Asset-light vehicles are moving into distressed markets such as Florida and California, a trend that’s becoming structural rather than cyclical, according to a panel of industry executives who spoke at the Inside P&C conference.
The panelists highlighted the changing role of MGAs, as legacy carriers pull back from cat-prone areas to combat growing losses from hurricanes, severe convective storms and other secondary perils such as wildfires.
“There’s no carrier in the market that hasn’t said they are re-underwriting their portfolio,” said panelist Anthony Shapella, deputy chief underwriter at SiriusPoint, noting that carriers are taking a more deliberate approach and reallocating their capital away from areas that aren’t “earning their keep”.
Armed with the technology necessary to drive better results, MGAs are moving to fill in the gaps left by those carriers.
“This cycle, it seems like a lot of capital is flowing in via these asset-light vehicles, and in the end that’s a net good because it solves at least some of the problems around capacity in these high-cat areas,” said David Flandro, Howden Tiger’s head of industry analysis and strategic advisory.
Shapella added that he thinks MGAs are here to stay for the long term.
“The model, when done well, is very, very good. It’s all about trading with the ones that are best in class, making sure you have good due diligence set up and monitoring performance. So, we're bullish on MGA’s,” he said.
Seconding the importance of due diligence, Flandro touched briefly on the scandal dogging “the [ILS InsurTech] whose name must not be said.”
“You're going to have to have a fairly forensic discussion about collateral and LLCs in these structures going forward,” he noted. “People will be drawing up new rules for this now, and I hope that enables these asset-light structures [such as MGAs, fronting companies and reciprocals] to come in and fill a gap where they're very much needed.”
The execs caveated their overall bullish outlook for these companies with a reminder that Florida and other cat-prone states, such as Texas, South Carolina and Georgia, are in a “tough spot.” Making matters worse, the exposure base in these states is growing as people migrate to them in high numbers.
“You've had smaller carriers step up, more entrepreneurial names that are trading on smaller balance sheets. But that business model requires reinsurance, and reinsurance right now is costly,” said Shapella, highlighting this year’s 30%-35% rate increases and growing cedant retention as the reinsurance market continues to firm.
“We're at a point right now where reinsurers are assuming less risk in terms of program structure than they have for a very long time,” added Flandro, citing a recent Howden Tiger study that pegged the average retention rate from 2000 to 2022 at 46%. In 2023, retention climbed 10% year over year to 64%.
The results reflect a multi-year journey of cat risk being “upstreamed” towards the ultimate source of risk in the value chain — the insured.
Starting at the beginning of 2019, there was an upstreaming of cat risk from the retro/ILS market to first-tier reinsurance, after which – intensifying from 2022 – it has been pushed from reinsurers back to insurers.
A heterogeneous market
“One of the things that's different about the [post-Ian market] and the post-Katrina market is that after Katrina, there was a $30bn inflow of supply [with several capital raises and IPOs including Lancashire],” said Flandro.
Now, there seems to be a high degree of heterogeneity among primary carriers and reinsurers, the speakers noted, saying that some are dipping their toes into new areas of E&S and retro, while others are doubling down on their traditional property markets and still others are embracing hybrid structures with a carrier balance sheet on one part of the structure and an MGA on another.
The execs attributed this divergence to the convergence of several factors — the war in Ukraine, an uptick in natural catastrophes, asset impairment, rising inflation and the Fed’s spike in interest rates from 2022 to 2023.
January 1 reinsurance renewals
Despite the challenges ahead, the panelists noted that January 1, 2024 renewals are likely to be more orderly than the prior-year period, barring a major hurricane or severe convective storm (SCS) event.
The panelists also cited improvements in risk-adjusted returns that could influence a more orderly renewal period.
“For the first time this cycle, and probably in over a decade, reinsurers have had the opportunity to earn their cost of capital,” Shapella concluded.
“As time goes on, if we're still talking about combined ratios in the mid-90s, 5% and 6% investment deals and ROEs of 16-18 with a cost of capital at 11, that becomes an attractive place for capital to come in. The smoothness of the renewals will be partly dictated by that.”
