Flandro: “Asset-light revolution” is structural rather than cyclical change

Howden Tiger’s David Flandro has forecast that the recent shift towards MGAs and other “asset-light structures” will represent a permanent feature of the market rather than a cyclical change.

In an interview with The Insurer TV, Flandro, the reinsurance broker’s head of industry analytics and strategic advisory, said the plethora of asset-light structures now coming to market was a function of the reduced capacity arising from some large players pulling out of their traditional markets.

“Three to four years ago, we would not have been talking about MGAs so much. We see this as the MGA revolution – or alternatively as the ‘asset-light revolution’, as it also includes fronting carriers, reciprocals, consortia and various different structures,” he said.

“We think this is a structural change – it is not cyclical. We think MGAs are a permanent feature of our market, as they enable capital to meet risk in a way that traditional structures have not been able to do quite so rapidly.”

He also highlighted how in today’s market, investors seemed to have a preference for asset-light structures over balance sheet businesses.

“Asset-light structures don't have the volatility that some traditional entities have as a function of the coalescence of events that we've just been through – the heightened catastrophes and risk premia, and the massive changes in balance sheets that we had in 2022,” he said.

“We’ve made a big bet on MGAs with SabRE and Dual – we think this is the way of the future,” he said.

Asset-light vehicles such as MGAs have also become synonymous with innovation and emerging technologies. Flandro cited the example of California, where wildfire business is now being written in the admitted mark thanks to the deployment of new technology.

Technology is something that the group has been focusing on very heavily for the last five years, at both Howden and Howden Tiger.

“Technology and data surround everything we do now, particularly in the MGA market. If you want to know about pricing, reserve development, buyer behaviour, peer group comparisons, catastrophes, credit risk – all of this is enabled by data.”

Flandro said the broker’s business intelligence platform, Nova, is an attempt to create a critical mass of insurance data on topics including catastrophes, credit risk, regulations, reserves, pricing trends and more.

“This is a new era that we are in and we need to be able to have data so that our clients can query it,” he said.

One headwind for the MGA and fronting space this year has been the troubles surrounding Vesttoo. However, Flandro said he believed it to be an isolated incident.

“Perhaps the best analogue is what happened before the financial crisis with catastrophe bonds.

“I see the events of the summer as a teething problem which is going to strengthen our processes and due diligence, and will enable people to have better, more intelligent discussions about the collateral behind these structures, including letters of credit.”

Flandro was being interviewed alongside Stuart Beatty, Howden Tiger’s head of Asia Pacific, who highlighted MGA growth in that region.

“The more mature markets, such as Australia, New Zealand, as well as Hong Kong, have a vibrant MGA market. Other Asian markets are not so prevalent, but it really comes down to matching capital and carrier appetite with effective distribution.

“In a lot of primary markets, carriers have retracted their portfolios away from some classes and left a gap. Good MGAs are underwriting niche classes in niche ways in niche territories. The value proposition of an MGA with that sort of focus is definitely a value add.”

Watch the full interview with David Flandro and Stuart Beatty for more on: