The chasm between the big three brokers and the next tier is wider than ever. With great scale comes great analytics and global reach but is that what all clients want? Or is there an opportunity for smaller players to step up with a more personal and creative service?
It takes size and vast resources to truly make it as a reinsurance broker in today’s market. At least, that is the message from those at the top of the league tables.
“If you look at the industry as a whole from a competitive standpoint, it has very much become an oligopoly, with relatively few companies having the ability to invest in those services and capabilities that our clients are looking for brokers to provide,” Guy Carpenter’s Americas chairman Pat Denzer told Global Reinsurance last November.
Denzer was formerly president and chief executive of US reinsurance broker Collins, which Guy Carpenter – the world’s second-largest reinsurance broker – bought in April 2009. “We knew that being able to come into a platform where the scale was available, and where there was a commitment to building out scale, was important,” he says.
Aon Benfield chief strategy officer Bryon Ehrhart agrees. “A reinsurance broker needs a pretty large platform these days to do the analysis that’s needed for even a medium-sized insurer,” he says. “I’m not saying it’s impossible or hopeless, but I think it is harder now for a small broker.”
There is plenty of evidence to support the ‘bigger is better’ argument. As in the insurance market, reinsurance broking is dominated by the ‘big three’ – Aon, Marsh & McLennan Companies and Willis – through their respective reinsurance broking operations Aon Benfield, Guy Carpenter and Willis Re. There is a huge gap between the top three and Cooper Gay Swett & Crawford, the fourth-largest according to rating agency AM Best’s 2010 reinsurance broker ranking, based on 2009 revenues.
The largest brokers have spent millions of dollars developing various analytical services to help their clients, the reinsurance buyers, do their jobs more effectively. Services include catastrophe modelling, capital modelling and dynamic financial analysis.
Smaller brokers can only dream of matching the spend the top three have invested in their analytical capabilities. Aon Benfield has 450 analytics professionals – a team that dwarfs the entire reinsurance units of most of its competitors. Towers Watson’s London market reinsurance operation is 200 strong, for example, and Cooper Gay’s reinsurance team employs around 51 people.
The largest reinsurance brokers also have global reach. While some of the mid-tier brokers offer services in a number of key markets around the world, their overseas offices cannot hope to compete with the large branch networks of the biggest firms. Aon, Aon Benfield’s parent, has a presence in 120 countries, for example.
When it comes to launching in new markets, the bigger brokers are likely to get there faster and in greater numbers. “They have got the financial resource to run a loss-making operation in a territory for years if they think that the long-term play is worthwhile,” Cooper Gay’s managing director of reinsurance Andrew Hitchings says.
Meanwhile, life is getting tougher at the smaller end of the broking spectrum. More stringent regulations have increased the cost of doing business and raised the barrier to entry at the bottom end of the scale. Hitchings contends that compliance teams in particular now have to be larger, and that ensuring adherence to rules is a growing part of brokers’ day-to-day business.
“If you were a specialist niche broker operating 10 years ago, you could probably survive on a relatively small turnover and make a decent profit on it,” he says. “But the fixed costs of trading have no doubt put a lot of pressure on a lot of small companies and in some cases made them completely unviable.”
While he says that there is no such thing as a minimum turnover for a London market broker, Hitchings believes those bringing in revenue in the low single-digit millions of pounds are likely to struggle.
Size isn’t everything
But cracks in the big three’s apparent stranglehold on the market are starting to appear. For some, the biggest reinsurance brokers have simply gotten too big. The 2008 merger of Aon Benfield, for example, which cemented Aon Re’s position at the top of the pile, prompted a staff exodus from the firm. Smaller London market rival Miller picked up around 38 departing Aon Benfield brokers.
One broker who made the switch from a small to large firm reports that while working for a smaller firm, they spent 90% of their time serving clients and 10% of their time on internal matters. At the larger firm this switched to 70% on internal matters because of the size and complexity of the bigger company.
Employees are not the only ones who are growing frustrated with the larger brokers’ business approach and slower, more impersonal service. Some buyers’ patience with the top-tier brokers also appears to be wearing thin.
“The message we have from buyers is that they are desperately trying to do something with those other than the big brokers,” Miller’s head of facultative reinsurance Mike Papworth says. “They are working with the big brokers because they feel they have to, not because they want to.”
Chief executive of the world’s seventh-largest broker BMS, Carl Beardmore, also detects a weariness among cedants with the large brokers’ tendency to throw their weight around.
“Without wanting to sound critical of the big brokers, they, to some degree understandably, have worked very hard to get themselves into a position where they can apply a lot of leverage from a lot of directions to persuade clients to use them,” he says.
“The message I am getting very clearly from the marketplace, whether it is from clients or producers, is that they are becoming constrained and a little bit concerned about the sheer domination of the big guys, and clients in particular are questioning whether they are getting truly dispassionate advice.”
Smaller brokers believe that because of their smaller, simpler structures, they can offer a superior service than the behemoths. Being able to provide clients with a single contact that manages their business through the entire process is a big competitive advantage, they argue.
“The big three do a fantastic job, there’s no doubt,” Hitchings says. “But with personal ownership of business, you are going to walk that extra mile to get the job done for your client. Our business is a service business, and our clients expect that from us.”
