Howden Tiger’s Beard: capital and operational demands will spur fronting carrier M&A

The fronting market is primed for M&A activity, with consolidation among the current 25 or so players in the space needed if they are to meet the balance sheet and operational demands of the fast-growing programs and MGA sectors, according to Howden Tiger’s Matt Beard.

Talking to The Insurer TV ahead of this year’s Target Markets conference in Scottsdale, Arizona, Beard, managing director within Howden Tiger SabRE, the reinsurance broker’s MGA and programs-focused platform, said the fronting market has “definitely grown a lot in the last few years”.

There are currently around 25 fronting carriers operating in the market, a number that Beard, who leads Howden Tiger SabRE in the US, described as “heavy”.

“I think we will see that number shrink down over the next few years, to some degree, but I don't think it will go back to the old days where we have one or two options,” he predicted.

The market “will naturally establish” how many fronting companies are needed to satisfy the growth in the MGA marketplace, Beard said.

“What exactly is the right number is still to be determined, but we do expect there to be some acquisitions over the next couple of years [and] we do expect there to be some mergers.

“We think there's a lot of value in the balance sheet strengthening coming together, [and] we think there's value in the operational strength of these companies coming together.

“As the fronting carriers grow [and] as the demands on them grow, the balance sheet strength could be important to establish market leaders,” the Howden Tiger SabRe executive said.

Along with consolidation, Beard predicted the hybrid fronting carrier model will continue to grow in prominence.

“All stakeholders will look to the carriers to continue to do more,” Beard said, with fronting carriers increasingly expected to take on more underwriting risk, as well as provide actuarial services to ensure they can manage the growing number of programs on their books.

And when it comes to fronting carriers, along with MGAs, having “skin in the game”, Beard said that market trend will increasingly become the norm as reinsurers demand some element of risk participation.

“The buzzword of ‘alignment of interests’ is certainly loud and clear in the market,” said Beard.

“The reinsurance capital, the risk capital expects everyone to be aligned in these transactions,” he stated.

“What we've seen traditionally… is MGAs putting their commission at risk, based on results.

“But what's grown over the last few years, and we think will continue to grow, is MGAs starting captives to truly have underwriting risk, and be able to tell their reinsurance partners, ‘We are alongside you as an underwriting partner’.”

Beard said sharing in the underwriting risk alongside fronting carriers and reinsurers “is a great way for the MGAs to utilize the capital that they've raised to deploy to protect their business”.

Doing so, Beard suggested, could also secure MGAs and program managers better reinsurance terms.

“We do think that the alignment of interests will continue to be a pressure point for risk capital. And it helps to separate who is serious in this business and who wants to really show the capital, ‘We're alongside you’.

“The companies that continue to put capital towards captives and ways to take risks will position themselves to unlock better terms and better security in the reinsurance marketplace,” Beard noted.

Watch the full 12-minute interview with Beard to hear the Howden Tiger SabRE executive also discuss: