Paul Bawcutt argues that brokers have amajor role to play in the hard market.

Brokers have taken a lot of flak in recent years with many corporate insurance buyers, consultants and others questioning their role and whether they are really worth the fees and commissions paid to them. Questions have also been raised regarding brokers' relationships with insurers, asking whether they are maybe a little too cosy; much has been written about the role of volume commissions in the insurance industry and whether they enable the broker to demonstrate truly arm's length and client-orientated advice.

In a soft market, which has existed for many years, the brokers' role may have become difficult to justify. It has been relatively easy for them to negotiate and claim the credit for reduced premiums and wider coverage when there is a mass of overcapacity. However, the downside of this - which is rarely discussed - is that it is undoubtedly more difficult for brokers to maintain a high quality service in an environment of falling commissions on premiums or if fees come under attack as a result of competitive pressures, which target cost and not the quality of service provided.

Brokers' rates
In many respects, brokers are their own worst enemies. They seem reluctant to aggressively charge the right rate for the job. By comparison with their professional peers such as management consultants, accountants, lawyers and investment bankers, insurance broker fees are low. What's more, they seem embarrassed about demonstrating the value they add when compared to higher earning advisers.

However, times are changing and the often touted cliché that brokers will prove themselves in a hard market gives them a real opportunity - the first for many years - to prove their worth.

Before developing this theme, a diversion. Brokers are largely recognised as being good at two things, and this observation is not an opinion but based on credible market research. The first is the design and negotiation of insurance programmes, and the second is carrying out property loss control work, particularly by the major brokers. What is often overlooked, perhaps surprisingly, is the role that brokers play when the client has a claim. Given that buying insurance is predicated on having the claim paid promptly and without argument, surely when a claim arises, brokers should make more of a song and dance about this critical part of their service. But they don't. Incidentally, this is a service that is usually not charged for in addition to the main servicing fee, even though the work involved can be extremely time-consuming.

Broker capabilities
Let's get back to the broker in a hard market and the need to ensure that the broker makes the most out of a difficult situation. As a `grey panther' you might expect me to mention the importance of using a broker that has experience of doing deals in previous hard market environments. Sadly many don't have these resources or have `early retired' the panthers to save costs. Those that have been more forward-thinking now have a chance to impress clients, including individuals at higher levels within the client hierarchy, as the cost of insurance and/or the lack of coverage is rapidly becoming a board-level issue.

In hard markets brokers can play a number of key roles including:

  • assisting the client with putting together the complex underwriting presentation that will bring about the best response from the underwriter and, indeed, is demanded; and

  • helping the risk manager educate senior management and prepare them for changes in strategy. These changes will be necessary when the levels of imposed risk retentions dramatically increase, areas of critical cover are not available, and inadequate capacity means that `full cover' cannot be purchased. In short, the broker can help educating them in all major issues apart from the frightening and often unbudgeted increases in premium that many find difficult to comprehend.

    Skill in selecting and negotiating with the most appropriate re/insurers is now a key role for the broker. Much of the insurance market has adopted `technical underwriting' approaches based on desired industry sectors. It is essential to understand the principles on which these underwriting strategies are based. Equally as important is knowing those underwriters who have the appetite for a particular risk or client group, as well as knowledge of their available capacity and the restrictions, e.g. sub-limits imposed upon them by reinsurers.

    Although corporate insurance buyers have been urged for months to address their renewal strategy early, this has often not elicited a swift response from underwriters, who seem to be bogged down with the `technical underwriting' effort they are engaged in and consequently need to take a view on priorities. This has led to decisions to deal only with renewals for existing clients or to offer quotations only two or three weeks before expiry.

    This can be nerve-racking, but the good broker has to manage both the market and the expectations from the client. As a result, adequate resources, influence and technical expertise now need to be added to basic broking skills.

    A well-trodden path and a valuable role of the broker is the development of new, alternative capacity. Historical examples of this are, of course, group captive facilities, risk retention groups and the two big successes of yesteryear, ACE and XL, both set up in the 1980s as a response to the liability crisis at that time.

    Market status
    In the current hard market, the initiatives relate to more specific problems and include aviation group captives for terrorism cover, high excess property reinsurers set up in Bermuda, construction industry mutuals, captive owner or captive-generated capacity and risk-swapping vehicles, with surely more ideas and alternative vehicles to come as the year progresses.

    The risk financing and captive management arms of the broking firms are particularly active at this time. New captives are being formed by companies all over the world; more notably, existing captives are being used more aggressively to finance higher retentions imposed by insurers, using the reinsurance market to greater effect and sharing in primary risk where this can avoid the imposition of `best terms', at unacceptable prices and conditions, where a risk is difficult to place fully.

    Having suffered from criticism in recent times, brokers now have an excellent chance to show their mettle. Whether it be by quality broking skills, the development of new capacity for their clients or helping to develop relevant and effective captive strategies, the opportunities are considerable. Let's hope they respond to the challenge.

    I have to end by remarking that the Editor's title for this piece is either `over the top' or rude (isn't a man's best friend his dog!) - but I will go so far as to suggest that the broker can be your best ally, if you choose the right one, use them properly and pay them well.

    To emasculate one of Oscar Wilde's aphorisms: "A risk manager cannot be too careful in the choice of his broker."

    By Paul Bawcutt
    Paul Bawcutt is chairman of the International Risk Management Group (IRMG) in London.