Munich Re’s Kassow urges risk carriers to take more active role in MGA growth

Strong, bullish sentiment for the growth of MGAs (managing general agents) in Asia and around the world has led to significant increases in combined ratios and insurers and risk carriers have to avoid just being a “dumb capacity provider in the background”, said Achim Kassow, Member of the Board of Management at Munich Re.

Kassow made the comments during a wide-ranging discussion on the future of (re)insurance at the Singapore International Reinsurance Conference on Tuesday (Nov 5).

“I think in the beginning of the last decade, we have seen a lot of enthusiasm about these kinds of players and how they will change the marketplace,” said Kassow. “And unfortunately, at the end of the day, the only change in the marketplace was that the combined ratio moved significantly up.”

Kassow argued that this was not in the interest of a sustainable business model, and capacity providers have to understand clearly what’s happening.

“Don’t believe that you do better business by having someone who understands it better than you do,” he said. “You need to come up with a clear answer to a very simple question: if there are too many players in a value chain who all want to make money, who is, at the end, the poor guy to pay for it?”

It’s not a surprise for markets that offer a decent margin for distribution to have more MGA activity than others, and it’s up to a client to make their choice, Kassow added.

“From the risk carrier perspective, I would argue, let’s not be innocent,” he said.

Underwriting talent in the US have started spinning up their own MGAs as they were attracted by potential returns, said Matthew Carletti, Managing Director of financial brokerage Citizens JMP. “If you get it right, you can get 14 to 17 times multiples on the back end, it’s pretty lucrative,” he said.

But he expected some degree of structural change in the US MGA market. “We’ve seen this cycle before, when markets harden, and some capital sources want to take advantage of that,” Carletti added. “It takes a long time to build products and not a long time to design a capacity agreement to get into a market.”

Carletti added that the success of MGAs will depend on product differentiation. “You can’t just go in without a plan,” he said. “You need to have that alignment of interest.”

Equilibrium

Speaking more generally about the reinsurance market, Kassow said market sentiment is in “some kind of equilibrium.”

Mid-size events are probably going to be more relevant to the market, Kassow said, and while the trajectory of prices can only go “upward”, nat cat events have meant that (re)insurers are not likely to relax in their underwriting or pricing, he added.

Underlying policies are changing, said Citizen JMP’s Carletti, with some risks being pushed to the insured. “Investors kinda looked at this cycle and said – this doesn’t look good,” he added. “So when you kind of looked at what’s happened, by large, reinsurers have gotten out of the business of insuring volatility or insuring earnings for insurance companies. They’re for the balance sheet of the industry, but less so about managing earnings.”

Carletti expects this year to be a good return year unless something major occurs — even with all the cat events that have already occurred. “The proof’s in the pudding.”

Reinsurance contracts are also changing to take into account secondary perils, said Dawn Miller, Chief Commercial Officer at Lloyd’s and CEO at Lloyd’s Americas. “As we’re seeing the reinsurance contracts change, and be more prudent, if they could stay there at that point, we can spend the time that we have to make sure we’re working the right factors into the rate and getting the return on capital that we need,” Miller said.

And as that change happens, investors are starting to become more optimistic about the market, said Carletti.

“We spent most of (our) day talking to investors in the industry, and they’re very optimistic in that we went through a very long, soft market, and so it’s been a while since investors have had optimism,” he added. “It’s an interesting cycle term, in that most cycle terms in the past, investors have been conditioned to expect a giant hole in the balance sheet, a hole of capital that needs to be replaced. This time, it’s simply – the industry was tired of not making money.”

The dynamics of secondary perils mean that the risk landscape is now evolving, but reinsurers have to be sustainable, said Kassow, who added that price isn’t everything.

“The purpose of the industry is not to be cheap, the purpose of the industry is to be sustainable,” he said. “In order to be sustainable, you need to make money. Making money means you need to earn your cost of capital.”

Cyber wording

Crowdstrike demonstrated the big exposure (re)insurers was facing, said Clemens Philippi, CEO of MSIG Asia in Singapore and Executive Officer at Mitsui Sumitomo Insurance in Japan. “We all noticed that the insured losses were minimal, but it also demonstrated to us, the big exposure that we are facing, even from a non-malicious event,” Philippi said.

When it comes to cyber, it is most important that the right wording is in the right place, said Miller. “It’s about making sure you’re getting the right awareness of it, the right pricing for that return on capital, and that your client understands the product they’re buying,” she said. “What we look for is making sure that the teams that are underwriting cyber have the capability, the right wording in the right place, and as much education as we can put out.”

The most important thing (re)insurers have to do is work on a sustainable capital base that goes beyond the balance sheet of individual insurance, Kassow said. “If you look at the overall growth opportunity of cyber globally, it’s pretty clear that this is not a niche thing that can be handled out of 2, 3 reinsurers, 2, 3% pockets of capital,” he said. “This is something that would really call for massive inflows of new capital that is then also sustainable.”