Aon Benfield chief executive Eric Andersen says standing still is no longer an option for the reinsurance industry – companies need to find a way to succeed in any market cycle
What do you think will dominate discussion at this year’s Monte Carlo?
We’re hoping that a lot of the conversation this year is actually driven by where the industry is today. Through all the changes of the past decade, how do we actually use these changes to drive more of an innovation agenda and more of a growth agenda?
Insurers and reinsurers have more capital than they’ve ever had, and they’re all being pressed to find opportunities to put that capital to use – they’ve got to find a way to grow. When you look at all the M&A and all the different kind of investments people are making, they’re all searching for ways to use the capital.
Our position – we were saying this last year, and I think you’ll hear us say it again a lot – we as an industry have the tools and the capabilities, we just need to be better at finding opportunities for them to put it to use. I think everybody’s really focused in on “OK we’ve got all this capital, how do we actually use it to grow the business?” In essence, how do we take more risk?
The rate of renewals generally within reinsurance has dropped again this July. How does that impact on reinsurance brokers?
There’s a lot of capital, we’ve had a very benign loss experience, period. In the first six months of the year, it continues to be the case. It’s a market, so prices will go up and down with supply and demand. I think it helps create more of a burning platform – for reinsurers and the insurers. Just standing still and trying to renew your current relationships is really not a very solid strategy at this point, you’ve got to be more creative. And by the way, I put [Aon Benfield] in that category, as well as the other brokers. Doing the same thing year in year out is not going to help you meet your goals.
We’ve got to get more creative around how we use the capital to bring the products back into the market that have left the market over the years, or find new avenues to use your insurance capital to meet new risk. It’s not easy, obviously, or it would be done already, but you’ve got to find a way to succeed in any market cycle.
The excess capital has fuelled a lot of M&A activity, for both reinsurance and the reinsurance broker world. With all of this consolidation what will the reinsurance broker landscape look like in 10 years’ time, in your opinion?
Whenever someone asks me a question about more than three months down the line, I think it’s important to highlight you always have to go back to look forward. There have been periods of consolidation in our business where people have said the market is shrinking, it’s going away, it’s going to have three competitors and that’s it. Reinsurance is pretty innovative. In an era where capital is plentiful, I think you’ll continue to see new specialty insurers form.
The day that the HCC and Tokio Marine deal was announced, Fidelis was launched. You see the consolidation and then the new companies. Ultimately there is always a place in the market for people that are able to bring innovative creative solutions. I get asked a lot “Do you think the specialty players disappear from the landscape?” and I actually think they don’t. When you do large M&A, you do it for either scale, geographic reach, for underwriting, or product expertise. But ultimately, a lot of the innovation comes from some of these smaller specialty players, so there’s a market for it. We’re not that worried that the world ends up with five big insurers and two big brokers, I just don’t think that’s the way it’s going to play for the landscape. What we’re talking about 10 years from now, the risks we’re trying to grapple with, will probably be different, but I think the underpinning of the business is the same.
It is often said that relationships are key within reinsurance. How has consolidation and the current state of the market impacted the reinsurance broker relationship with reinsurers?
The world works better when you’ve got good relationships with the people that you’re trading with. But I do think at the end of the day it is only a part of it.
You have to have the capability to be able to provide to the reinsurers an understanding of the book of business that you’re asking them to underwrite and reinsure. You’ve got to have good analytics, and you’ve got to have smart brokers with good client relationships.
When you really look at how the business trades, and how you bring the insurers to the brokers, and into the reinsurance market, I think relationships are an important part, but they’re only a part.
As the business has continued to develop, so has the need to be able to provide better modelling tools, better regulatory advice, and all the components that are not a part of the reinsurance world.
The reality is we’re trading billions of dollars of reinsurance premiums here. So it is more than just relationships.
You describe the industry as very innovative and creative. Aon Benfield is a substantial brand, how do you grow and where does your expansion come from – particularly with regard to how your counterparts are expanding via M&A?
We still see a lot of opportunities in the reinsurance space. There’s a lot of conversation that happens about the pricing and the alternative capital. A lot are focused in on the natural catastrophe property losses – that’s where a lot of this alternative capital has hit.
But there are areas of the marketplace today where reinsurance or insurance have not provided solutions to clients. So how do you bring capital to new things? Cyber and mortgage credit are areas that we’ve invested pretty heavily in and are seeing some growth in. We look at products that have left the market over the past 25 years, maybe because of losses. Today, do we have better information, better tools and capabilities that we could reintroduce new products?
Think about professional liability for banks, or intellectual property for technology companies, things where we can help our insurance clients grow and therefore help the reinsurers grow as well. Then you’ve got the catastrophe liability type products, oil and gas, or rail, where they need catastrophe limits more than what the traditional market can provide. So can we help our reinsurance markets bring that capital directly into the retail market through MGAs, or other vehicles to help them put their capital to use? And then you’ve got the geography piece, places where you’ve got growing economies where we are nowhere near fully developed like we are in the US or the UK. There are global pieces, there’s product, new areas, new risks, where we see plenty of opportunity.
What Aon Benfield is today was really the result of an acquisition done almost seven years ago, where number one Aon Re bought number three Benfield. We’ve been through that process. With M&A, if it’s just to be bigger, I don’t think there is a lot of value in it for the ultimate customer. But if it gives you the resources or the scale to make investments, to actually do new things, whether it’s a broker or an insurer or a reinsurer, then I think you can then really drive value for the deal.
So we’re trying to use the scale to invest – whether it’s in new models, or new teams, new talent – to make sure we’re able to take advantage of some of those opportunities.
You mention that there are still geographical locations where you may not necessarily have a huge presence yet, where do you think will be the next hotspot for Aon Benfield?
You know I think it’s very similar to what you’d hear across the whole industry – Asia-Pacific is a growth area for us. China is a very interesting, exciting place. We just hired a new head of China and we’re working on our investment banking capabilities in that part of the world.
We also see some pretty good growth in Latin America. And it’s the same issues: growing economies, very low insurance penetration risk, or insurance penetration ability. It takes a while – people that think this is going to happen in the next 12 months are not correct. You have to allow for local flavour. People want it tailored to what they need.
One of the fun parts of being in a global company is that you get that flavour mixed in with the expertise, and it does allow you to innovate and be creative.
At the last Monte Carlo there was a lot of talk around public/private partnerships being part of the future of reinsurance. One year on, how do you see the future of PPPs and reinsurance?
I think we’re still as bullish on it. When you think about the public part of the PPP, public finance is still very stressed, in the developing world and the developed world. Even in things such as the mortgage credit business – we’re working very closely with what is effectively the US mortgage credit underwriting arm, they buy all the mortgages that the retail banks originate. We’re working with them on transferring some of that default risk into the reinsurance market. People tend to think about PPP as a construction place, building bridges and tunnels and roads, but if you define it as private industry working with public sector, that’s one where you can say it has been a success. Things like weather bonds, there’s a lot happening around it, around how we can work with government entities using the capital to try and solve society issues.
I think that will continue. People talked about it at Monte Carlo, without a lot of specificity last year, but those are just two examples that people have developed since.
Everything evolves and innovates as people see need.