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Value chain pressure to match MGAs with ILS capital

Insurance-linked securities (ILS) and alternative capital will inevitably pair with MGAs in the future as the value chain continues to be squeezed, panellists at the Managing General Agents’ Association (MGAA) conference said last week.

On a discussion about the future of insurance, Argo's global head of distribution Chris Lee-Smith said every participant in the (re)insurance market was trying to establish how to get capital as close as possible to risk.

“The value chain is being disrupted, there’s no question about that,” he said, adding that the disintermediation of some participants in that chain would be inevitable.

There is inherent cost in the current value chain and that needs to be stripped out, Lee-Smith continued.

“ILS capital is currently the cheapest form of capital by a long way, and bringing that capital directly to the consumer will change the shape of the industry going forward,” he said.

“I would expect the ILS funds and reinsurers to gravitate towards direct business,” he added.

Keith Jackson, director of general insurance and conduct specialists at the Financial Conduct Authority (FCA), said the regulator would be neutral on the use of ILS capital for MGAs, provided that the consumer would still get clarity on the product they were buying.

“Provided there is no prudential risk and no deterioration in the service to the customer, I could be very comfortable with that [ILS] space,” he said.

On the point of using unrated capital for MGAs, Jackson said there was no “blanket ban” on its use by the regulator, but previous failures meant it was an area where the Prudential Regulation Authority and FCA looked very closely.

“We encourage the appropriate due diligence before anything is signed,” he said. “If it looks too good to be true, it probably is.”

Sam White, whose company Pukka Insure uses an unrated paper provider, argued that there was a place for unrated capital for MGAs.

The CEO said: “[The unrated providers] are signing up for products where the traditional insurers won’t, so they do offer that innovation.”

MGAs must be careful to scrutinise the quality of the businesses providing unrated paper and do the right due diligence, White added.

“I understand the nervousness, as there have been pretty public displays of businesses with unrated paper which have collapsed,” she said. “But we can’t tar all unrated providers with the same brush.”

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