A hotbed for innovation

Welcome to the first of our two newsletters from the Target Markets Program Administrators Association Annual Summit, which has once again attracted a record number of attendees.

As we note elsewhere in this publication, that so many people have made the trip to Scottsdale is testament to the continued positive market dynamics at play within the programs and MGA space, with the sector’s continued growth sure to be a hot discussion point in the coming days.

The programs and MGA space has long been a hub for innovation, with the sector frequently launching new coverages allowing insureds to transfer niche, high hazard and challenging exposures off their books.

Increasingly though, the programs and MGA market is bearing witness to other innovations.

In recent years that has been through the utilization of technology, with all manner of insurtech MGAs harnessing the power of big data to support their underwriting.

Gone are the days of insurtechs seeking to disrupt the established industry order though. Today, insurtech MGAs use technology to better help them understand and underwrite evolving perils like wildfire and severe convective storm.

There is also innovation elsewhere in the market, with Program Manager earlier this month revealing that Starwind Specialty Insurance Services had raised $270mn for a Bermuda sidecar-style reinsurer called Fractal Re.

One of the main drivers for the programs and MGA market’s continued growth has been strong investor interest. Fractal Re’s formation is an innovative way to give those investors access.

Fractal Re, backed by investors including Nationwide and Enstar among others, will write a 15-20 percent quota share across the 35-plus programs on Starwind’s underwriting platform.

Sources described Fractal Re as a ground-breaking, one-of-a-kind multi-year structure, which is expected to be part of a series of transactions, effectively creating a permanently capitalized reinsurance vehicle.

The structure also features a so-called forward exit option (FEO) – a commutation arrangement with Enstar that kicks in after year seven that effectively functions as a prepaid commutation, and which provides finality to investors.

That FEO also addresses a concern that has been seen as a barrier to investor interest in supporting ILS vehicles and other capital markets-style structures assuming long-tail liability risk.

At a time when casualty is a growing concern in the broader (re)insurance industry, more business could enter the programs and MGA market. Innovations such as the FEO supporting Fractal Re may be a way for investors to meet those heightened capacity demands.