Reinsurance brokers are increasingly offering a number of different tools to their clients, according to the results of a recent survey conducted by Global Reinsurance.
When Carl Elsener, a Swiss cutlery maker, sat down at his workbench in the latter part of the 19th century he set himself a very straightforward brief - design an implement that would allow a person to carry a small blade safely in their pocket without risk to pocket or person. The result was a knife housed securely in a metal handle, and on 12 June 1897 Mr Elsener patented his penknife. However, the development process did not stop there, and today, a standard penknife will include a large blade, small blade, scissors, cuticle pusher, Phillips screwdriver, can opener, nail file, cap lifter, wire stripper, reamer punch, key-ring, tweezers, toothpick, and fish scaler with hook disgorger as standard.The evolution of the penknife is like that of the reinsurance broker. Whereas ten or fifteen years ago the reinsurance broker was a simple transactor of business, a combination of increased competition, market fluctuations, and an increasingly sophisticated and market-savvy cedant has resulted in a reinvention of the role of the broker. "We aim to offer a whole package of capabilities," explained John Pelly, Chairman and Chief Executive of Willis Re, "which involves financial modeling capabilities to assist our clients optimise how they buy and why they buy; financial modeling tools to help them utilise their capital in the most effective way both in the insurance market and in the capital market; a series of catastrophe modeling capabilities to help them understand the extent of the risk they are taking on; and models to assist them both in their underwriting and selection of risks they are absorbing onto their balance sheets."To compile this information, Global Reinsurance asked a number of Chairmen, CEOs, Presidents and Managing Directors in the reinsurance broking sector to complete a comprehensive questionnaire. Questions were divided into four main categories relating to individual information, company overview, financial statistics, and factors affecting their business. Every respondent was guaranteed anonymity. However, a number of interviews were carried out 'on the record' with individuals to discuss the general findings of the review.
The BrokerThe survey revealed that the higher levels of management in the reinsurance broking sector are populated by a relatively young group of people, with no respondents over the age of 60 and approximately one-third aged between 40 and 45 years. The fact that of this relatively youthful group over two-thirds had more than 20 years of experience in the reinsurance broking marketplace, with almost half of those having more than 30 years, would appear to show an industry which is being headed by well-seasoned players who should still be on the field of play for many years to come. It is not surprising then that, when asked what their previous field of employment had been prior to reinsurance broking, almost 70% of brokers stated that they had never worked outside the sector. Over 60% of those who had entered the sector via an alternative route had transferred from another branch of the re/insurance industry, with a number having previously been underwriters or actuaries. Of those who had entered broking from a totally unrelated field, these included sport, education and computer software. However, with reinsurance brokers seeking to incorporate into their ranks an increasing number of individuals from alternative backgrounds to enhance the skills base and increase the degree of services they can offer their clients, it will be interesting to see whether those who were not weaned on the reinsurance sector will be able to infiltrate the higher ranks of the industry.
The locationWhile the majority of respondents were headquartered in either the UK (53%) or the US (41%), their overall reach left few corners of the globe untouched, with over 120 different cities playing host to the offices of a reinsurance broker. Of the brokers surveyed, 65% operated an office in London, while the highest populated state in the US was New York, with 25% of respondents either being headquartered or having an operation in the city, closely followed by Miami and Los Angeles. The review revealed that many companies maintained a strong presence in Asia, with a quarter of respondents having offices in Singapore and a fifth operating in China, while 15% of respondents operated an office out of Mumbai, India. Australia also figured strongly in the list of office locations, with just over 20% having an office located in Sydney. Western European locations were dominated by France, Germany and Italy, while Eastern Europe revealed a number of brokers had offices located in both Russia and Poland. Other office locations included: Brazil, Chile, New Zealand, Kuala Lumpur, Taiwan, Labuan, Kazakhstan, the Slovak Republic and Pakistan.However, despite this immense global coverage provided by the reinsurance broking community as a whole, breaking the responses down on a company-by-company basis revealed that the global reach of many participants was rather limited. Of the brokers headquartered in the US, over a quarter did not have an office outside of the country, while in London, 20% of respondents restricted their operations to the UK.This fact brings into stark contrast the degree of polarisation which exists between individual companies within the broking sector. While the total number of offices (both domestic and international) ranged from one to 147, almost 60% of respondents had less than five offices, while over 70% had less than ten.
