Tom Bailey, executive director of Tempo Underwriting, has a theory about what it takes to build a business based on the reinsurance MGA model.
“For a reinsurance MGA to be successful and to have a strong offering, you have to be very, very focused in a niche, as we are. I think a general reinsurance offering is going to be much tougher for an MGA,” said Bailey, who leads a London-based MGA that focuses on cross-class emerging market treaty reinsurance as well as professional lines, including D&O and professional indemnity on a direct and facultative basis.
Bailey said Tempo’s reinsurance treaty book makes up a bit more than half of the business, and then direct and facultative business, grouped together, account for slightly less than half of the business.
Tunde Olowofila, director and head of Treaty at Tempo, explained that the niche Tempo focuses on is a geographical one. From a treaty perspective, Tempo’s focus is Africa, Asia and Europe, which accounts for roughly 90 percent of the business the company writes, Olowofila said.
He noted that 40 percent of Tempo’s treaty business is from Africa, 30 percent comes from Asia, which includes the Middle East, while 20 percent is from Central and Eastern Europe. “The remaining 10 percent is what we would call opportunistic business as brokers turn up with good risks from here, there and everywhere.” (The bulk of Tempo’s revenues are broker generated.)
Olowofila speculated that there are very few reinsurance MGAs because many capacity partners write reinsurance in one way or another themselves. “What they don’t want is someone who’s going to be stepping on their toes and writing the same business. They don’t want the exposure to, for example, U.S. wind, Japanese quake, the main peak cat zones that the capacity partners can very much write themselves,” he said.
“Dare I say, there aren’t many markets that have the expertise in Africa, in particular, although less so for Asia and Europe,” Olowofila said. “But we’ve carved a niche for ourselves that works very well, and it works well for capacity partners, because it allows us to offer some diversification to their existing portfolio.”
Another reason that reinsurance MGAs are rare is that “people get really sensitive about delegating treaty business,” Olowofila said. “If you’re an underwriter, and your boss comes to you and says, ‘Look, we like these guys at Tempo. We’ve had a very positive conversation. We’ve looked at their data; the numbers check out. We’re going to delegate to them, and we just wanted to run it past you first.’ What do you think that treaty underwriter is going to say?” Olowofila questioned.
“The underwriter is going to say: ‘No, thank you. We don’t need to delegate; we can do this business perfectly well ourselves.’”
“People get very precious about their fiefdoms,” he said.
“We don’t want to blow our own trumpet, but we monitor our business by Lloyd’s risk codes and, on a like-for-like basis, we have consistently outperformed them on average over the last eight years by 15-20 percent,” he said. (Lloyd’s classifies its business by class and subclass into risk codes and publishes the annual underwriting results for these risk codes).
Part of the problem for Lloyd’s is that the average expense ratio at Lloyd’s is 40 percent, “which is just abhorrent,” he said, explaining that partnering with Tempo can cut this by at least half.
Underwriting U.S. wind doesn’t require much underwriting expertise as it’s largely model driven, Olowofila said. “The price is what it is; it’s a commoditized product. And this is the same with Japanese quake. There really isn’t that intellectual knowledge required to understand your client in depth. Florida wind is Florida wind; it doesn’t matter who the client is.”
Olowofila reported that he has been writing the same portfolio of reinsurance business, which specifically avoids U.S. and Japan catastrophe risks, for almost 20 years, with eight of those years at Tempo. “We have an extensive database and our own proprietary model that we have built and refined over the years. This has evolved into an objective pricing tool, which takes time and significant investment.”
In addition to its geographic focus, Tempo writes cross-class business, including non-marine, marine, energy, aviation, which helps the company “achieve consistent and better returns than monoline underwriters,” said Olowofila.
“The aviation portfolio is a classic example. Back when we started writing treaty business in 2013, aviation made up a significant portion of our portfolio. Now it makes up less than half a percent,” he said, explaining that as rates dropped and the number of market losses grew, profitability was eroded for that portfolio. “Because of our cross-class approach, we have the ability to close down that line of business. Now that we’re starting to see rating environment on the aviation side increase, we’re starting to look at that business again.”
If Tempo focused solely on aviation underwriting, “I’d have to write that business, irrespective of whether the rating environment was good or not, because if I didn’t, I’d be writing myself out of a job,” Olowofila said.
Most of the company’s non-marine business consists of property risk and property catastrophe, which makes up about 65 percent of the portfolio, while marine, which includes hull cargo and associated liabilities, makes up about 15 percent. The remaining 20 percent is energy, up and downstream, while aviation makes up less than half a percent.
Tempo’s capacity partners on the treaty side are traditional reinsurers and insurers, as well as alternative reinsurance vehicles and ILS platforms. (Tempo also is a Lloyd’s coverholder.) One major treaty capacity provider is the Bank of Montreal, which independent of Tempo writes a very large London market excess (LMX) retro portfolio, with a focus on U.S. wind and Japanese quake. As Tempo specifically avoids these areas, there is no doubling up in terms of aggregate, said Olowofila. The maximum line that Tempo writes on behalf of BOM is $15 million across all classes.
This is supplemented by its other capacity provider, Markel Corp., which delegates on specialized risks in Africa such as strikes, riots and civil commotion (SRCC), war and terrorism (W&T), and kidnap and ransom (K&R).
With such a broad offering, Tempo is able to compete against some of the largest reinsurers in the market, Olowofila explained.
“We also write what I would classify as ‘regional retro.’ That would be, for example, the state reinsurer of a particular country.” He cited the example of Korean Re, which after its inception in the early 1960s became the state reinsurer of South Korea. It was privatized in 1978 and now writes 25 percent of its business in international markets. “We will support them on their Korean portfolio; that’s domestic exposure only, rather than what I would call ‘hard-blown retro,’ which is global reinsurance—for example, supporting a Lloyd’s syndicate that has exposure on a global basis.”
Olowofila said that Tempo doesn’t engage with many clients who view reinsurance as a commodity—those that only buy it as a cost-efficient way to offload some of their risk. In general, Tempo seeks to develop long-term partnerships with its ceding company clients, which can range in size from small local insurers up to the equivalent of FTSE 250 companies on the treaty side. Without reinsurance capacity to operate, small insurers “would struggle to satisfy their own underlying clients,” Olowofila said.
“As we’ve now been around for eight years, we’re well established and have a track record. People know us, trust us and understand our approaches. As a result, we’re starting to engage with capacity partners on a multiyear basis,” Olowofila said, noting that MGA’s typically operate on a year-by-year basis.
“If you can get a multiyear deal secured, and we’re in the process of having a number of those discussions now, then it makes everyone a lot more relaxed, and you’re not under constant renewal pressure every year.”
In addition to geographic niches and cross-class underwriting, Tempo buys reinsurance and retrocession cover for existing capacity partners. “Most MGAs don’t have that ability and don’t have that freedom given to them by capacity partners,” Olowofila noted.
Similar to any Lloyd’s syndicate that buys reinsurance to protect its account, Tempo aims to think and act as if it’s a reinsurer in the true sense, even if it’s not the ultimate risk carrier. “Just because we’re not carrying risk, it doesn’t mean that we should change our approach to making sure that we’re protecting the balance sheet of our capacity partners,” he said.
The three articles in this special series are: