policy holders buy from retail brokers
retail brokers buy from 1) carriers 2) MGAs 3) wholesalers
only carriers underwrite
MGAs do not underwrite and need a reinsurer for the 1) balance sheet 2) license. They pitch they can better underwrite
Usually they can get from reinsurance firms like SwissRe or MunichRe. But there are only a handful in the entire world and capacity is severely constrained and backlogged
Fronting carriers then existed to also provide this license and balance sheet
they still direct risk to the reinsurers
effectively they cushion between all the MGAs and the reinsurance firms
Fronting carriers can be constrained too because they are ultimately still dependent on reinsurance firms
Problem: reinsurance capacity is constrained.
Demand: investors are increasingly interested in alternative asset classes and diversifying their investments
ILS funds also moving away from nat cat given how poorly data there has been
Everyone else doesn't understand insurance risk but wants to get a piece of it if the returns are good.
Solution: democratize and sell this risk to investors!
helps MGAs get risk placed
fronting carriers + reinsurance firms offload their capacity
provide a certain return to ILS funds
Questions and risks
takes time to see if promised returns materialized
ability for the firm running this marketplace of risk to actually understand what is good risk and bad risk
ability to get ILS funds involved and investors
in an economic downturn, investors move away from new alternative asset classes and stick with more traditional methods