Feb 4 - (The Insurer) - “There are only two ways I know of to make money,” Jim Barksdale, CEO of software giant Netscape, told an audience of British bankers in 1995, “bundling and unbundling”. Thirty years on, specialty insurance is in the midst of a great rebundling, writes William Pitt.

Barksdale’s company famously lost the “browser wars” to the biggest technology platform of the day, Microsoft. In today’s insurance market, well-financed platforms of a different kind are bundling not just insurance products, but also insurance company functions and diverse forms of capital, in novel ways. No one platform looks likely to achieve a position of market dominance comparable to Microsoft’s in the 1990s, but collectively they may become the specialty insurance market’s dominant business model.

The current rebundling is not simply a reversal of the unbundling of insurance company functions that began more than a decade ago, as MGAs and MGUs conquered parts of the value chain that were historically the exclusive preserve of insurance companies. Today’s platforms are, for the most part, being built on an asset-light chassis. But they are very different businesses from the standalone MGAs that were proliferating a few years ago. They are structured to reduce operational risks while – if they wish – assuming more insurance risk. Underwriting platforms are of course not new – the model was pioneered by companies such as Euclid and K2 in the US more than a decade ago – but they have recently blossomed globally in a wide variety of forms.

Platforms offer a spread of risk to both capacity providers and investors – and relieve them of the need to perform exhaustive due diligence on each of the MGAs operating from the platform. But it is for talent that their value may be most compelling, managing risk in three categories:

1. Entrepreneurial risk

With rare exceptions, insurance company underwriters are not natural entrepreneurs. They are trained to focus on downside risk in a way that is at variance with the optimistic mindset of entrepreneurs. Platforms appeal to naturally cautious underwriters because they reduce entrepreneurial risk – they handle the operational functions of the business that most underwriters are unfamiliar with. Their pitch to underwriters is that, by joining the platform, they can focus exclusively on those activities at which they excel, namely underwriting and distribution.

While the appeal of platforms is global, this pitch may prove even more attractive in less developed MGA markets than in more mature markets. Forming an MGA is not a well-trodden career path for talented underwriters in many parts of continental Europe and Asia, unlike in the UK, US, Canada and Australia. If underwriters can be relieved of much entrepreneurial risk and empowered to focus purely on underwriting and distribution, more may be willing to make the leap.

2. Concentration risk

Reliance on a single capacity provider that may withdraw support at short notice is the biggest risk that most startup MGAs confront. Platforms address this in two ways. They lure multiple capacity providers with more diversified risk portfolios than standalone MGAs can offer. And they exercise control over some of their capacity through a range of vehicles, including reinsurance captives, sidecars, in-house insurance and reinsurance companies, and Lloyd’s syndicates.

“Minimization of concentration risk is a key attraction of these platforms,” says George Bucur, co-head of the specialty practice of MarshBerry. “They offer access to multiple programs, multiple markets, multiple geographies.” Bucur ascribes the historically high Ebitda multiples achieved by wholesale brokers and MGAs in 2024 (16x, including earnouts, according to MarshBerry, up from between 12x and 13x in 2020) in large part to the strong appeal of the platforms that have recently come to market.

3. Regulatory risk

Regulation has not historically kept MGA founders up at night because regulators largely focus on the insurance companies that are ultimately responsible for paying claims. But in some regions and for certain lines of business, this is beginning to change. In the UK, MGAs offering personal lines products are being more closely scrutinised under the consumer duty standards introduced by the Financial Conduct Authority in 2023. Similar tighter controls over distributors of personal lines products are being introduced in other markets.

In Australia, start-up MGAs will soon have other regulatory pressures to manage. In June, CPS 230, a new prudential standard for the management of operational risk, will come into force, requiring insurers to exercise “robust monitoring” of service providers, including MGAs. Simon Lightbody, founder of the Australian MGA incubator Rhodian, argues that this will make life more complicated for start-ups and small MGAs, increasing the value of incubators.

Whetting the appetite of investors

The risk appetites of capacity providers are also shaping the structure of some platforms.

One particularly innovative arrangement was unveiled last October by TIH, the parent company of wholesale broker CRC and MGA platform Starwind Specialty. Nearly one-fifth of the capacity for more than 35 Starwind programs is now supplied by a sidecar called Fractal Re, backed by $270mn in ILS investments and fronted by State National.

Fractal Re is expected to write over $750mn in premium in its first two years. One of its investors, the legacy giant Enstar, plays a critical role in the venture by offering other investors a forward exit option after seven years. This option affords investors finality through a novation, alleviating concerns over the risk of trapped capital given the long tail nature of much of the business being reinsured.

Casualty-focused Fractal Re follows an earlier sidecar, Trouvaille Re, which supports another TIH company – the large catastrophe property-focused MGA, AmRisc – in writing E&S coastal property risks. Investors’ comfort level with short-tail property risks is far higher than with long-tail casualty business so no exit option was required in this case.

Underwriting platforms are not panaceas. If they grow too large and complex, they may come to resemble the lumbering insurance companies of yore, though still free from the constraints of a massive balance sheet. Large insurance companies lack the speed and focus that distinguish standalone MGAs, and a platform writing in excess of $10bn could suffer a similar fate.

But, for now, the great rebundling continues.