MGA Programs Suffer In Re Renewals

The reinsurance capacity crunch that has hit the casualty market has been especially pronounced for managing general agents trying to renew treaties supporting their casualty programs for 2002, industry observers agree.

Previously it was viewed as a specialty area that a lot of reinsurers wanted to get into, said Gregory Sandvik, a managing director for Guy Carpenter in Stamford, Conn. Going back a few years, he said, “there was a strong appetite” for MGA program business.

But by year-end 2001, he said, the general view among reinsurers was “that MGA-driven business was not the flavor of the month.”

Many of the reinsurers, intermediaries and MGAs that spoke to National Underwriter identified MGA program business as the one type of casualty business where capacity was much scarcer going into 2002.

Rod Fox, chief executive officer of Benfield Blanch in Dallas, was among the first intermediaries to spotlight problems for MGAs during a presentation at a reinsurance conference in early December. “The MGA business has really suffered. You cant find reinsurance capacity for a number of MGAs,” he said.

“Of all the lines of business, we saw the biggest contraction in the MGA area, and Id say that was pretty universally true,” he told NU in a January interview.

Mr. Sandvik agreed. “Because of some losses that came out of some MGA-driven program business, a number of markets have pulled back,” he said.

A reinsurer representative, who did not want to be identified, speculated that the pullback might not always have been the direct result of bad experience on the programs themselves. He cited the fact that MGAs typically produce business in classes now viewed as difficult generallylike nonstandard auto, medical malpractice, nursing homes, directors and officers, and professional liability, as well as long-haul trucking.

Whether trucking is considered an attractive or unattractive class for reinsurers sparked some difference of opinion among experts who were interviewed. At one point, Mr. Fox described commercial auto as one of the “more innocuous” classes on reinsurer pricing matrices. He suggested that primary rate hikes in recent years have kicked in successfully to make the line more profitable.

Still, MGAs with poor-performing auto programs struggled to find capacity, he said. In general, for all types of casualty business, including non-MGA business, reinsurers are looking at “quality of data and track record,” he said.

For MGAs specifically, he said, programs that were new or very general saw the greatest pullback. “If you had a great MGA that was a real specialist, it was still a struggle, but they were able to get” reinsurance.

Joe Hutelmyer, president of Seaboard Underwriters Inc., a managing general agency in Burlington, N.C., said “it was ugly this year” for MGAs with respect to reinsurance. While he was able to work with his issuing carrier to find reinsurance capacity for a commercial truckmen program, the terms were “dramatically different from last year,” he said.

(The treaty for Mr. Hutelmyers program came up for renewal on Oct. 1, rather than Jan. 1, he said, noting that the renewal was postponed until Nov. 1 because of the events of Sept. 11.)

Noting that there are a number of reinsurers on his program, he said there was a general unwillingness among them to provide quota-share reinsurance; that “everybody wanted excess-of-loss.”

“Pure fronting arrangements also are unavailable,” he said. While his issuing carrier is taking risk, for other insurers that dont take risk, the treaties “didn't renew,” he said.

“Reinsurers are also looking for the program managers or MGAs to put some skin in the game,” he said, noting that Seaboard Underwriters is taking risk in the form of a loss corridor and a tougher swing-rated commission arrangement.

Explaining the loss corridor, he said, if the loss ratio hits a certain level”in our case 90were responsible for losses between 90 and 95 percent.”

In addition, he said, pricing went up on every layer. “What it cost us for $900,000 excess of $100,000 last year, it cost us for $750,000 excess of $250,000 this time,” he said, suggesting that the changes worked out to a 25-to-30 percent increase in reinsurance pricing. “At the same time, ceding commissions were reduced around 40 percent,” he said.

Mr. Hutelmyer also described changes in the level of information that reinsurers are now requiring from MGAs and issuing carriers. “If you go back roughly five yearsto when we bought Seaboard from its previous ownerswe went to reinsurers with no statistics, no data and got 100 percent quota share reinsurance,” he said.

“Now, not only do they want four or five years of statistics, but an actuarial statement. There was a two-fold increase in requirements last year and a 10-fold increase over three years,” he continued.

Mr. Sandvik and others said reinsurers are asking for a lot more information on all types of submissions, not just from MGAs. But by changing their underwriting approaches on program businessand requiring a lot more detail about relationships between MGAs and carriersthey made it impossible to write contracts that cover several MGA producers at once, Mr. Sandvik said.

Typically, he said, a carrier that specializes in program business might cede most or all of its programs into one core treaty. “One or two reinsurers now look at that and say, We cant do that because of the level of detail we need on the relationship between each MGA and the carrier.”

Cedents are not only very uncomfortable with sharing details of MGA agreements, but its just a matter of the volume of material. “That would be too much for a reinsurance underwriter to digest” in the period of time available to underwrite the deal,” he said.

At American Re in Princeton, N.J., Bonnie Boccitto, senior vice president in charge of the specialty division, said her companys appetite for MGA business had not decreased and, in fact, that American Re is looking to write more.

Unlike the situation Mr. Sandvik described, she said, American Res approach is to write specific treaties for each MGA individually, rather than to reinsure a group together. “Its hard enough to get your arms around the program of one MGA, let alone a treaty that might encompass 20 different programs,” she said.

She agreed that other reinsurers are deserting MGAs. They may see better opportunities in other lines, like property catastrophe, she speculated.

Another reason might be that reinsurers have come to the same conclusion AmRe hasthat MGA program business is resource intensive. “You need to have specialists working on it. And if reinsurers are not willing to devote the resources to set up specialty units [with] people who specialize in this business, they may find that its not something to just dabble in,” she said.

Steve Kiernan, president and chief executive officer of Burns & Wilcox Re Inc. in Upper Saddle River, N.J., an intermediary that places a lot of MGA business, said that both reinsurance capacity and the availability of policy issuing companies affect MGA programs.

Like everyone else seeking reinsurance this year, MGAs had the normal problems of pricing, he said. But if the MGA has not shown that it can price and select business the way the reinsurers want, or it cant process the business efficiently, that just adds to the problems of finding reinsurance capacity, he added.

“If its any kind of marginal program, reinsurers definitely are looking at those programs very closelyand looking at the expense factors involved. Even if a program is fairly successful, they are re-examining commissions paid to ceding companies and to MGAs, he said.

Mr. Kiernan didnt believe that reinsurers were asking for any more information than they had in the past. The change, he said, was that they were “absolutely pushing” for the information and they were very precise about the format they want it in.

There was a lot more “back-and-forth” this year, he said, noting that reinsurers would reject data that wasnt in the right form. “In the past you would just send in the losses. Now you have to be able to triangulate them. That takes expertise and systems capabilities,” he said.

At United Brokers Inc., an MGA based in New Albany, Ind., Anthony Glotzbach, president of the firm, said he “could not have come out better” on reinsurance renewals.

“One thing that this really revealed was the test of old relationships. They are extremely important,” he said, noting that reinsurance underwriters who knew who they were doing business with were more receptive than those who faced new customers.

“I think perhaps the biggest difference this year is that all of us witnessed a dramatic change in terms of our confidence” about the economy and about “the way things had been” before 9/11, he said. “There was a sudden awareness that dramatic change is possible and inevitable,” he said.

“I didnt hear any negativity. It wasnt that reinsurers did not want to do business,” he added. Instead, he said, like everyone, reinsurers took a “very cautious, very deliberate” approach to their business during the Jan. 1 renewal period. While he observed a “real cleansing of terms and conditions,” in both the liability and property segments, “thats very healthy for the industry,” he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 18, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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