David Carson Insurance Day Big Interview


David Carson

‘London market property cat MGAs are an acquired taste’

Coronavirus, the negative publicity around ILS and the high cost of retro cover are creating unique opportunities in the property cat market, the founder of managing general agent K2 CAT says.

K2 International, the London-based specialty underwriting platform launched in June this year, is set to execute its programme of dynamic expansion in 2021.

Undaunted by the challenges of the present market environment, K2 International’s management is planning to increase the operating scale and territorial scope of the managing general agency (MGA) platform over the course of next year. This will be done through a combination of organic growth and the acquisition of specialist underwriting teams and MGAs.

K2 International was created out of the successful parts of the troubled Pioneer Underwriters’ businesses acquired in April by California-based holding company K2 Insurance Services. The transaction included Pioneer’s property catastrophe, property direct and facultative, financial institutions and marine insurance and reinsurance books of business.

The deal, which is K2 Insurance Service’s first outside the US (where it owns 15 MGAs writing in excess of $800m in premium income in 2020), is intended to form the cornerstone of the company’s ambitious international expansion plans, which include building one of the biggest MGA franchises in the world. K2 International is expecting to underwrite more than $200m of premium in 2021.

K2 International’s biggest business, its property catastrophe underwriting division, K2 CAT, had its best year ever in 2020 since the division was launched under the Pioneer Underwriters’ brand seven years ago.

Ironically, expanding the scope of its activities in today’s market environment could be challenging. These challenges arise because as the market hardens carriers inevitably start to wonder whether they would be better off writing the business themselves instead of continuing to place their trust in an MGA to achieve profitable growth.

Tough class

In addition, property cat is one of the toughest classes in which to find capacity providers for an MGA in a hard market, let alone attract similar levels of fee and commission demanded by some coverholders writing financial institutions and other specialist liability lines business. For most carriers, property cat MGAs, of which there are very few in the London market today, remain an acquired taste.

For David Carson, K2 CAT’s founder and head underwriter, however, the opportunities in today’s market environment outweigh the challenges. He is very clear, however, the path ahead will have to be carefully negotiated.

For a property cat MGA, he says, this hard market will be all about quality of service and results. “If we, as an MGA, don’t add value, if we don’t service the account efficiently and provide judicious risk assessment, pricing and offer something different to the brokers, there is no point for the carrier to use us,” Carson says.

Focusing mainly on traditional property cat reinsurance and targeting regional insurers in the US, Japan, Canada and the Caribbean, K2 CAT will account for at least 50% of the total premium written by K2 International in 2020. At present it underwrites through six facilities, primarily on behalf of Hong Kong-based global reinsurer Peak Re – its founding capacity provider – but also on behalf of Cathay Century Insurance in Taiwan and Taiping Re in Hong Kong.

Encouragingly, the change in ownership and the fact K2 Insurance Services has kept the best parts of Pioneer Underwriters have generated a marked increase in interest and offers to K2 International by carriers, other MGAs and individuals who want to work with the business. “The change in ownership effectively means we are now part of a $1bn premium income group that has got good, strong connections with capacity providers in the US, the biggest property cat market in the world.”

Capacity expansion

As things stand, there is no fixed idea about just how big K2 CAT should be. The business is in talks with two other carriers, which, if they come to fruition, could see the size of K2 CAT increase 50% overnight, Carson says.

“It’s a long game. Our thinking is developing as the situation evolves,” he says. “As a business, K2 International is regularly approached by specialist underwriters with good track records who have their own capacity backing which they can bring to us. We are looking forward to embedding some of these teams during 2021.”

K2 CAT, like other incumbent property cat writers, had a number of issues to contend with in 2019, particularly in relation to the deterioration of prior-year cat losses, including losses from Hurricane Irma two years earlier. The other challenge for the division last year was Japan, which suffered its second consecutive year of major typhoon events in the form of typhoons Faxai and Hagibis.

But, according to Carson, it was quite clear even before the hurricane season started in 2020 that the market was moving, and moving in the right direction. The advent of Covid-19 at the beginning of the year, he says, had very little impact on K2 CAT’s performance. On the contrary, the market saw significant rate increases on accounts, particularly in the US Midwest regions, that had had a lot of loss activity in 2019. This was followed by further rate increases in the middle of this year when property cat accounts in Florida, Texas and the other US hurricane-exposed coastal territories renewed.

