The energy and imagination brought by the smaller, independent brokers could breathe new life into the fight to break the current vicious circle on pricing, explains Julian James, CEO of Lockton International.
If the (re)insurance world thought that surviving 2009 in reasonable shape meant that we could all sit back and relax, the signs are that they may have been seriously mistaken. The earthquake in Haiti reminded us of the potential scale of natural disaster, Greece and the eurozone have travails of the man-made kind, and everyone is talking about a softening market.
We have seen reinsurance rates down around 10% on average and, barring major losses during the current year, we would expect further incremental decreases going into 2011. With good profits being announced for 2009 and balance sheets remaining strong, a return to something like 2008 rates was hard for the market to resist. But as investment returns are still frail, the need for underwriting discipline is even more crucial than usual to prevent a head-long slump into serious losses.
There is a fundamental problem in trying to maintain a firm line on pricing, however: the primary insurers are working with businesses whose cashflow and balance sheets are still challenged, so their ability to buy/pay more is very limited. This undoubtedly will trickle down to the reinsurance market and reduce the desire for buyers of reinsurance to pay more. So, how do we break this vicious circle?
Some might argue that the answer lies in dealing only with firms that have global reach, standard models for analysing data, and the power and influence to get the market’s attention. It is perhaps unsurprising that those arguments are put forward by the world’s largest broking houses. And it is equally unsurprising that Lockton – as the world’s largest privately held broker – would be a strong advocate for the power of lean entrepreneurial independence.
Of course, scale is sometimes a factor, but I would argue that to concentrate on structure is to look at the world from the wrong end of the telescope. What our industry really needs is a much greater focus on the customers and provision of excellent service – and that needs to include accessibility and transparency. Then the customers will decide.
For Lockton, it is an imperative point of principle that the most experienced people are accessible to clients, rather than being tied up with operational management, because our business is all about highly skilled insurance people actively seeking risk management solutions for their clients.
I think everyone would agree that value and service are worth paying for, but everybody needs to know how much they are paying, what they are paying for and to whom they are paying it. A lack of transparency breeds a lack of trust, and we are not an industry with much of that to spare.
Reinsurance buyers are not some unique breed. They want the same things as buyers of services the world over. They are looking for brokers with energy, imagination and hunger. The right cover and the right price have a role to play, but when times are tough and money is tight, creativity is a key component. This does not sit comfortably in organisations where a silo mentality rules, or where people are worried about losing their jobs in a merger.
There is no other market where clients, brokers and underwriters come together face to face; where problem-solving is an intrinsic part of the industry’s DNA. This requires experience as well as expertise, and yet a number of brokers and insurers are looking at this period as one in which to lay off staff, introduce unpaid leave, a shorter working week, and so on.
In fact, to deliver the service our customers demand, the (re)insurance market should be hiring talent and investing in its human resources. How can we work smarter and deliver more creative solutions when expertise is being lost to the sector?
The final answer lies, as always, with the customer. They will want choices dependent on their business and its needs, and they will make choices dependent on the service they receive. Most service industries support a range of providers from the monolithic to the boutique, serving clients of diverse structures and complexities, perhaps a specialist in a particular field or market, or a global provider.
Ultimately, the market as a whole will decide whether there is a place for independence, not those on either side of the debate. GR
Julian James is chief executive of Lockton International