At the recent MGAA Conference, leaders from across the re/insurance market debated the merits of fronting insurers versus traditional insurers in supporting MGAs with innovative products and leveraging new distribution channels.
In a follow-up interview with Insurance Business, Gary Head (pictured), director of schemes & delegated authorities at AXA UK, shared an overview of the makeup of the market as it stands and some of the key differences between the models. “Terminology varies,” he said, “but from my experience in the UK delegated authority (DA) marketplace, there are clearly defined differences between traditional and fronting insurers. As the name suggests, traditional insurers offer insurance capacity to assume risks on to their own balance sheets that customers do not want to assume themselves.”
Head noted that many traditional insurers have been in the marketplace for a number of years and, as such, have amassed a wealth of experience in helping customers to reduce and manage the risks that they face. Transferring these risks to a traditional insurer protects the customer’s balance sheet and ultimately their business if the worst happens and they need to make a claim.
“Traditional insurers have a long history in the UK market and are familiar with its associated risk exposures and loss trends,” he said. “They use this expertise and knowledge to help the DA or Managing General Agent (MGA) to build a profitable book of business over time. Because a traditional insurer’s money is on the line when claims happen, they work very hard with the DA/MGA on an ongoing basis to craft a profitable book of business for the long term.”
Head estimated that about 75% of the DA market in the UK is currently made up of these traditional insurance firms. Meanwhile, he said, fronting insurers play an altogether different but important role. In his opinion, they could be described as ‘match makers’, pairing DAs or MGAs with a reinsurer or reinsurers – often domiciled outside of the UK and perhaps looking to diversify their book of business.
The fronting insurer does not take the financial risk as the vast majority is passed straight on to the reinsurer. Unlike the majority of traditional insurers, reinsurers often have little experience in the particular areas of the UK market and so rely heavily on the DA or MGA’s expertise to ensure that they underwrite profitable business on their behalf.
“This ‘arms’ length’ relationship can increase the risk of a DA or MGA writing a book of business that does not turn out to be profitable and that’s where challenges can arise for both customers and brokers alike,” Head said. “I would estimate that around 25% of the UK DA/MGA market is currently placed via this fronting model.”
Outlining some of the key differences between how traditional and fronting insurers operate, Head emphasised how traditional insurers tend to work closely with the DA/MGA while fronting insurers usually just make the introduction between the DA/MGA and the reinsurer. The latter approach means any technical and pricing guidance offered by the fronting insurer is fairly limited, he said, although they may arrange access to the models of the reinsurer who is providing the capacity.
Oversight is another area of differentiation, he said, given that most traditional insurers have a regular dialogue with their DA/MGA partners and stay close to the evolving book of business, assessing each bordereau and guiding the DA/MGA towards profit. Meanwhile, fronting insurers will most often step aside once the introduction is made and allow the DA/MGA to speak directly to the reinsurer.
In addition, traditional insurers tend to have established and well-resourced teams in risk management and regulation & compliance to help guide their DA partners, ensuring that customers are getting valued products that produce expected outcomes.
Cost of capital is another point of differentiation, according to Head. “Accessing reinsurance capacity directly can, in some cases, reduce the cost of capital and the light touch approach may reduce expenses in the value chain,” he said. “Depending on the product, customer segment and overall proposition, this approach might be useful. However, in a market that faces into significant regulation and a dynamic risk environment, having experts on call is often invaluable.”
There’s a number of core advantages to the traditional insurance model, he said but the key ones come down to:
