Home Substantial portion Growing MGA Business in Trade Credit, Surety and Single Risk Business – A Reinsurer’s View | Point of view

Growing MGA Business in Trade Credit, Surety and Single Risk Business – A Reinsurer’s View | Point of view


I have seen comments in the media about investors preferring to put their capital in MGAs rather than insurance companies. Certainly, we are seeing an increasing number of new proposals from AGG on the single risk market which focus on medium and long-term credit operations and political risks.

Admittedly, MGAs are not new to the market and cover a range of businesses from multi-line portfolios of over $1 billion to monoline niche products of $10 million.

GAs are well established in surety markets such as Italy, Norway and South Africa. And Trade Credit MGAs have been active for many years in the UK, Australia and Canada. Reinsurers apply an additional layer of due diligence motivated by some skepticism around the MGA concept. But why is that and what does it mean for MGA’s business cases for reinsurance capacity?

Main areas to consider for a reinsurer

Trade credit and bonding AMGs showed higher earnings volatility than their group of insurance underwriters, including cases of complete portfolio collapses with loss ratios that would not normally be seen at an insurer.

An MGA is an additional link in the underwriting chain with the need for cost compensation and part of the profits. In a non-proportional reinsurance market this would not be a problem, but the majority of credit risk reinsurance programs are proportional where the cost structure of the reinsured business is one of the critical parameters.

Does a MGA have the potential to underwrite its specific credit related business at a lower loss ratio throughout the economic cycle compared to the peer insurance group to allow reinsurers the same margin despite the higher cost?

“Reinsurers are applying an extra layer of due diligence driven by some skepticism around the MGA concept”

What might make a lot of sense for an insurer from a combined ratio perspective no longer works for a reinsurer after adding the endorsement to compensate the insurer for its own costs.

Let’s look at the insurance market because no AG can issue a policy without the capacity of a licensed insurer. In trade credit, surety and single risk, the policyholders/beneficiaries are mainly large companies, banks, public entities and multilateral institutions.

For most of them, a very strong credit rating is essential when selecting the counterparty to insure with. An MGA, particularly in the single risk market, will need to have access to at least A-rated insurance paper to be considered by policyholders. However, as most insurers rated A and better already write these product lines in-house, the available pool of insurers who could qualify from a rating perspective while writing any of these lines through of an MGA is very limited.

Reinsurers will generally not view the MGA as the sole counterparty and will view the insurance company only as an exchangeable front entity. Ideally, the insurer is an existing customer and the reinsurer already has in-depth knowledge of the insurer’s underwriting culture.

The credit risk insurance business must perform well throughout an economic cycle and for this reason reinsurers generally commit commensurate capacity in these classes assuming a long-term relationship, as the Exiting the treaty after one or two years will leave them with extreme risk on average four to five years in surety and single risk, with some policies spanning 10 to 15 years.

Liberty Mutual Re supports MGA’s business in the trade credit, surety and single risk business segment subject to a high level of confidence that the insurer/MGA partnership is long-term, with the insurer retaining a portion substantial risk and having full risk monitoring supported by its own credit expertise.

MGA’s business plan should be realistic because aggressive growth takes you down the credit curve quickly.

Uwe Haug is Head of Business Development and Underwriting Strategy – Financial Risk Reinsurance at Liberty Mutual Reinsurance