The revenueTotal revenues for 2001 ranged from $322,000 to $720m, rising to between $420,000 and approximately $833m in 2002. The change in total revenue year on year varied from between 133% and -30%, with an average increase of 21.5%. That brokers should report such a marked increase in revenues over a twelve-month period is not overly surprising given the degree of hardening which took place in the market during this period, and in particular the dramatic rise in rates emanating across so many different lines from the events of 9/11 and the myriad corporate scandals. When asked to explain the reasons for the change in total revenues, virtually all respondents cited the current hard market and the associated sharp rise in premium rates as being key factors in the overall rise in revenues. Other contributing factors included: organic growth, an increase in the client base, additional business from existing clients, branching into new lines of business and expanding existing lines, acquisitions, employing improved risk management tools and customising services to meet client needs. Of those who reported a decline in revenues, the main reason given was the general decline in the US economy.The vast majority, 80%, of those surveyed were willing to forecast total revenues for 2003. While the range of predictions were similar to those achieved in 2002, with forecasts of between 100% and -30%, on average the expected change in revenue was an increase of 10%. Depending on who one listens to, the market is beginning to show varying degrees of softening and has been for quite some months, with property and aviation being the two sectors most regularly cited, but with some suggesting a market melt in other lines, even US casualty. As Callum Stewart, Managing Director of Heath Lambert Reinsurance, explained: "The soft markets aren't welcomed by either [underwriter of broker] to be quite honest. A broker might be able to prosper in a soft market if they are very agile and get a lot more new business, but if their current portfolio is showing a 20% or 30% reduction in income, they're going to have to work that much harder if the brokerage is on the income to get new business to increase their existing portfolio." It is therefore to be expected that forecast growth for 2003 should be somewhat muted. Those respondents who forecast no change or a revenue decline pointed the finger at a fall in rates in specific lines, a lack of capacity, continued poor investment returns and further consolidation of clients. Reasons for predicted increases in revenue were: new business; continued expansion; and rate movements in certain lines.When asked to break down their income into fees and commissions, 25% said they had no income from fees. Of those who did, fees constituted only a small percentage of their overall income, ranging from 1% to 18%. However, there are those in the industry who suggest that this balance may soon begin to swing away from commission-based income, as it is easier to ride the storm of fluctuations in the reinsurance market if a company is buoyed up by fees. This theory is supported by Micky Brookman, Chairman of JLT Re Solutions Inc, who said: "More recently, there has been a greater move towards fee-based remuneration, which over time will help alleviate the potential for the insurance cycle to be reflected in a broker's balance sheet."Switching from commissioned-based to fee-based income is not the only means available to a reinsurance broker when it comes to combating the affect on the balance sheet of downturns in the reinsurance broking marketplace. The balance sheets of those reinsurance brokers reviewed were not solely reliant upon income generated from broking. When asked, "What other revenue streams does your company generate income from?" less than a quarter of respondents said that they did not possess any alternative means of generating income. Other revenue streams were: catastrophe modeling and management services, run-off services, dynamic financial analysis, reinsurance consulting, M&A intermediary services, underwriting, actuarial and strategic consulting, reinsurance loss recovery, claims handling and web-based services. Almost three-quarters of those who offered additional services offered some form of consultancy-based work. However, many of the brokers stated that such services were not seen as a means of specifically generating income, but rather as a way of enhancing the overall package which they offered the cedant when establishing the 'best option' for placing business. Describing it as a means of "filling the value gap", John Pelly said: "We spend a lot of time advising our clients on analytical, financial, capital and strategic issues, to help them deliver their financial plans."However, as Stephen Hartigan, Director at JTW Reinsurance Consultants, pointed out, this is where the situation becomes somewhat confusing. "What has happened in recent years," he explained, "is that brokers have tended to introduce those consultative services without necessarily charging for them." He continued: "That is where I think everything is going slightly wrong, because they ought to be able to charge for those services and clients should be willing to pay for those services."