“In between, we had the coronavirus, the negative publicity about the insurance-linked securities market, particularly, Markel CatCo, and the higher cost or, in some cases, the complete unavailability of retro cover. All of that, together, strengthened the market’s resolve and made it much tougher. There was a lot less capacity in the market. We saw rates moving up, even for accounts that were loss-free, which has not been the case in the past. There were a lot of private placements and non-concurrent terms imposed,” Carson adds.


When K2 CAT was set up in 2014, it opted to look for capacity outside Lloyd’s for a reason. The business did not want to be subject to some of the rules and regulations Lloyd’s was starting to impose on the market, particularly in terms of its property cat exposures, a trend Carson describes as the homogenisation of cat business. “They want everyone to be the same and, as a result, the market has lost some of its entrepreneurialism, agility and the ability to react,” he says.

“Every entity operating in the market now has to go through multiple layers of a very complicated bureaucracy; we were looking for flexibility. If we want to alter our business plan with Peak Re in any way, we call them to discuss it and agree a way forward. Keeping it simple definitely has its advantages,” he adds.

As an example of K2 CAT’s flexibility, Carson cites the wildfire rating methodology developed by the MGA over the past few years in response to increased loss activity. “We have generally avoided earthquake risks in California because rates have been quite low. But while the market thought they were reinsuring earthquake risks, they later found out that wildfire was a far more costly peril. We will reinsure wildfire, but only at a commensurate price.”

Brokers initially described K2 CAT’S wildfire rates as far too expensive, saying there was no way they could ever sell the product. “However, they came back a few weeks later and conceded we might be on to something. And that is the sort of thing that interests us,” Carson adds.

K2 CAT is now writing wildfire business at multiples of the volume it previously did and despite the fact the market just had the worst year in wildfire history this year, K2 CAT has not, so far, had any loss advices, according to Carson. “For us, there is always a price that is commensurate with the risk. But, as an underwriter, you need to be able to communicate to the market what it is that you are pricing for and have the discipline to stick to that price,” he says.

Capacity support

Whether property cat MGAs fail or prosper in the market environment will depend on how supportive their capacity providers are. Peak Re, which currently provides the majority of K2 CAT’s capacity, has been incredibly supportive, according to Carson. “They grasped the nettle because what they see here is an opportunity. For them, it is very important we present a consistent message to clients and brokers and be in a position where we can write business.”

Some Lloyd’s syndicates, for example, are having to stop writing property cat business because the market authorities are worried about exposure and premium and many syndicates cannot find the levels of reinsurance or retrocession cover deemed adequate by Lloyd’s. “Peak Re has always been keen on us continuing to offer a service, irrespective of how tough conditions are. They are there for our mutual clients,” Carson adds.

K2 CAT has been working with Peak Re for seven years now writing business in the US, Canada, the Caribbean and Japan. The reinsurer is very much the mod- el of an ideal capacity provider, according to Carson. “Very early in the relationship they put a significant level of belief in our operation – they gave us their trust. We have respected that. They did not second-guess us. We have been their eyes and ears in the London market since 2014. It is a relationship which has worked very well,” he says. “We are a relentless advocate for Peak Re. If you deal with us, essentially, it is like dealing with Peak Re London and I think that, above everything else, is what defines us as an MGA.”

It helps greatly that Peak Re is well capitalised and has a reputation as a reinsurer that pays its claims very quickly. It is the only reinsurer, Carson says, that actually publishes how quickly it pays its claims.

“In fact, the most important thing that happened to K2 CAT was the first claim we ever paid in 2015. Peak Re paid it quickly, within a day. That promoted both our brands to the US market. An advertising or PR company could not have done a better job.

“The broker was impressed. The client was impressed. It made the market realise the property cat MGA reinsurance model worked when backed by a responsive partner such as Peak Re – that dealing with an MGA was like dealing with the reinsurance company itself,” he adds.

K2 CAT is looking to find similarly minded capacity providers that will trust the MGA to write property cat business, and add value, on their behalf.

“We will only succeed if that’s the case,” Carson says. “So far, in K2 International’s brief history the signs are encouraging. We have supportive carriers, and very much enjoy the high level of collaboration and transparency with Bob Kimmel [K2’s chief executive] and his team in the US.”

This first appeared in Insurance Day and published with David Carson's approval.

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