Tighter capacity terms could slow MGA growth after Vesttoo news: Conning

Insurance focused investment manager Conning has commented on the news about fraudulent or forged collateral linked to reinsurance deals facilitated by insurtech Vesttoo, suggesting it could add pressure to MGA’s negotiations for capacity deals.

Conning explained that the US managing general agent (MGA) market has been growing rapidly, exceeding $85 billion of premium in 2022, including business written for the account of Lloyd’s syndicates.

There has been a strong flow of capacity from reinsurance capital sources to MGA’s, largely intermediated via fronting carriers and specialist program platforms.

Among those were reinsurance deals facilitated by Vesttoo, as reasonable amount of the collateralized reinsurance arrangements it has been involved in are assumed to support MGA programs.

Conning estimates that fronting companies accounted for over $12 billion in premium written by MGAs in 2022, which had risen significantly by 38% over the prior year.

Around 15% of total MGA premium is now supported by fronting companies, Conning states, which has more than doubled as a share in just the last two years.

As we’ve been reporting in relation to the Vesttoo-linked letter of credit (LOC) collateral issues, fronting companies have often been part of the chain of risk transfer in these deals and so fronted programs for MGA’s are likely to have become exposed to the fact some collateral LOCs are alleged to have been invalid, in a number of cases.

That’s pressuring the fronting space to a degree and Conning feels this could have a knock-on impact to MGA’s looking for capacity.

“As competition has intensified among fronting carriers, the fronting model has come under growing scrutiny,” Conning explained.

Adding, that this has been seen “Most recently following news that Vesttoo, a provider of ILS (insurance-linked security) capacity to many fronting companies, was investigating issues relating to the collateral afforded by letters of credit for two transactions.”

“The terms on which MGAs are able to secure capacity have been tightening significantly, and we expect this to slow future growth,” William Pitt, a director at Conning commented.

“That said, we expect growth to continue because MGAs are, in many cases, winning the war for talent with insurance carriers and brokers, and because they continue to offer attractions to both traditional and alternative capacity providers.”

It’s entirely possible that the capacity fronting and program space for MGA’s sees some disruption while the fall-out from the LOC fraud linked to Vesttoo continues.

Conning noted that MGA premiums have been boosted in recent years by the continuing availability of capacity via fronting arrangements.

The investment firm notes that the emergence of a new generation of hybrid fronting companies have helped to channel billions of dollars of capacity into the U.S. MGA market.

But, with terms on capacity already in question before the collateral issues arose, there is a chance they tighten up further as a result of the ongoing scandal.

The result of which could be an impact to the availability of capacity, or further tightening of terms and capital providers, both traditional and alternative, becoming more selective about where they deploy it.

For top-tier MGA’s though, with robust underwriting and performance, the hunt for capacity should never prove too hard. Likewise, the top fronting specialists will find themselves still an attractive conduit for capacity.

There will always be capital, both traditional and alternative, looking to attach itself to high-quality sources of risk, and there will always be MGA’s looking for capacity for protection and growth, even if the terms surrounding it might be getting more onerous.

Read all of our coverage of the alleged fraudulent or forged letter-of-credit (LOC) collateral linked to Vesttoo deals.