Will there be a role for reinsurance brokers in the future? What lies in store for the reinsurance broker? Brandon W. Sweitzer suggests some answers.
Our contention at Guy Carpenter is that brokers who maintain and expand their value-added contribution to insurance transactions will thrive in the 21st century.
Let us look first at the fundamentals as to why brokers exist at all and then look at some key trends that suggest a growing - but changing - need for their services.
Simply put: brokers exist because clients find their services useful. In every industrialised country where specialisation occurs as a result of sophisticated processes, "middlemen" play an important function. They prosper because their special knowledge is valuable to customers. This is as true today as it has been in the past.
At a basic level, there are intermediaries that deal with standardised products who have a unique knowledge and expertise in their field. These experienced persons refine and improve their specialised "know-how" on a daily basis. But when each product is unique and most often must be custom-designed, such as reinsurance treaties, the role of the intermediary becomes more demanding and valuable.
Reinsurance brokers bring knowledge and intellect to the challenges faced by their clients. As the world of insurance becomes more complex, client companies need more specialised knowledge and expertise in handling their risk transfer needs. This means they need more specialised and informed brokers. A mere five years ago, concepts like catastrophe modelling and dynamic financial analysis (DFA) were unheard of by most practitioners. Today, the brokers at our firm routinely use these advanced analytical tools. Brokers with sufficient resources and commitment to intellectual capital played no small part in bringing those new resources to the market.
There is also another role the broker plays - it comes from a special relationship that brokers have with their clients that often cannot be emulated by a direct relationship with a reinsurer. It is a result of the fact that the interaction between the buyer and seller of reinsurance is indeed a delicate one. The buyer wants to be sure that he or she is getting the best price, with the most advantageous terms and conditions, and with the highest security. The seller, on the other hand, does not have the same goals. The seller will view price from his or her own financial needs and will want to reduce exposure as much as possible. Brokers, who do not have a direct economic stake in the risk transfer part of the transaction, are useful ambassadors of cedants in this area.
Besides the placement of reinsurance, brokers play a key role in the claims process. For a company like ours, quality service has been a cornerstone of our operation for decades. In addition to the processing of claims, brokers help in the settlement process between cedant and reinsurer. The claims environment currently and most definitely in the future will have a number of grey areas, where there can be legitimate differences of opinion. The year 2000 problem is a prime example, as delineated in our white paper Year 2000 Countdown. Intermediaries can and do play an essential role in helping to resolve disputes in these grey areas.
Increasing demand and demands
As we enter the 21st century, a number of factors suggest that the needs of our current and future clients will increase the demand for reinsurance brokers. These factors also suggest that the successful brokers of the 21st century will include those who have a global span and a strong technical and intellectual base.
The first factor is the tendency for insurance companies, particularly in continental Europe, to move increasingly from proportional to excess of loss treaties. This demands an increased need for expertise in modelling and advice on pricing. One of the "long suits" brokers have is their excess of loss experience which assists clients become more sophisticated reinsurance purchasers.
Secondly, insurance companies and their clients are looking for newer ways to manage and transfer risk, on an integrated basis, combining their risk management efforts in practically all areas of the corporation. There is also a continued growing interest in securitising risk. Here, firms like Guy Carpenter can play a powerful role. Capital markets have shown a healthy appetite for insurance risk. However, investment bankers need partners with expertise and knowledge of customers in insurance markets. Intermediaries can and are filling this need.
Thirdly, liberalisation of insurance and reinsurance markets around the world is likely to create a growing need, particularly in emerging countries, for private sector reinsurance. National authorities are deregulating these markets. In addition, international trade in services is being liberalised. The recent World Trade Organisation's agreement on financial services calls for a continued dismantling of barriers, beginning in March of next year. These markets will need advice and knowledge as they enter this era and intermediaries can play a special role in guiding these markets in their use of reinsurance.
Finally, for the sake of argument, let me project a future scenario that deals with the current non-stop trend toward consolidation. Once the wave of consolidations has peaked, I would expect some disillusionment to set in, as the desired returns from a number of mergers do not materialise. Some management teams may falter in the difficult task of managing large, complex organisations. As a result, one should expect spin-offs of specialised insurance operations. These new firms will have higher reinsurance needs than they did while under the parent umbrella, where there could be a wider spread of risk. Again, brokers will have more than ample opportunities to provide education and advice to these new companies on the correct level of and price of reinsurance.
In sum, not only do I see a continued role for reinsurance brokers in the 21st century, I also see significant growth in that role, as we enter the new world of global financial services.
Brandon W. Sweitzer is president and ceo, Guy Carpenter & Company, Inc.