The story of the three-legged stool

The value proposition of the hybrid-fronting carrier is analogous to the definition of a three-legged stool.

What is a stool? A stool is a seat or pedestal without back nor arms whose support is dependent on its legs, typically three. To provide proper support and stability, each of the stool’s legs must be strong enough and aligned with its counterparts.

So how is a stool akin to a hybrid-fronting carrier? It is the very dynamic that takes place in the hybrid-fronting space, in that the three parties – the program administrator/MGA, the hybrid-fronting carrier and (one or more) reinsurer(s) – are each critical to the success of each transaction/endeavour.

While success from the onset is never certain, to maximise the likelihood of a positive outcome and “make the sturdiest stool possible” it is vital to ensure there is proper alignment when structuring the transaction.

This will mean that when one party succeeds, all succeed – and conversely when the results are negative, they are likewise felt by all. Let’s look at the parts of the stool in more detail.

Commission terms

Beyond general acquisition costs, commission terms in reinsurance agreements that are described as either loss-sensitive features and/or result-dependent conditions can serve as a means of aligning the interest of the MGA/program administrator with the other parties.

While sliding scale commission-adjustable features can typically have a range of 6-8 or even 10 points, there are no legal minimum or maximum boundaries.

Even something as small as a swing of 2-3 points, while conventionally not thought of when considering sliding scale depending on the portfolio in question, when combined with other contractual elements may serve as a material motivation in aligning interests among parties.

Profit or contingent commission-adjustable features are other terms that, when properly worded, can achieve the same outcome, both in terms of financial results and associated motivation.

Forming a captive

This provides an opportunity for an MGA/program administrator to take a risk-bearing position in their portfolio, thus affording it the opportunity to share with its partners in the upside/downside potential of that portfolio.

In relative terms, from a time, cost and effort standpoint, it is a relatively straightforward and not overly burdensome process for the MGA/program administrator to create and/or lease a captive.

Hybrid-fronting carrier

Unlike the historic fronting company, which traditionally took little to no underwriting risk and existed largely to facilitate the transfer of exposures to the reinsurance community, the hybrid carrier actively participates in the exposures, sharing in the performance of the portfolio along with their reinsurance partner(s).

When properly constructed, the MGA/program administrator is also party to this arrangement. Being mindful, a clear indication of the responsibility of the carrier – alone among the “stool legs” – is the carrier’s name on the policies, establishing their responsibilities and duties of care.

Challenges for reinsurers

This marketplace is global in scope and exists to take risk. One challenge for this market segment – as the cohort typically furthest removed from the underwriting – is evaluating and pricing of risks that they participate in. Reinsurers can minimise this risk by ensuring structural alignment.

This can be achieved through making the executed underwriting guidelines between the hybrid-fronting carrier and MGA/program administrator a formal part of/attached to the reinsurance agreement(s). Aligning all the legs of the transaction contractually helps ensure they are all working towards the same desired outcome so all “legs of the stool” can win.

The means to provide a secure platform that allows the highest probability of support and stability and the desired outcome of all parties is now an available market construct.

It does much to alleviate the opposite perspective – of a “wobbly” stool which will not add the level of value and/or efficacy for the the program administrator/MGA, the hybrid-fronting carrier and (one or more) reinsurer(s) as they seek to work together to win in the marketplace.

You can also view this article in the first weekly edition of #ReinsuranceMonth, which was published on 1 September by The Insurer and is available to download for free at