The MGAs with an appetite for captives

Managing general agencies (MGAs) have been big winners of the hard market. As their specialist underwriters have been able secure well-priced policies and good returns for carrier partners, capacity deals have been easier to come by. However, many MGA leaders have recognised it’s more than just increased fee income where they could be winning. More want to share in the underwriting profits they are generating for their capacity partners, and captives offer the perfect route to achieve this. Written by Saxon East.


‘Skin in the game’ was a phrase popularised in the 1980s by legendary investor Warren Buffet to describe high ranking insiders who buy stocks in the company they are part of.

In the world of insurance today, captive formations have become the go-to choice of managing general agents seeking skin in the game.

In the last five years, there has been a series of announcements of managing general agents forming captives, especially in the cyber market.

In 2019, US insurtech Cowbell started up to help underserved small and medium-sized fi rms gain cyber insurance coverage.

In January last year, having raised more than $100 million in funding, it launched its own captive as an additional source of underwriting capacity.

Around the same time, another US-based managing general agent, Resilience, announced it planned to launch its own captive to reap the benefits of being a risk carrier in its rapidly expanding customer base.

The formation of the Bermuda-based captive was completed this May. Another managing general agent taking this option is Coalition, which has enjoyed rapid growth from its humble beginning as a San Francisco-based insurtech in 2017.

In December 2021, it launched its very own captive, having been valued at an impressive $3.5 billion and serving some 52,000 policyholders.

Shawn Ram, head of insurance at Coalition, explains why they chose the captive route: “At Coalition we’ve got experienced high quality underwriting. We certainly have confidence in our underwriting and it has generated margin and profit for our carrier partners.

“So, we wanted to leverage that underwriting capability and, for lack of a better term, put our money where our mouth is. We therefore built a captive where we could participate in the profitability of our underwriting in a more robust way.”

Ram says the capital in the captive provided flexibility around coverage, price and claims. “The final thing that I’ve appreciated about a captive is that culturally it assists you,” he adds. “At Coalition, we’ve always been quite sensitive to our carrier partners. In fact, all our partners are trying to drive a profitable result.”

Key growth generator

Captive Review estimates global premiums grew by an estimated $8.7 billion in 2022 to more than $176 billion.

Although there are no official figures on managing general agents and captive premiums held globally, there is a widespread view that they have been part of the wider captive growth story.

David Coupe, principal at DYC Insurelaw Consultants Limited, works with managing general agents in the UK and Europe, and is seeing high interest.

“There are many companies currently looking at having their own insurance vehicle. I am currently dealing with five or six, looking at Gibraltar, Guernsey, the UK and even Lloyd’s.

“Some are looking at full-stack insurers, but most are looking at much smaller entities, perhaps to provide reinsurance first using fronting arrangements, or through protected cell companies offering small co-insurance lines with larger players. There are many possibilities depending on the book of business and the risk appetite of the managing general agent itself.”

Faster profits

He says managing general agents are becoming risk sharers because they want to book profits much faster.

“Managing general agents may receive something like 7.5%-10% as their basic commission, and no profit commission until three or even four years after the underwriting year closes.

“Participating in profitable lines of business as an insurer perhaps gives you the ability to receive some of the benefit of your good underwriting a little earlier than simply waiting for a profit commission. This alignment is not new. It’s been around in the Lloyd’s market for decades. I just think, at this particular moment, it’s a case of some non-Lloyd’s managing general agents considering the benefit of alignment and wanting to put their own capital at risk in the hope of participating in future underwriting profits.”

In the London market, the length of binders is also a security risk.

“When you actually look at the typical binder period, many of them can be cancelled on 30 days’ notice, which gives little certainty to the managing general agent or its customers,” Coupe adds.

“Having your own captive capacity is something in your back pocket to allay the risk that your binder might be cancelled by a major market player at short notice. It gives the managing general agent, and its consumer clients, if relevant, a little bit of security. However, it allows you to align your underwriting with your own personal risk appetite.”

Capacity shortage

Another factor behind managing general agents embracing captives is down to a shortage of capacity, especially in cyber.

The risk that corporate customers want covered by cyber insurance can be sizeable. Companies have their operating systems and intellectual property sitting within their information technology, so want as much insurance coverage as possible.

This can leave shortfalls in capacity. According to Marsh proprietary benchmarking data, captives can work on retention layers anywhere from $250,000 to $200 million.

This means managing general agents can fill shortfalls using their own captives.

