The rapid development of the hybrid front-end model continues to reshape the reinsurance industry – but what are the key advantages of this model and where will hybrid front-end go next? These were among the questions asked of Bermuda Broker CEO Hugh O’Donnell, senior broker Neil Hitchcock and business development consultant Kurt Pounds in a recent interview with the reinsurer.

One of the key benefits of the model is that it means that the person closest to the risk is measuring it most closely, because he or she is on the hook for bearing a large share of the risk, O’Donnell (pictured left) noted. Additionally, Pounds added, a hybrid interface demonstrates the legitimacy of a particular advance because it has been vetted by the participating carrier.

“From an MGAs perspective, MGAs are looking for good, durable insurance paper, which will give them the pen to enable them to write the products they want to write,” Hitchcock (pictured right) said. “If they can do it just by securing the relationship with the insurance company or the Lloyd’s syndicate to be able to do it without any kind of interface, that’s much better because it means there’s less mouth to feed in the whole chain.

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“For MGAs, the advancement and access to the reinsurance market gives them much greater capacity and more players to choose from to get their program off the ground. A lot of times, the front company or issuer company wants you to come to them with reinsurance because they don’t necessarily have the experience needed to ensure the MGA and all the people and so on, so it’s probably a longer process, but it just opens up potential options for the MGA.

How the hybrid interface fits into the reinsurance industry’s style

One of the key factors to consider when discussing confrontation is the personal element that underpins the way the reinsurance industry operates, according to O’Donnell. Although his team has great relationships across the market, MGAs often don’t have those relationships yet, so the focus for them is how to create a strong relationship with the front company.

“You’d be surprised how important that often is,” he said. “Does the front company have a good face with the reinsurer? Have they done business with them in the past so their people know each other? It is surprising how often these things are not just about who is willing to do it, but who is willing to do it.” So you are ready to do it with him.

What – and where – next for the hybrid interface model?

O’Donnell, who offered his predictions on where the hybrid standoff will go next, said he expects to see a shift to more formal, long-term relations. The hybrid interface model has always been about increasing insurance risk sharing in a given year. But the MGA world is not a world where changing paper is a good idea.

“Once you establish the relationship, you really want to make sure that relationship continues, and that’s often because you’re quoting businesses for 90 days,” he said. “So, if your renewal date is July 01, on April 01, your renewal should be effective… There has already been a move where the newspaper has been willing to give the MGA multi-year contracts and I think there will be more movement toward That’s over time.

“Besides this, I see the need for the MGA to be more involved in risks commercially and to tighten the relationship between the MGA and the paper. At the moment, it is usually the relationship between the MGA and the reinsurer that matters. I think that over time it will change and there will be a large part of the paper making A very serious effort to establish a long-term relationship with MGA, where the relationship with reinsurers is more transactional.

Will MGAs be required to take more risks in the future?

Moving down the market food chain, Hitchcock said he expects there will be greater pressure on common carriers to take on more risk, in the same way that reinsurers have begun to require issuing carriers to take on more risk. If you go back less than 20 years, MGAs could happily take a set percentage of every dollar of premium they wrote, regardless of whether they made a profit, he said.

“Now, most MGAs want their commissions to keep the lights on and cover their costs, but where they make their real money is from underwriting profits,” he said. “And I think there will be greater pressure and perhaps more formal ways in which MGAs take on risk, whether that’s through captive cells rather than just a tiered-scale commission. Whatever that looks like, I think there will be increasing pressure on MGAs to take on an increasing amount of risk on itself.

From his perspective, Pounds said he believes there will be greater synergy between the MGAs and the front-end market involved, as they will have some form of ownership or equity in each other. As participating fronts begin to take on larger and larger slices of risk, he awaits the day when the first participating interface market becomes the primary carrier of the program.

“It seems logical that this would happen somewhere down the road,” he said. “And I believe there should be more front-end markets involved to support the MGA world as we continue to move forward on this path.”

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