A new report from specialty reinsurance broker BMS Re highlights the continued influx of capital to the MGA program sector of the insurance industry, which it says has experienced exponential top line growth in recent years.
2021 proved to be a key year for the space with the largest year-over-year gross premium growth at 48.8%, and, while this pace slowed slightly in 2022, last year was still the second largest period of growth in the past eleven years.
BMS Re notes that one of the biggest risks to fronting carriers is reinsurance recoverable risk, since most of the risk is ceded to third-party reinsurers.
Its findings showed that ceded premium-to-surplus and reinsurance recoverable-to-surplus have continued to climb to over 2.0x and 3.0x respectively, while the surplus growth of 114% CAGR over the past eleven years is not keeping pace with the 143% CAGR of net reinsurance recoverable.
The broker expects these leverage metrics to continue to climb in 2023 as more underwriting teams move to the MGA model and more reinsurance capital targets the program sector.
“The net reinsurance recoverable-to-surplus ratios are very eye-opening. There continues to be an influx of reinsurance capital hungry to deploy in the program space. Fronting carriers are utilizing this capacity, and in doing so, pushing their leverage further and further up,” analysts noted.
As net reinsurance recoverable risk starts to attract heavier risk charges to account for the higher leverage, it’s thought that fronting carriers ratings could begin to decline, forcing carriers to increase surplus or begin to retreat from some business.
“The MGA sector has seen extraordinary growth over the past several years. As that success continues, and gross premium growth is increasingly outpacing surplus growth, the industry is reaching a critical inflection point,” BMS Re wrote.
“The future continues to look very bright for fronting carriers, however the current environment shows that they need to proceed with increased caution,” it concluded.
“With reinsurance capital eager to deploy in the programs sector, reinsurance recoverables will continue to increase year-over-year. Given the rise in premium and reinsurance recoverable leverage, and declining net income, the fronting carriers are being faced with lower risk adjusted capital from all capital models. Fronting carriers will need to improve underwriting, boost investment income, or bolster capital from investors in the near term to avoid negative pressure from both regulators and rating agencies.”
