which is to work more directly with MGAs and brokers who have books of business,” he said.
Del Carlo said that reinsurers are taking multiple approaches to remain relevant, including delegating authority to a coverholder for facultative business, delegating authority to a coverholder with a front – which is much more common in the US, and where coverholders already have capacity with an insurer, reinsurers are providing quota share capacity to increase line sizes behind the insurer.
However, at the same time, ILS funds are finding it more difficult to source business which meets return on capital requirements.
“With exposures needing to be fully collateralised, ILS funds have been limited to one-shot deals putting them at a disadvantage to rated carriers who can offer reinstatements without the need for full collateralisation,” he said. “Nephila recently set up a Lloyd’s syndicate and Credit Suisse recently set up Kelvin Re – both of which provide capital compression to their models. Other ILS funds currently have limited ability for capital compression.”
Del Carlo also spoke of the issue of fronting, which bring challenges for both reinsurers and ILS funds, saying that this could be addressed by the introduction of a specialist carrier.
“For personal lines or SME business there are many unrated carriers prepared to front. For business requiring an “A” rating, there are very few rated carriers prepared to front. Outside the US, fronting is an accommodation that a rated carrier begrudgingly makes,” he said.
“I think there is an opportunity for a carrier in the market to specialise in fronting – to create a pool of risks and run it like a book of any other portfolio. This may suit a new type of hedge fund insurer who takes on the credit risk of fronting and may provide some tail risk in exchange for the ability to invest the associated float.”
He described the recent deal between Nephila and State National in the US, whereby State National fronts for Nephila to access business directly from brokers, MGAs and insurers, as an interesting one, and said that he expected to see a collaboration of the ILS funds to create their own mutual rated carrier.
“I could see a number of complementary ILS funds getting together to create their own mutual rated carrier to act as a utility of sorts for the ILS community,” he said.