While it is true that cedants value brokers’ analytical capabilities – they received a strong vote of confidence from buyers in a recent issue of Global Reinsurance (‘Don’t treat us as just another cedant’, September 2010) – some of the smaller brokers, while acknowledging the quality of their bigger rivals’ offerings, contend that it is not necessary to spend millions of dollars to provide a good service.
For example, Cooper Gay, rather than developing analytics in-house, has formed a partnership with independent provider Underwriting Management and Actuarial Consultancy Services. The company believes offering third-party consulting and analytics rather than in-house equivalents is a competitive advantage because of the independence of the advice.
The larger brokers are clearly relying heavily on their superior analytical capabilities as a competitive differentiator. But some firms contend that while the advisory and analytical side of broking is important, its importance is waning.
“It is not the be-all and end-all,” Hitchings says. “A lot of companies, especially now with Solvency II, are having to perform their own actuarial analysis without any input from brokers at all. Solvency II will require these companies to demonstrate that they have been through internal actuarial processes to hit the Solvency II targets. They won’t be able to completely rely on a broker’s input; they have got to be able to do it themselves.”
Some even argue that the provision of analytics could soon shift away from reinsurance brokers altogether. Analytics and modelling are currently available at many points in the reinsurance chain – the cedant, the broker, the reinsurer, and independent third parties.
Papworth recalls that the primary insurance market was similarly served around a decade ago, but the provision of analytics shifted away from the broker towards independent professionals. He predicts the same will eventually happen in reinsurance.
“The big brokers have spent hundreds of millions of pounds and so are going to say modelling is a fundamental value add,” he says. “But any major cat programme will have the same data modelled 20 or 30 times. That has got to be incredibly inefficient. In a business that is looking for efficiencies, something has to give pretty soon.”
And although the mid-tier cannot offer the same geographical reach as their bigger rivals, such a large office network is not necessary to impress all clients. “Overall, it must be an advantage to have that global reach, but I don’t think it is a particular differentiator in an awful lot of clients’ eyes,” Beardmore says.
Run for your money
Given the dissatisfaction they detect with their larger rivals’ service, small and mid-sized brokers believe they have an ideal opportunity to capture market share from the big three with their speedier, more personal service.
But, while cedants’ frustration with the top tier may create an opening for the smaller firms, it is not a guarantee of new business. Smaller firms will still have to fight for their share. Larger brokers will certainly not take smaller brokers’ claims of poorer service lying down.
“I think that is what they would have to say,” Aon Benfield’s Ehrhart says in response to charges that larger brokers’ service is slower and less personal. “Our teams are organised in small groups that serve clients. Our goal is for clients to feel like they have people that are specifically tied to their account and that care deeply about the results we accomplish for that account. I get comments all the time from clients about how they feel like they are the only client of our firm.”
While some smaller brokers argue there is a disconnect between the client-facing teams and placing teams at larger firms, Ehrhart says this is not the case at Aon Benfield. “Generally, the person handling the relationship with the client is the person who works with the client to structure the programme and is heavily involved in driving the placement,” he says. “Our brokers are true brokers and not just relationship managers.”
He adds that Aon Benfield’s operation is structured so that brokers can spend between 90% and 95% of their time focused on client matters. He also believes cedants’ demand for broker analytics will remain for some time. “I see that demand growing, not shrinking,” he says.
As they cannot match larger brokers’ analytical and capital markets firepower, Ehrhart believes smaller firms “had better have very good relationships and very good ideas. And they need to be able to convince those clients that they have good relationships with markets and that they can execute those ideas from their smaller platforms as well as some of the larger firms.”
Smaller brokers acknowledge that winning business from their larger rivals will be tough. Many buyers could take the attitude that it is better the devil you know. “Just as it is safer to buy IBM computers, it is perceived to be far more difficult to use an unknown or smaller brand because you just don’t know what the service is going to be like,” Papworth says. “You accept the mediocrity knowing that it’s safe rather than going with the new, exciting proposition.”
Got what it takes?
One particular challenge is that brokers are increasingly being chosen using a request for proposals (RFP) process rather than through personal relationships or recommendations.
“Efficiency, service, quick turnaround and better claims handling all add up, but it can be very hard for an independent to get into the RFP process,” says Martin Davies, a director in the London market reinsurance brokerage division of Towers Watson. “It is not impossible, but it does come down to being clear about what you are offering and what the benefits are.”
The smaller and mid-tier brokers are convinced they have what it takes to win over cedants. “Part of the fun for us, my peer group and for the team I work with is having the time, energy and enthusiasm to come up with new ideas, putting them forward and developing the business,” Papworth says.
But the natural cycle of reinsurance broker development has changed. In the past, mega-mergers would prompt disgruntled executives to depart and set up their own small start-ups. Some feel that the cost of doing business today could limit this entrepreneurial activity.
Davies says: “While many support functions, including some aspects of compliance, can be effectively outsourced, I think one tends to see rather fewer of the star brokers setting up their own shop than we used to a number of years ago.”
Yet smaller firms do believe that market forces are on their side. “My perception from talking to an awful lot of people is that the time is right for an alternative to be developed. Clients want it, markets want it, people working in the insurance sector want it,” Beardmore says.
“In life in general, people always like to have options, and they are feeling that at the moment their options are not as great as they should be. For the mid-tier brokers especially, I think it is a period of superb opportunity.” GR