THE MGA AGENCY CAPTIVE EXPLOSION

The captive insurance world continues to grow in leaps and bounds year after year with new entrants, and in doing so, parallels another industry segment that is growing exponentially: managing general agents (MGAs). These two segments often overlap, which is frequently seen in the form of agency captives.

There is an explosion of agency captives in the industry, as MGAs recognize the benefits of forming a captive as they grow into more sophisticated entities. Various market forces are contributing into this industry growth, as improved market conditions abound in primary rate adequacy, more options to captive domiciles, third party vendors and fronting companies, and access to reinsurer capital.

MGAs have been a part of the insurance industry for a long time. However, over the course of the previous decade, they have emerged as a major force to be reckoned with. MGAs are estimated to have written $53.8 billion in gross premium in 2021, a staggering number which is expected to continue growing. Roughly 45 percent is admitted business and 55 percent (and on the rise) is excess & surplus (E&S) lines.

It is worth noting the term MGA is a loaded one, with different companies and executives sometimes using it interchangeably with the terms managing general underwriter or program manager. While there may be some minor differences between the three labels (and determining when each is best used is getting deep into the weeds), the overall ongoing impact these organizations are making is undeniable.

New sophistication

The growth of MGAs comes from a variety of trends including the shift in experienced underwriting teams moving to MGA platforms, an ongoing explosion in E&S program launches and a major growth of MGAs into segments they previously were not a major part of, such as D&O, A&H, surety bonds and other lines of business. A major trend behind the growth of premium volume is the ongoing development in the sophistication of these MGAs.

There is stark contrast to MGAs of 15 years ago which is exemplified in how these modern entities accumulate and utilize data, build and refine complex IT and underwriting systems, and pivot and change policy form wording—all of which they can do at high speed, more so than their carrier partners typically can. This level of sophistication extends to how MGAs build their programs. MGAs now take a very active role in whom they partner with, including the reinsurance partners that support their carriers.

Having direct access to this reinsurance capacity allows MGAs to be more involved in creating the structure of their programs. MGAs can understand the economics of all the different stakeholders and help fine-tune the terms and conditions. Their goal is then dual-purposed: to optimize the structure in a way which serves their own needs and to create terms that will ensure longevity with their partners.

One additional and noteworthy element in the increased level of sophistication of MGAs is their ability to access outside capital, which is more prevalent than ever. Many MGAs are now owned by private equity firms and have the wherewithal to utilize that capital.

Even those MGAs who don’t have that financial backing have easier ways of accessing capital, with experienced executives on the teams who know capital markets, reinsurance brokers and other entities that can make those connections. All these factors for MGAs dovetail to create a perfect storm for the strong growth of agency captives that the industry is seeing.

Agency captives continue to be a major part of the surge of captive growth over the last few years. MGAs, as the prime entities driving this surge, have many benefits. First, by forming a captive and taking risk alongside their panel of reinsurers, the MGA can share in the profitability of the program. The agency captive can take the structure which the stakeholders closely negotiated and fine-tuned and turn it into a profit center.

Additionally, reinsurers are very cognizant of the different entities having “skin in the game”. Just like they want and need their carrier partners to take a risk-sharing position, they also have a very positive stance on the MGA itself doing so. An MGA which utilized an agency captive is going to have access to more reinsurance capacity and is going to be able to leverage that risk taking position for better terms.

“The hard market is giving underwriters more confidence than ever in the profitability of their portfolios.”

A good market

Another major reason for this growth of agency captives is the current market conditions are optimal. The underwriters that drive the MGA programs recognize that the current hard market is creating a unique opportunity.

The current rate adequacy in the market, particularly in E&S casualty, commercial auto, D&O and professional lines is better than it has been in almost two decades—and for many executives the best they’ve seen in their careers. Statistics coming out of the January 1, 2022 renewals indicate that rates were up anywhere from 10 to 30 percent on various lines of casualty business, with some segments, such as D&O, up over 50 percent in 2021.

