Due diligence, data and alignment key in program management: PM panel

Alignment of interest through risk retention, strong due diligence and the ability to monitor performance are at the center of the growing use of hybrid fronting carriers by reinsurers looking to access program business.

Speaking during a virtual debate hosted by Program Manager, Swiss Re direct national lead Daryl Polenz highlighted the characteristics the reinsurer looks for in MGAs and carrier partners on its US program book.

It carries out due diligence to ensure MGAs have good distribution, “proper” underwriting expertise, pricing ability and the capacity to manage claims, policy administration and the appropriate reporting.

But its carrier partners – including fronting insurers – play a major role in the management of the programs it supports.

“The due diligence process up front hopefully involves that carrier partner, who we expect to participate on the risk because we’re trying to create the appropriate alignment of interest. Longer term, we expect that carrier partner to help us do the ongoing performance monitoring,” said Polenz.

While Swiss Re is a large company with plenty of resources, it is not set up to monitor individual programs so requires help from its carrier partners to ensure programs are performing as expected.

“If we can get appropriate underwriting expertise from our carrier partners to help with the due diligence, align interest through risk sharing, and ongoing performance monitoring, well we’ve got a pretty good combination there,” the Swiss Re executive added.

Also speaking on the panel, Todd Campbell, president and CEO of hybrid fronting carrier Accredited Surety and Casualty Company (ASCC), said his company undertakes “deep diligence” of MGA partners and his “extensive internal processes”.

“With regard to retention, it’s an evolving market, we all see that number ranging from zero to 20 percent. We do take risk in some [programs] and in some we don’t. But the point of that is it’s not because we do or don’t like that business; we treat every single account the same way,” he explained.

ASCC parent Randall & Quilter has also just launched an E&S platform led by former Aon executive Pat Rastiello called Accredited Specialty Insurance Company, which secured its A- AM Best rating earlier last week.

Commenting during the virtual debate, Rastiello said the E&S carrier would take risk and added that reinsurers had driven the move towards retention by fronting carriers in recent years.

“Frankly, coming into the E&S market at this point is a good time to take some retentions because we see underwriting profitability is probably going to be the highest it’s been in a decade.

“This capital-lite model is effective, it gives MGAs an easy access to the marketplace, and it gives reinsurers cause to look at primary business,” the executive added.

Valuable hybrid model

As previously reported, there have been a significant number of new entrants to the program fronting space in the last few years, with investors attracted by the success of State National – which was the first publicly traded example before eventually being bought by Markel at a high multiple.

The market environment where reinsurers have shown strong demand for program business and have been looking to get closer to the risk has created opportunities for start-ups to enter the market.

Matt Beard, head of client solutions at GC Access, said the hybrid fronting carrier model is becoming “more valuable by the day”, with the new entrants positioning themselves to meet the needs of MGAs and reinsurers simultaneously.

“With an MGA you’ve got to be able to sell them that you can unlock reinsurance capacity better, more easily, more quickly and more robustly than the old model can. And what the reinsurers want to hear from these companies is that they are watching over the program in a bit more detail in the past and taking risk alongside them.

“So this new hybrid model is really positioning itself perfectly between the reinsurer needs and the MGA needs, and has led us to the current framework we have in the marketplace today,” Beard said.

Matt Grossberg, CEO of tech-enabled program administrator ISC, said the “capital-lite” carrier model of hybrid fronting carriers gives MGAs the opportunity to bring the reinsurers risk on a primary basis.

“It’s going to the reinsurance community and saying, ‘We have this fantastic program, we have a fronting company that’s working with us on it and taking a small risk component, would you guys be interested in holding most of the primary risk?” he explained.

Unconflicted primary capital

Miles Wuller, COO of Ryan Specialty Group’s MGU platform RSG Underwriting Managers (RSGUM), said that the advent of the new hybrid fronting carrier platforms is a “real industry service”.

“They’re providing a new source of unconflicted primary capital that is becoming increasingly scarce. And it’s the transformation of reinsurance and investment capital into primary capital, so I think that’s an exciting service to the industry,” he commented.

Wuller highlighted an example where RSGUM had worked with a hybrid that retained 20 percent of a transaction with the MGU platform then bringing in capacity from its affiliated reinsurance vehicle Geneva Re to start filling out the panel for the program.

Beard said that the availability of traditional program insurer capacity and the new breed of hybrid fronting carriers meant that the reinsurance broker is able to have more of a strategic conversation than ever before with MGAs around evaluating the carrier market.

Readers can access video of the panel discussion in full, or in bite-size chunks, in the Viewpoint section of our website.