27 May 2020
Genstar-backed hybrid fronting start-up Obsidian is targeting opportunities with retail and wholesale risk aggregators as well as more “traditional” MGA program business as it looks to build out its platform with a dual strategic focus.
The Bill Jewett-led carrier officially launched at the end of March with $100mn of capital from private equity firm Genstar and an A- financial strength rating from AM Best.
As a hybrid program fronting carrier Obsidian will take up to 10 percent of the risk on programs it writes, ceding the rest to panels of reinsurers. It has admitted and nonadmitted paper.
It has assembled a management team including former Endurance president Jewett as CEO, former Hanover Insurance Group executive Craig Rappaport as COO and Dan Larkin, formerly of Allianz, as CUO. Chief counsel Emily Canelo previously worked with Jewett at Endurance.
In an interview with The Insurer, Jewett said Obsidian will look to be an economically and strategically aligned partner for larger risk aggregators, including retail brokers, wholesale brokers and large MGAs.
“One area of our focus is to help them create value along the continuum as we see the expense compression in that business. He who controls the risk controls the business. It’s a common expression but one we wholeheartedly believe in.
“And we think a company like ours with a competitive cost structure is well positioned – especially without legacy issues or channel conflicts,” he said.
As previously reported by this publication, there is growing interest from retail broker aggregators such as Acrisure, USI and other fast-growing consolidators to find ways of efficiently placing the more homogenous SME business in their portfolio.
That has led to suggestions that aggregators could bring that business direct to the reinsurance market by pooling large volumes of similar risks from across their platform of acquired agents and brokers.
A fronting carrier could act as a conduit to reinsurance capacity as part of that process by providing its paper, licenses and other infrastructure to write the business.
“It’s being driven by aggregators that are looking for alternatives to the current marketplace and we can be part of the solution for them. There’s also a pull from the reinsurance community that wants access to that risk – risk that most likely they would not see if it was written by a large traditional carrier,” said Jewett.
Also talking to this publication, Rappaport said Obsidian sees an opportunity to facilitate aggregators by providing a more stable, cost effective solution to address large aggregations of similar risks they have in their portfolios.
Although he wouldn’t talk about specific firms, he added: “The aggregators will have to drive that process, but we can help facilitate it in an efficient way for them.”
Jewett added that part of the start-up’s business model and platform build has been focused on being able to provide the capabilities and cost structure to engage with risk aggregators.
“These can be large complex deals which require a certain level of underwriting and actuarial sophistication as well as operational capabilities, modelling and analytics. We are building ourselves to meet those needs and that’s what’s going to be a key differentiator for us,” he said.
Traditional programs and tech
Obsidian will also have a strong focus on the more “traditional” program business and has been building on relationships with MGAs to develop a strong pipeline of deals.
He explained that the carrier is “pretty agnostic” about lines of business it will consider adding programs in but will steer clear of property cat and workers’ compensation.
Jewett added: “While we can play a role in those seeking to manage catastrophe exposures by providing a bridge to varied sources of capital seeking that risk, we will not subject our balance sheet to that risk. We can be part of a solution, but not the solution.”
“What we’re seeing so far is in keeping with the traditional MGA space, so commercial lines, commercial auto package, and niche business focusses,” Rappaport said.
The start-up views the traditional MGA market as appealing because of increased consolidation and “professionalisation” of the business.
The executive said a critical part of the build out for Obsidian has been to create a platform that is both efficient and valuable to MGAs and reinsurers.
He said that the market is trending towards MGAs increasingly controlling the front end of the transaction, either with retail agent producers or the actual insured, by issuing policies.
“Then we have built a structure and common integration platform to take in that information in the most efficient way. Building this from scratch we have been able to design efficiently, keep everything cloud-based and use the newest tools to make it as seamless as possible,” said the former Hanover executive.
Jewett and Rappaport said that part of the rationale for launching Obsidian is a demand from MGAs and large aggregators for more stability from their capacity providers.
“They are seeking more stability that this model provides with its portability of capital,” said Rappaport.
The transitioning market of the last 18 months has led to capacity issues for many MGAs and brokers as a carrier appetite across the P&C sector has shifted.
Rappaport noted that a relationship with a fronting carrier and a panel of reinsurers can provide a more stable partnership for an intermediary.
“If you have a portfolio of reinsurance support it’s easier to replace a single party in that model than to have to completely move your program from one promary carrier to another,” he said.
Jewett said that by operating as an underwriting company first and taking a risk position, Obsidian would be better aligned a part of the tripartite relationship between the MGA, reinsurer and program carrier.
“Our focus on nderwriting profitability lays the foundation for a long-term sustainable relationship, which is what MGAs and reinsurers are looking for”, he commented.
The executive said that on the majority of the deals in a “very active” pipeline, Obsisdian would look to retain up to 10 percent of the risk.