In a recent interview, AXA UK’s Gary Head extolled the virtues of traditional insurers versus fronting insurers, highlighting how the former offer insurance capacity to assume risks on to their own balance sheets while the latter does not take the financial risk, as the vast majority is passed straight on to the reinsurer.
In recent years, however, the UK market has found itself welcoming a new model to the re/insurance marketplace in the form of ‘hybrid fronting’. In conversation with Re-Insurance Business, Bridgehaven CEO Paul Jewell (pictured) noted that while the firm launched as the UK’s first hybrid fronting company, it’s a model that was already quite popular in the US.
With over 35 years of experience in serving MGAs, insurers and reinsurers to his name, the opportunity to support a burgeoning market was too good for Jewell to pass up, and Bridgehaven was authorized by the FCA on July 4, 2023, securing an A-minus rating from AM Best in August of last year. Part of the investment thesis behind the company was formed by examining the challenges facing MGAs today, he said, and determining what could be done to help them navigate them.
“I think MGAs have faced a number of headwinds, including the annual planning cycle,” he said. “They’re struggling with long-term capacity arrangements and what confidence they’ve got to support their customers. Another headwind is insurers’ appetite and whether or not they want to support MGAs, or support certain products. Brexit saw a number of capacity players either pull either of the UK market or decide to shift their strategy slightly.
“We felt very strongly that this is an innovative sector that has grown up. Fifteen or 20 years ago, it may have had some underwriting challenges and may not have had the ability it has now but we feel that the MGA sector is here to stay. We feel that, particularly for the commercial specialty space, it offers customers product innovation, service and the ability to transact in very particular niches where they understand their customers really well.”
Recognising that the MGA market is underserved, Bridgehaven saw an opportunity for an insurer to come in and link the capacity offering for MGAs by utilizing reinsurance differently – which is where the hybrid fronting element comes in. Hybrid fronting allows an insurance company to underwrite for profitability and align with reinsurers by taking on risk – usually retaining from 10-20% of the risk – and then also using reinsurers for approximately 80-90% on a proportional basis.
There are a number of reasons why reinsurers like that model, he said, not least because it creates greater transaparency between the MGA, the insurer and the reinsurer because it’s very clear who’s doing what in the operating model. That clarity has been one of the key ingredients for the success of the model in the US – and now in the UK – not least given the headwinds facing MGAs and brokers operating in the market today.
Insurers changing their minds and pulling out of market segments or pulling back from segments has caused strain for MGAs, particularly those striving to grow. “MGAs want product and they want flexibility. They want to be trusted to do their job and get on with it, and to produce underwriting profit but also get to share in the upside. That’s where the real alignment of interest lies – in making sure the policyholder gets a good product at a good price, but also that the MGA is rewarded for creating underwriting profit that the insurer and reinsurer are willing to share.”
That’s the bridge Bridgehaven is looking to create, Jewell said, and instrumental to doing so is creating greater awareness of the advantages hybrid fronting brings all along the re/insurance chain. The commercial and specialty sector is currently being impacted by several macro challenges, which are creating the need and appetite for new solutions and models. Whether it’s ESG, cyber, technology advancements, or the cost and scope of existing products, the value of the insurance market has been well-tested.
“I think the insurance industry has a number of things that it needs to grapple with and I think we as insurance companies and as MGAs can solve some of those,” he said. “[…] Where MGAs have really struggled is if they're looking for capacity in ‘traditional markets’, there may be only a single insurer who may only have appetite to write a certain breadth of products, or set certain limits, or have a certain appetite.
“Certain insurers may have a clash, where they have branches selling similar products. Some MGAs are being challenged where there’s a direct conflict with the insurance company that’s providing them capacity and also selling similar products through their branch structures. We see that as an opportunity to support MGAs because the hybrid fronting model means we don’t deal directly with brokers or customers, so there’s limited or no channel conflict.”
In essence, he said, Bridgehaven operates as an insurance company that leverages reinsurance, but where the hybrid fronting model differs from other offerings, is that it aligns the reinsurance to the MGA – matching the appetite in the reinsurance market to the offering of the MGA. By accessing reinsurers globally, it’s not limited to one company’s view which allows the model to bring the best of reinsurance capital to the UK. Reinsurers appreciate the model because they’re able to link directly with the MGA.
“So, the MGA has clarity of where the capacity is coming from, and the reinsurers are able to match the products that they like to the distribution,” he said. “The hybrid fronting model offers a really good mix and match. I visualize it essentially as a graphic equalizer, allowing different reinsurers access to different products, different limits, and we’re able to move each of those around to suit each MGA, creating a very transparent tripartite relationship.”
