MGAs need updates to avoid downgrades

When Trisura Group saw its AM Best outlook downgraded from "stable" to "negative" in mid-March, the reason given was its management of captive insurance companies through managing general agents (MGAs).

Trisura had to write down reinsurance recoverables because catastrophe reinsurance costs rose and depleted the insurer's collateral. Captive arrangements align insurers, reinsurers and MGAs.

The reinsurance side of such partnerships in the MGA insurance market has gotten tighter, with reinsurers being more cautious about investing, according to Randel Bennett, vice president of strategic partnerships at Swiss Re, who spoke at InsurtechNY on March 29. "We've learned lessons in the last three years from some carriers and some insurtechs, where a lot of their performance was being paid for by the reinsurer," he said. "Now that is being paid for by the investors."

Captive arrangements that Swiss Re would have fully supported two years ago are now less likely to get that same level of support, according to Bennett. In the past 25 months, Swiss Re has seen 472 submissions for reinsurance backing for MGAs, he added.

"Ultimately, it's the MGA's job to go out there and show they will be supported by somebody with a large balance sheet," Bennett said. Some of the ones Swiss Re backs are startups and others are existing MGAs. Now, Swiss Re wants to see streamlined expenses when considering supporting MGAs, according to Bennett.

MGAs and captives will have to make changes to meet market demands, according to Zach Lerner, a partner specializing in insurance and reinsurance regulatory and transactional work with the Locke Lord law firm. "We have to take a new, fresh look and so do the regulators," he said. "They have to look at and see how they can update and conform their interpretation of loss to what the market is demanding."

In Trisura's case, catastrophe (CAT) insurance is symptomatic of a hardening insurance market, which compounded its challenges, according to Lerner. "Changing appetites" for CAT insurance, especially in Florida, for reinsurance or fronting (reinsurer coverage of risk as a risk management technique), had to be managed or negotiated in some way, he said.

Digital or insurtech-based MGAs can make a difference, according to Dogan Kaleli, CEO of Stere, an insurance ecosystem and digital insurance tools provider. "If you can work with the right partners, it's not super difficult to build energy today, because the resources are there to pick the right partners," he said. 

For MGAs to succeed, and avoid a downgrade like Trisura, alignment of interests is critical, according to Michael Scholl, chief pricing actuary at Everspan Group, a New York-based partnership of six carriers. 

"Having a really strong alignment of interest with whoever's providing the capacity, whether that means having your own captive, whether it means having a material sliding scale, whatever it is, that alignment of interest is a critical component," he said. "Today it's table stakes to go live to be successful."