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Insurer in Full: A cautionary tale...

Much has been written over the last few years about the maturation, sophistication and professionalisation of the MGA, MGU and program administrator space.

In the 90s and early 2000s areas of the program business were viewed in certain quarters as being at the fringes of the mainstream insurance market, with practices and standards that sometimes fell short of heavily regulated and rated carriers.

And of course that played out in the results of some insurers that leaned in too heavily to the sector without the right level of due diligence and caution. Some even described program business as the “problem child” of the industry.

The sense is that the MGA world has changed much since then, however.

Change has in part been driven by the emergence of large, consolidator platforms such as those housed in the wholesale and retail broking giants, as well as best-in-class operators such as Euclid and others that have consistently delivered for their stakeholders.

With that has come major investment in technology, greater governance controls, broader capacity relationships with high quality (re)insurers, underwriting expertise, and a host of other developments around infrastructure and operating models that have led many to see MGAs as the equivalent of carriers without balance sheets.

That shift in the perception of the sector is one factor that has driven a growing wave of underwriting talent from carriers, with MGAs now seen as a more than respectable destination of choice for those seeking a more entrepreneurial environment.

And last year, of course, AM Best launched its Performance Assessment (PA) framework for delegated underwriting authority enterprises in recognition of the growing importance of the sector and development of its participants.

But events of the last couple of weeks are a timely reminder that the guards of those operating in the sector as well as distribution partners must never be let down.

Phantom paper

Our sister publication The Insurer revealed last Monday that Indiana-based MGU James Allen was facing scrutiny – including from Lloyd’s and state regulators – regarding the capacity supposedly supporting its large commercial property program after intermediaries discovered it didn’t have Lloyd’s paper, as had been claimed.

Brokers widely believed that the property program was supported by a panel of carriers that included Canopius, Tokio Marine and Liberty Mutual.

But it was brought to the attention of intermediaries that the cover was instead underwritten by unrated US insurer National Direct Insurance Company.

James Allen has denied that a fraud took place, but the scale of the problem for wholesale brokers and retail brokers that had used them to place business with James Allen is beginning to become clearer.

As we report, the MGU moved to scale its property program dramatically last year, especially in the fourth quarter, with premiums thought to represent between $40mn and $50mn of a total $85mn portfolio.

It appears James Allen had come from nowhere to become a major capacity player, with primary layers that had limits as high as $10mn and excess layers with limits as large as $100mn.

That inevitably draws comparisons with GuideOne, another property writer that went from a fringe player to writing huge lines on major accounts.

Left with significant portions of some placements now on unrated paper, retail and wholesale brokers spent last week desperately scrambling to move James Allen accounts.

And it has been far from smooth sailing.

Hard property market

The discovery of the James Allen paper issue coincides with one of the hardest property markets in memory, with capacity already significantly restricted.

Consequently, brokers have been left in a very difficult position as they try and make it right for clients.

Here of course the main onus is on the wholesalers that placed the business, although their retail clients are also potentially facing E&O exposures too if the cover isn’t quickly replaced and claims come in.

There will also likely be financial implications for wholesalers in having to make up the difference between the premiums deals were placed with James Allen and those charged in the market to take on the business.

The sorry mess may have a knock-on effect on relationships between retailers and wholesalers involved, and it will certainly lead to a reassessment of the due diligence protocols and governance controls in place.

There is always the chance of a James Allen-type event taking place, however strong those protocols and controls – particularly if there is a rogue operator at work.

Such events – though apparently few and far between in the modern-day MGA sector – do provide an opportunity for lessons to be learned and actions to be taken.

At a time of market dislocation if anything counterparties should be more closely scrutinised to make sure they are not too good to be true in the quest to keep pace with record submissions and deal flow and find scarce capacity, especially in property cat.

And the case could be made that the emergence of AM Best’s PA framework would provide an extra layer of due diligence around MGA partners to help avert another James Allen, and help ensure that there is no let-up in the drive to maintain standards in a sector that continues to offer so much opportunity.


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