Guy Carpenter’s 7th Annual Specialty Insurance Program Issuing Carrier Survey, Part V, Reinsurance Purchasing, Acquisitions
Reinsurance continues to play an important role for program issuing carriers. Sixty-six percent of respondents to the survey this year indicated the use of both direct reinsurers and intermediaries, while 32 percent indicated their use of intermediaries exclusively. This is pretty much consistent with the survey results of 2009 and 2010.
Structural preferences regarding reinsurance have changed. This year, 69 percent of respondents preferred excess of loss reinsurance structures and 31 percent preferred quota share. Last year’s responses were 59 percent and 41 percent, respectively.
Tighter financial conditions appear to have had an impact on the carriers’ willingness to compensate reinsurance intermediaries when program specific reinsurance is not purchased. Last year 95 percent of the respondents indicated they would compensate intermediaries either directly, via a finder’s fee or by increasing the PA/MGA’s compensation, allowing them to pay the intermediary. This year, 89 percent of the respondents indicated they take this approach.
Growth Through Acquisitions
Program carriers continue to be interested in making acquisitions, although their level of interest appears to be waning. This year, 56 percent of respondents indicated an interest in growing through acquisitions (down from 72 percent, last year). When queried on the types of acquisitions they are seeking, most respondents’ interests appear to be equally balanced between acquiring either PA/MGA firms or teams of people, each at 43 percent this year (down from 56 percent and 51 percent, respectively, a year ago). It also appears that carriers are continuing to look at buying other insurance carriers, although interest has waned somewhat. Twenty-one percent of the respondents indicated they are interested in this growth area (down from 29 percent in 2010).
The majority of the respondents plan to use company funds or company stock (if applicable) to make acquisitions (53 percent this year, versus 76 percent last year). Even though bank financing, private equity and venture capital are options, it appears insurance companies have ample capital and would use their own resources rather than go to outside sources.
As the market remains soft, capacity remains strong and the economy shows little sign of improving, organic growth just isn’t there. Carriers have to consider acquisitions if they want to attain any meaningful growth.
The PA/MGA market continues to thrive. Over the course of the last seven years, through our annual survey, Guy Carpenter has tracked the market from the carriers’ perspective. The 2011 results reflect change, flexibility, growth opportunities and an exciting outlook for 2012. As the entrepreneurial spirit of the PAs and MGAs pushes them to look for ways to profitably expand and grow their business, their carrier partners appear poised to work with them in order to find solutions to assist in that growth. The PA/MGA space remains an underwriting arena and as such it will be driven by underwriting profit. Hopefully, the results of this year’s survey have provided some insight into what program carriers are looking to do in order to achieve mutual growth and profitability with their partners in this vibrant insurance market segment.