Private equity investment into the MGA sector also continues to be strong, says director of insurance research and consulting

A “great deal” of new capital is “lining up” to back managing general agents (MGAs), as opposed to traditional investment from the global reinsurance markets, according to insurance focused asset management firm Conning.

Speaking exclusively to Insurance Times, Conning’s director of insurance research and consulting, William Pitt, said: “This capital supports the paper offered to MGAs by a new generation of fronting companies, which have mushroomed over the past years.”

Mike Keating, chief executive of trade body the Managing General Agents’ Association, confirmed during an Insurance DataLab webinar in November 2022 that he has also seen an uptick in fronting – particularly when it comes to US businesses wanting to operate in the UK. He believes this type of capacity will flow more heavily into the MGA market in 2023.

The new capital flowing into MGAs has seen the sector increase in value – an AM Best report released in September 2022 found that MGA premiums worldwide reached a record $60bn (£53bn) in 2021.

Fronting companies – which typically cede all of their insurance risks to a reinsurer, while still receiving a percentage of premium for underwriting the original policy – have grown in importance as capital providers for MGAs, said Pitt.

From just one major player in 2017, the market now contains more than 20 dedicated fronting companies, he added.

According to Conning, the 17 fronting companies it monitors pumped capital into the global MGA market to support a total premium of $8.8bn (£7.7bn) in 2021 – a growth of 45% compared to 2020.

“There are good reasons for the strength of capital support for MGAs,” said Pitt. “They have shown themselves to be very nimble in addressing rapidly changing risks and in harnessing new data sources to do this.

“They have been able to do this in part because they seem to have less difficulty attracting high quality technology talent than is the case for traditional insurers.”

In addition to this new investment from fronting companies, alongside existing support from the global reinsurance market, Pitt said that private equity investment into MGAs continues to be strong.

He explained that this was the case “particularly for tech enabled MGAs focusing on fast evolving and challenging risks, such as cyber”.

More than $900m (£783m) was invested into the top five US-based cyber MGAs by private equity investors alone in 2021, he added.

Entry point to insurance

Part of the reason that capacity providers from outside the insurance sector are taking an interest in the MGA market is because these firms provide an entry point into insurance for these investors.

Peter Horncastle, finance and compliance director at MGA incubator NuVenture, explained that insurance was a “counter-cyclical” investment, since the insurance market as a whole didn’t follow stock markets.

“From an asset diversification point of view, insurance is viewed as its own asset class and if you’re a private equity investor, then an MGA does give you access to that counter-cyclical market,” Horncastle said.

On top of the access to the insurance market that MGAs can provide, they hold an advantage over traditional insurers as investments because they also don’t hold “huge balance sheets” or have the potential for “unknown losses”, explained Horncastle.

He said: “From a capital perspective, the MGA market is really attractive.”

Reduced regulation

MGAs are also becoming attractive to investors from outside the insurance sector because of the reduced regulatory burden they operate under, as opposed to traditional insurance companies.

Horncastle added: “Insurance firms are regulated by the FCA and Prudential Regulation Authority, whereas MGAs are only regulated by the FCA, so the costs there are massively reduced.”

However, MGAs must also show their investors that they are stable and can provide returns for investors.

Philippe Gouraud, chief executive of MGA Rising Edge, said: “Things start to go wrong when the interests between an MGA and its capital providers are not aligned – and what aligns these interests is underwriting performance.

“What secures the future of these relationships is first and foremost dependant on the MGA delivering expected returns.”