Now that traditional reinsurers are adjusting to the idea that third-party capital providers have moved into their space, managing general agents may be next to feel the negative impact of new capital, the leader of a specialty broker said recently.

Speaking at the Standard & Poor’s 2015 Insurance Conference last month, Steven DeCarlo, the chief executive officer of AmWINS Group, provided details of a deal between AmWINS and Nephila, an investment manager specializing in reinsurance risk, which is helping Nephila plow into new territory—the direct insurance marketplace.

It’s the MGAs that were disintermediated in the deal, DeCarlo asserted during a session on trends in the specialty insurance market.

DeCarlo made the remark after going over his rationale for accepting almost no commission under terms of a deal. Basically, he said the deal gives Nephila access to a vast retail distribution network without 10 points of commission going to an MGA to get there. (AmWINS has both MGA and wholesale brokerage operations.)

The background and basics of the arrangement are these, according to DeCarlo:

“Nephila is a well-known brand, and they obviously have been on the reinsurance side for years. [But] more and more as they had seen less opportunity to acquire reinsurance, it was not lost on a lot of us that they weren’t going to sit there—that they were going to figure out a way to distribute their capital directly into the [insurance] marketplace …

“They did it originally through some facilities at Lloyd’s, through some MGAs in the U.S. And then we struck a relationship.

“They wanted to get access to insureds. They cannot manage 20,000 retail brokers. There are just too many …So they’ve hired us to do that on their behalf.”

In addition, DeCarlo noted that AmWINS handles a large book of property insurance business—$2.5 billion overall, including a $1.6 billion program of shared and layered premium. Nephila wanted to participate on that shared and layered premium. The issue was how, he said.

To solve the problem, “what Nephila did was give us the ability to put their capital out on these property placements countrywide”—small, medium and large. “They follow form, basically like Lloyd’s. They follow terms and conditions and pricing established by somebody else.” Another underwriter establishes the layer’s pricing, and they participate on that pricing.

“What people have missed on this is typically that looks like an MGA, and I would make an extra 10 points. [But] instead, I took a half a point. I took basically nothing,” DeCarlo said. “The reason I took it is because I want to sell exclusive product—because if I can get retailers to call me, I’m going to get more opportunities,” he explained. “I’m willing to distribute product that’s exclusive without the additional frictional cost.”

“Nephila’s happy, less friction. We’re happy, exclusive product. That’s the distribution game that’s going on …We’re managing retailers with less frictional cost to the capital markets. And it was a quick way for Nephila to participate on a very, very big book of excess property business,” DeCarlo said.

“Will they do it in [workers] comp? Will they do it in GL? I don’t know their strategy. That’s their choice,” he added.

DeCarlo also explained that Nephila needed a fronting company to get this done, revealing that Allianz is the risk transfer agent in this arrangement.

The specialty broker executive also revealed that he took a lot of heat from carrier executives “because it looks like we’re underwriting. We’re not. We’re distributing,” he stated.

Carriers shouldn’t be upset, he said. “Who got disintermediated in that transaction?” he asked the audience, quickly answering his own question. “Frankly, MGAs—because if I can do it myself without going through that big frictional cost, we’re going to save everybody money,” he said. AmWINS had the ability to do this because they had analytics to share with Nephila, he added. “We had the analytics where they could see through our book of business, [which] we distribute through to 600 markets …

“They got comfortable with that big data. That’s one of our core skills,” he said.

Summing up, DeCarlo said, “The reality of the Nephila transaction is [this]: If I had 600 direct insurance companies before, now I have 601. It’s the MGA and the Lloyd’s platforms that potentially could be impacted,” he concluded.