Market issuesAfter having established the overall financial health of the reinsurance broking sector, the review turned its attention to those market issues which were currently affecting the direction in which the industry was heading.When asked to list the three biggest factors contributing to growth, the responses reflected the earlier comments regarding the reasons for the increase in total revenues in 2002 and the ability of the industry to profit from the affects of the current hard market, with respondents citing rising premium rates, an increase in their customer base and new classes of business as being by far and away the most influential factors in facilitating market expansion. For almost all of those surveyed, the last few years have seen a substantial increase in income. Any hard market is considered a boon period for the broking industry, with cedants increasingly reliant upon the abilities of the broker to hammer out the best deal. The client must depend upon the buying power and market leverage afforded by the broker at such times when capacity is scarce and the reinsurer is becoming ever more selective in terms of the risks which are deemed acceptable. As Clement Booth, Chairman and CEO of Aon Re International, explained: "Reinsurers, driving the need for more technical underwriting, demand far more data from cedants in order to fully assess their risk and brokers have had a key role in helping cedants supply this increased level of information." On the flip side, participants in the review were asked to list the issues they considered to be detrimental to the growth of their business. Approximately 55% of respondents stated that increased levels of competition constituted the main constraint. While, unsurprisingly, exactly the same number of brokers, when questioned about those issues which they deemed most threatening to their company, indicated changes in the type and level of competition. In conjunction with concerns over heightened levels of competition, 61% cited consolidation within the industry as being a threatening factor. "We have seen in the last ten years or so a huge consolidation within the broking industry," explained Julianne Jessup, Head of Research at Benfield, "and increasing concentration of reinsurance business in the top four brokers [Aon, Willis, Benfield and Guy Carpenter]. From looking at league tables, you can see that there is a huge gap between the top four and the rest." And according to Callum Stewart, this gap will widen further still in the coming years. "You are always going to have the bigger brokers getting bigger and I think that that will continue," he said. "And you will also have the smaller brokers who are fast on their feet and perform well and provide a service." However, it is difficult to see how the smaller broker can continue to compete successfully with these global heavyweights, as even those brokers who are highly specialised and line specific will struggle to offer the client the immense market leverage that the big four can provide.
A staff shortageReturning to the issue of constraints on growth, a shortage of skilled staff was given equal billing with that of increased competition. "Over recent years consolidation of both primary and reinsurance markets has restricted growth for many reinsurance brokers," said Mr Brookman. "A consequence of this has been little investment in quality people. Additionally, the insurance industry has not historically been as competitive as other financial services areas in hiring high quality talent." This inability on the part of the reinsurance broking sector to actively promote itself in order to draw in the levels of skilled staff required was echoed by Mr Booth, who said he believed that the industry has simply "not been proactive in attracting talent." This concern is further supported by the fact that 44% of respondents considered a shortage of qualified personnel to be one of the most threatening market issues which they faced, while 62% indicated that recruiting and competing for quality staff was one of the biggest challenges they faced.The industry is no longer just seeking to attract those who can place the business on behalf of the client, but also those who can enhance their ability to offer the client a variety of services. "The sort of people we are employing," said John Pelly, "and have been employing over the last ten years are completely different to who we were employing in the previous 90 years: actuaries, accountants, lawyers, earthquake engineers, mathematicians, etc." While it is possible to source those people who can provide such specialist skills, some practitioners claim that the talent pool for those who can combine a knowledge of the reinsurance sector with this alternative expertise is limited. Callum Stewart, however, does not agree with this. "There are more of those people around than people who can actually produce the business and place it, which has always been the perennial problem. There are a lot of highly qualified actuaries and accountants in the market who one can get for a price, and that is relatively easy. There is a dearth of talent of people who can actually go out and place the business, and that has always been the case." It is worth noting that while it may prove difficult to attract skilled staff into the sector, once there they seem reluctant to leave, as only 11% considered developing and retaining potential leaders to be a challenge they had to face.Shortage of capacity also figured strongly in the list of constraints on growth, polling 44% of respondents. However, Micky Brookman questioned the extent to which there has been a lack of capacity. "In some areas there has been a perceived