“Cyber was an area that, at least for a while, was very challenged for capacity. It is less so now,” says Charles Manchester, founder of Manchester Underwriting Mangement and chairperson of the UK-based Managing General Agents’ Association.

“If you put your own skin in the game or appear to put some of your own skin in the game, then other (re)insurers are more likely to see their interests aligned with you in those difficult areas.”

Hard market

The emergence of harder market conditions is perhaps the biggest reason of all behind managing general agents embracing captives.

Fitch estimates that the US cyber insurance market rose by over 50% in 2022 to $7.2 billion compared to 2021.

Standalone cyber cover, which represents around 70% of industry premiums, increased by 62% in 2022.

Davies Group controls £2.2 billion in captive premium and is a specialist in helping managing general agents with captive arrangements.

The group claims to have grown its captive business significantly during the hard market of the last few years, in part due to an escalation of managing general agents embracing captives.

“The sustained hard market has made rating attractive for the managing general agent sponsors to participate in the retained risks of the business,” says Richard Tee, Davies managing director of captive management, Guernsey.

Davies claims to have helped over 70 managing general agents, many of them with captive solutions.

“Participating as a reinsurer will deepen the relationship of the managing general agent with capacity and show a significant commitment to producing profits for capacity not just earning from commissions,” Tee says.

Philip Alexander, partner at tax, accounting and consultancy firm RSM, based in the Cayman Islands, says in the past, capital requirements from regulators were less onerous, meaning it was easier to be a small insurance company.

But as the regulatory capital requirements increased, it became harder to set up small insurance companies and managing general agents became a more favourable option.

Now, with the hard market, managing general agents are attracted back into taking on the risk. “I think the primary reason is the hard market,” Alexander says. “They’re switching again now to have skin in the game. They want the underwriting profits.”

Domicile choice

If a managing general agent decides to pursue a captive option, two big decisions it will face are over the location of the captive domicile and the captive structure.

Tee says for UK and European firms, Guernsey and Bermuda are well-established options.

“Either a cell or segregated account solution can work with a fairly simple reinsurance plan. A cell company has a single board that will make the board decisions for the benefit of the company and cells, collectively.

“A standalone reinsurer would probably have some of the senior managing general agent staff on the board and would be a more active and integrated part of the overall insurance plan. A cell or segregated account would probably be of lower cost and comes without the direct burden of participating in the board.

“Transitioning from the cell to a standalone reinsurer can always be done at a later date, when the cell has established its business and accrued some profits,” Tee explains.

Insurer role

The other major geographic location for managing general agents setting up captives is the US.

The US has seen the headlines made by major cyber players – Coalition, Cowbell, Corvus and Resilience – all setting up their own captive structures.

But, according to Alexander, a large amount of business comes from insurers that operate with a network of managing general agents.

The insurers then set up the captive structure for the managing general agent, often choosing the Cayman Islands as their domicile of choice.

“It depends on your jurisdiction. If you are in the US, Cayman is as good a place as any,” Alexander says. “It has a regulatory benefit. Cayman has stayed out of Solvency II, whereas Bermuda has gone into Solvency II. It is much easier. If you are a big three insurer in Cayman, your capital requirement is $100,000, which is nothing these days.”

With so many jurisdictions ready to set up managing general agents and the harder market conditions, there is seemingly little downside to setting up a captive. However, Coupe says the cost of setting up a captive, if you are a managing general agent or smaller insurance fi rm, can be considerable.

“It is often said that you need a book of business with over £30 million of gross written premium for economic viability. This means you’re going to need capital of approximately £20 million just to start it. There are no absolutes here.

“It is possible to start at much lower levels, perhaps operating through a protected cell structure to start with, but the larger the book of business is, the greater the economies of scale are likely to be.”

Tied-up capital

Another potential downside factor is the length of time the capital is tied up and it can be “very difficult to extract”, according to Coupe.

“The difficulty of participating in risk is that capital becomes tied up in the insurance vehicle potentially for a long time. If one is in the UK or Gibraltar, Solvency II will apply. If you are in Guernsey, then you are not currently bound by the same level of solvency requirements but are more restricted about what one can or cannot do in the UK market.”

Manchester also warns of the impact of a managing general agent locking down its capital for an extended period.

“The downside for the managing general agent is that they’ve got the risk on their balance sheet which might be a tail risk, making it difficult to IPO (initial public offering) or sell. It just creates that underwriting risk.

“However, if they have an existential problem where they need to find an alternative way to get their capacity together, and putting skin in the game is the only way they think they can achieve it, then how they might exit some years in the future is probably the least of their worries.”

5-6 November 2025

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