Forecasts for 2022 see some leveling off but the consensus is that while not quite as dramatic, rates are still going up for casualty business. Property rates are also being forecast to increase coming off 2021, which several reinsurance companies have claimed as one of the worst property years ever. The hard market is giving underwriters more confidence than ever in the profitability of their portfolios, and this extends beyond price.

Terms and conditions continue to tighten up on primary policies as deductibles are trending up, defense inside the limits becomes more prevalent in certain lines of business, exclusions are being re-implemented and other terms and conditions are mitigating risk on the portfolio. The hard market is undeniable, and savvy MGAs are recognizing they need to strike while the iron is hot.

It is not just the primary insurance market that is experiencing optimal conditions to form an agency captive. In the US, there is a plethora of domiciles that are very competitive and commercial, which make forming and running a captive easier and more straightforward. Whether it’s the Carolinas, Connecticut, Montana, Utah, Vermont or any of another two dozen states, domiciles are making an effort to be easy to work with, have commercial benefits and help with speed to market. Bermuda and the Cayman Islands remain key domiciles for all parts of the captive industry.

Captive managers are more robust than ever before and have done an excellent job refining how they explain the intricacies of a captive to new agency captive entrants. They are helping new entrants recognize not only the long-term benefits of being a risk taker on their programs, but also utilizing the captive as part of their overall growth strategy.

The world of third-party claims administrators (TPAs) has continued to evolve with the growth of MGAs and captives. MGAs are working hand and hand with claims TPAs, in situations where they own them or where they have vetted them extensively and selected them as an expert partner on a specific program. In both scenarios, MGAs are working with them at a granular level, with access to advanced claims systems in real time which in turn helps their data analysis and underwriting process.

MGAs ensure the TPAs know and understand the policy form language to manage the claims strategy. This is giving MGAs more confidence that loss adjustment expenses are being managed, the tail risk of claims is being controlled and the TPAs are understanding the exclusion wording that can mitigate loss. Any agency captive strategy must proactively include a claims TPA strategy.

MGA agency captives are launching in a market that is giving more options than ever. A new wave of “hybrid front” carriers has launched over the past few years, where the carrier provides paper and retains a portion of the risk. As MGA business grows faster than the overall commercial insurance market (32.8 percent+ compared to 9.33 percent for the overall market from 2018 to 2020), hybrid front carriers are filling this demand. These carriers are eager to grow their business, and many bring captive insurance expertise to the table.

They are willing to work with the agency captive to gain comfort in having them as reinsurers on their balance sheets. The combined retention of the hybrid front and agency captive makes a compelling case for alignment of interests. Traditional alternative risk carriers also remain prominent in the agency captive world. More established and in the segment longer term, they are actively working with agency captives to grow their platforms, offer more lines of business and put their capacity to work.

Reinsurance

On the back end of the structure, the reinsurance sector is providing more options than ever before. Many reinsurers have woken up to the MGA world and the agency captive world over the last several years and are actively deploying their capacity to the space. Buying into the underwriting expertise and market opportunity, they’re willing to fine-tune a structure with excess of loss and quota share options.

Perceptive buyers of reinsurance can shape the structure so that the net captive retention is adjusted to address capital and collateral concerns. Reinsurers offer a wider array of products which can help captives grow and manage their balance sheets. This includes the legacy reinsurers who offer adverse development covers and loss portfolio transfers which can free up capital and trapped collateral, as well as create an exit strategy for older years. There is a lot of innovation going on in this segment of the reinsurance market right now.

The explosion of MGAs and captives in recent years has coalesced into a surge of MGA agency captives which is taking the industry by storm. Recognizing the multitude of benefits in forming a captive, MGAs are taking advantage of a perfect storm of market conditions: better rate adequacy and profitability, improved terms, a healthy domicile landscape, sophisticated third-party vendors, a competitive fronting market and a robust reinsurance industry that is getting creative in how it deploys its capital.

The net result is MGAs getting better terms for their programs and building a profit center via risk taking. As these colliding forces appear poised to continue unabated in 2022, it will be interesting to see how much more this segment will evolve and grow.

Desmond Bohan is executive vice president of origination at BMS Re US. He can be contacted at: desmond.bohan@bmsgroup.com