lack of capacity, however there is never a real shortage, if the price is right. If a class of business is affected by unusually heavy losses, or a bad attritional period, reinsurers will reconsider the premium to exposure ratio and if inadequate will remain reticent until the balance changes in their favour." He added: "If cedant and reinsurer are unable to redress the balance in the short term, there may be a period of time when the broker will find the cedants wishing to increase retention levels, thus reducing the amount of business to be placed. This in itself should not have a dramatic affect on a broker with a reasonably balanced portfolio." Where there is a shortage of capacity, the broker must then seek to exploit that capacity which is still available in a more efficient manner by restructuring the programme, in an attempt to either draw in capacity into that particular sector that was not previously interested in writing that business, to "structure it in such a way that makes it attractive to the new market," said Ms Jessup, "or to structure it in such a way that the cedant does not need to buy as much reinsurance." It is at this level, some suggest, that the smaller brokers can compete, by exploiting their ability to adapt quickly to both the changing market environment and the needs of the cedant, beating their more cumbersome larger competitors out of the starting blocks. However, a more direct route which has been taken in the past by brokers to overcome a lack of capacity is to simply create more. "Historically," Ms Jessup added, "the brokers have been quite active in creating capacity. They created the Bermuda market in the first place and the brokers were actively involved in creating some of the new vehicles in Bermuda this time."These new carriers are considered to be very much a broker market, relying almost entirely on the services of the broker to ensure distribution, and are therefore seen by some to be more 'favourable' to seek to place business. By contrast, the relationship with the more established players perhaps lacks this degree of closeness, as they have the market positioning which the new carriers lack to allow them to bypass the broker and deal directly with the client. That is not to say that the broker is avoiding the Munich Re's and Swiss Re's of this world in favour of the more receptive new carriers. With legacy issues calling into question the overall security of the larger players, and reserve strengthening becoming an almost permanent drain on capital, the legacy-free alternative afforded the cedant by the carriers established over the last couple of years has its attractions. "It depends on what the client wants," stated Mr Stewart. "A lot of clients want continuity, but on the other hand, they also want security. Very often they want continuity of relationship, but they are not going to get continuity of relationship by giving their business to a brand new carrier. However, the relationship might not be with the institution, but rather with the people in it, who they have known for a long time." He continued: "If the capital is there, and they know the individuals and they know the decisions which these people have made with them on their accounts in the past in their previous existences, then they would expect the same decision would be made within their new existence, with the new carrier, and may well want to give them the business." Placing business, he believed, is now very much based on relationships. While the importance of financial security, solid capitalisation and good ratings are key elements in the decision-making process, it all boils down to the simple fact that "people are placing their business with people who they expect to have a valid claim paid by. And that isn't just ability to pay, but also willingness to pay."Unsurprisingly, those respondents who cited a shortage of capacity as a hindrance to growth also cited fluctuations in the reinsurance cycle as being a major threat to performance, with 72% indicating that changes in the cycle constituted the most threatening market issue for their company. However, despite the substantial increase in rates which began in 2000, and the impact of 9/11, most claim that the current hard market lacks the severity of previous cycles, because even though unlike previous turns in the market this one has been very much across the board, leaving no sector untouched, there have been few areas in which the reinsurance sector has experienced the kind of capacity crunch that it has witnessed in the past, with cover still being available at the right price. This failure of the current hard market to reach the extremes of previous such cycles is expected to follow through into the coming soft market. "Cycles are not in themselves negative, and are a characteristic of economic systems" Clement Booth believed. "The duration and shape of cycles has not changed much in decades, although the development of better risk modeling techniques may mean that the peaks and troughs become less pronounced." Julianne Jessup concurred, highlighting also the fact that underlying market conditions, and particularly the investment market, suggested the industry should not experience such an extreme soft market, because in the previous soft market underwriters were able to exploit capital gains and relatively high investment returns to subsidise their underwriting, a route which has been well and truly closed in the last few years. This is, however, reliant upon reinsurers being able to maintain a level of pricing discipline, and history has shown that the industry is not renowned for its ability to hold back from its basic instinct of competing for market share.
