For the past several years, the reinsurance market has recorded some of the worst results ever. A decline in capacity and exposures to costly losses industry-wide have produced less than desirable profitability results across the board, including the program marketplace. Soft market conditions and an unbalanced approach to underwriting risk and incentives produced unprofitable results for reinsurers backing the business.
The reinsurance industry recognized the need to redirect business practices, and responded by devising a “new business model,” which has led to a growing and practical managing general agent-driven program marketplace. “Reinsurers struggled with this business on two different levels,” Jack Snyder, chief marketing officer at American Re Ins. Co., said. “In some cases, business was not properly priced, and everyone loses when a business is not priced properly.” Snyder also said that the struggle to create profitable results was only compounded by other underwriting issues, including inadequate oversight and control of program business.
Another issue that generated poor results involved the business model for market participants. “The business model was somewhat flawed,” Snyder said. “Some company program administrators and MGAs were looking at their incentive to write a lot of business regardless of profitability and risk selection, and reinsurers ultimately picked up the tab for the underwriting losses that followed.” According to Snyder, under the old business model, MGAs and program administrators were motivated by premium volume fees, while fronting carriers, or policy-issuing carriers, were motivated by service fees.
“There was a general recognition in the industry that the business model where the carrier was acting as the fronting carrier only, assuming minimal underwriting risk, was not working,” Paul Goodwin, senior account executive for American Re, said. “The carrier had no financial stake in the old model and the incentives between the carrier and the reinsurer were not aligned.” Consequently, the fallout for reinsurance capacity in the program marketplace was significant.
Today’s business model outlines a much different scenario and has been yielding positive results. The new model provides a shared risk approach versus a volume driven approach. Compensation revolves around the program business doing well—if the business does well, then participants involved do well.
“Under the new business model, you have MGAs and program administrators that are now being motivated more so on the underwriting profitability of the business,” Snyder said. “There is emerging a viable market for MGA program business for properly priced, well managed, and well thought out programs.” However, Snyder cautioned the market remains tight for carriers doing program business associated with reinsurers. “A lot of the markets that use to support MGA program business have exited or disappeared from the market, so the market remains tight from the perspective of reinsurance capacity.”
The number of program administrators and MGAs in the marketplace has also declined. “Those MGAs and program managers that were operating in an undisciplined manner were not producing profitable underwriting results for the carriers, and in many cases they’ve gone out of business because they cannot find reinsurer or issuing carrier support,” Goodwin said. Nevertheless, as the industry continues to operate in a more disciplined manner, quality programs will find the capacity they need to support their business. “Many will not, but many will fall into that category,” Snyder said.
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