Greater communication needed to highlight not all MGAs and fronting carriers are equal

Wholesale brokers must communicate more effectively to clients the differences that exist between the products they offer, with a particular focus on the capacity supporting MGAs and MGUs and the capital strength of fronting carriers.

Those were just some of the messages from wholesale broking executives Mike Brennan, CEO of commercial solutions at CRC Group, and Amwins CEO Scott Purviance during the E&S Insurer conference in New York City.

Brennan said unnamed “recent events” have “heightened the sense of the need for more and more scrutiny”.

Those events mean there is a “need to communicate more effectively to our client the difference between the products we’re offering – that’s really important”, Brennan stated.

While Brennan would not comment on specifics, the market has this year had to deal with the fallout from the discovery that Indiana-based MGU James Allen was writing large commercial property accounts on unrated paper, after allegedly previously claiming to have been supported by capacity at Lloyd’s.

And in early March, Trisura revealed its fourth quarter 2022 results included a one-time C$81.5mn write-down of reinsurance recoverables relating to a disagreement within its US fronting carrier business and a quota share contract it held on a catastrophe-exposed program that included captive participation.

“The fronting model is not without risk,” said Purviance.

“It serves a purpose, but as we saw over the last couple of weeks Trisura had a dispute with [its] reinsurers and they're on the hook. Not every fronting carrier has enough surplus to be on the hook if reinsurance doesn’t pay,” Purviance warned.

Fronting carriers, like MGAs, “are not all created equal”.

As Purviance noted, wholesalers do not necessarily have the ability to review the securitisation of the reinsurers that sit behind fronting companies.

“We certainly ask as we're dealing with MGAs that are using fronts: who is the reinsurance capacity? So is it Swiss Re? Is it Munich Re?” said Purviance.

“Is it somebody that … has longevity and commitment to the program?”

Purviance said “A7 paper” – an A financial strength rating and Class VII or above financial size category from AM Best – “is kind of the minimum security standard” that his company – and the majority of other major wholesalers – are willing to do business with.

“That's the paper that your client is buying and [they’re] taking the risk that it's going to be there to pay,” he said.