Serving the cedantReinsurance brokers have often been accused of placing programmes which they perceive to be in the best interests of the client without first attempting to fully ascertain what the interests of their client truly are. The review revealed that the ability of those companies surveyed to maintain levels of client servicing ranked as the third biggest challenge faced by brokers, while the issue of increased demands being placed on the broker by the client ranked fourth in terms of the biggest constraints on a company's future business growth. "Increasingly we are sitting down with the client," said Sean Mooney, Chief Economist of Guy Carpenter, "addressing the problems they have in the whole sphere of risk management, and coming up with solutions and at the end of the process, placing the business." Mr Brookman went one step further in his analysis of the changing relationship between the cedant and the broker, stating that, "the increased complexity of our business demands that the intermediary must have a total understanding of every aspect of the cedant's business from their portfolio risk management, through to their financial and investment management processes. Buying a reinsurance program is no longer a 'stand alone' issue." He continued: "The level of service required from the broker needs to be of the highest calibre, not just with regard to the advice and placement of a reinsurance program, but in terms of regulation and compliance, reinsurance security, wordings, and the premium/claim transactions."However, Stephen Hartigan was convinced that not only should brokers be seeking to improve dialogue with cedants, they should also be seeking to facilitate face-to-face meetings between cedants and reinsurers. "The old-fashioned broker, who lacked vision," he said, "was always concerned when their client and reinsurers got together - they didn't like it if they spoke without the broker being there. I think that brokers should by now have overcome that and have seen that it make a lot more sense for there to be an environment where there is a cedant who gets on well with his reinsurers, that there is transparency - in other words the reinsurer understands what the cedant is all about, what their business ethics are, what their business culture is." Far from devaluing the role of the broker it enhances it, by ensuring that the client is fully satisfied with the reinsurance programme. As Mr Booth explained: "Cedants are under pressure to deliver returns to their stakeholders, and they expect their reinsurance broker to play an active and positive part."At a recent panel discussion, organised by Helix, a claims management and collection service provider for the insurance industry, Nigel Morson, manager of claims and the claims and commutations unit at Royal & SunAlliance, highlighted the fact that, at the time of placement, there exists no official contract between the cedant and the broker, citing this as a major flaw in the placing process. Most of those present concurred that this was at the root of many of the problems which cedants faced, and particularly when it came to the issue of claims management, with some believing that while brokers were willing to accept their fees or commission for the placement of business, their commitment to providing additional services of managing and collecting claims was questionable. The conclusion was that to overcome this service problem, the relationship between the client and the broker should be carried out on a contract basis.
Conclusion"The cedants are becoming much more focused on how they manage their own risk," said Julianne Jessup," and how they should transfer that risk or retain that risk as the case may be and trying to understand their own risk profile." As the client becomes increasingly sophisticated and premium prices begin to soften, reinsurance brokers must ensure they continue to be viewed as a valued commodity. By offering a service for every solution, they are clearly striving to do this.By Nigel AllenNigel Allen is the assistant editor of Global Reinsurance.