Excess reinsurance capacity from both traditional and third-party sources has enabled MGA’s to drive a shift in the distribution channel. With firms increasingly realising the benefits of getting closer to the primary source of risk, according to Romulo Braga, CEO of BMS Capital Advisory.
Challenges in the global insurance and reinsurance landscape in recent times has driven an increased need among market players to boost efficiency across the entire balance sheet.
With ample capacity from traditional and increasingly alternative reinsurance capital providers, and a lack of large loss events dampening underwriting profits, and low interest rates continuing to test the difficult investment environment, lowering the cost-of-capital has become an important part of re/insurers’ strategies.
One such way re/insurance entities have sought to reduce costs and ultimately increase efficiency is by seeking to get closer to the primary source of risk, a trend that’s changing the distribution channel, according to BMS Capital Advisory’s Chief Executive Officer (CEO), Romulo Braga.
Speaking with A.M. Best at the Target Markets’ 2016 Mid-Year Meeting in Virginia, U.S. recently, Braga underlined that investors and capital providers are focusing on managing general agents (MGA’s) and other segments that have solid relationships with producers and the end users, in an effort to get closer to the original source of risk.
Discussing the trends in the distribution chain, Braga said that he sees “a much more active approach to distribution both from the MGA or program writers as well as the carriers and ultimately capital providers.”
“Be it hedge fund reinsurers or dedicated asset managers in the space who are actively looking to get closer to the primary risk.”
A recent example of this can be seen with the largest asset manager in the insurance-linked securities (ILS) space, Nephila Capital, which established its own MGA Velocity Risk Underwriters LLC as a more direct route to access catastrophe risks.
The reason firms like Nephila have sought to access risks more directly, says Braga, is they realise “the value lies in controlling the distribution channel.
“The closer you get to your ultimate client, your ultimate customer, the more value you’re going to have in the distribution chain. Right now we’re in the market space or in a market segment that there’s plenty of capital. Finding the capital to back those risks is really not an issue,” said Braga.
He continued to stress that with capacity in abundance MGAs are able to source capital to back the underwriting that’s sourced traditionally through insurers, driving a change in the distribution channel, “that’s putting them at the forefront of the risk value contribution to the system.
As mentioned previously underwriting and investment returns in the re/insurance landscape are proving difficult to come by as competition intensifies and numerous drivers continue to push down rates.
The establishment of an MGA to access the risk more directly means that companies can go out and source risk more directly, alleviating some of the reliance on typical reinsurance business that gets shopped around during renewals, which is perhaps less attractive to investment managers in the softening landscape.
“You expect more of those kinds of models to come in to the extent they’re having an underlying book of business already supporting that model. Ultimately also you see a lot of dedicated asset managers that are seeking to grab existing market share and also new ones,” said Braga.
Braga feels that the focus of these MGAs is to secure the funds of existing institutional investors in the space, but also to capture the capacity and backing of those sat on sidelines, waiting for the softening landscape to turn before entering the space.
“It’s a matter of time before that takes place and makes the market that’s already full of capital even bigger and more stable here also. The cyclicality of the business should decrease a little bit as we go forward and the capital becomes more robust on a long-term basis because capital, from our perspective, is here to stay,” explained Braga.
Alternative reinsurance capital further grew its share of the overall reinsurance market pie in 2015, growing to a reported $70 billion of the $427 billion total global reinsurance capital, while traditional capacity declined by 3.5% to $357 billion, according to Willis Re.
Should Braga’s prediction prove true and MGAs continue to capture a greater source of existing and new third-party institutional investor backed capacity, it’s likely the alternative reinsurance market will continue to expand its presence and reach with their help.
The MGA provides a useful way for institutional capital to get much closer to the ultimate source of risk, which as efficiency and cost of capital maintain their importance in reinsurance should result in this trend becoming increasingly important for ILS fund managers and investors to embrace.