Eric Paire: If I can come back to the technology again. One thing we are now able to do systematically is to track all the quotes we receive against the final order and the reaction of the reinsurers. In other words, it allows us to present our clients with some quantification of the point at which the market says no and the point at which you get the cheapest price possible, given market acceptance. We are now able to do that on a far more quantitative basis. Also, reinsurer by reinsurer you get a better feel for the elasticity and which are the ones who will say no and which are those who are likely to be more accommodating.

Jonathan Barnes: Alan, I would like to ask you, custom and practice is that all reinsurers have been offered the same prices on a placement. What is your view of differential pricing based on your relationship with that company and its financial strength?

Alan Fowler: Unless there is something intrinsically different about the proposition you are putting to the markets then we have not favoured differential pricing. We have offered the same price to all and we are quite clear on that when we go out with our covers. Occasionally, you will get something where you are putting a package together which makes it an inherently different deal, wrapping separate pieces together and I think that is different.

Jonathan Barnes: Nigel, do you have a similar view?

Nigel Ralph: I think there will be more differential pricing. It is a logical consequence as reinsurers get bigger and as we trade electronically. I think we will see more of it.

Andrew Brooks: In the direct market we have to stand by our quotes now. If you look at the big direct placements, you stand by your price and it is a patchwork quilt for, say, a Fortune 500 company. I totally agree with Nigel that as time goes on people will quote their cat commodity price, and you will be bound by it.

Jonathan Barnes: So it is already happening in the insurance business?

Andrew Brooks: Yes.

Helen Yates: Which is more transparent as well?

Andrew Brooks: Yes it is. It goes back to antitrust. What you quote is what you have to stand by. You regularly find with different prices that the layering is different but there are definitely different options out there for clients.

Andrew Kail: Do people think that the quantity of reinsurance that can be bought in the markets is in fundamental decline? If cedants are consolidating and getting larger they are keeping higher retentions, and maybe there is extra use of the capital markets as their products diversify. Do you think the amount of traditional reinsurance over time will just fundamentally decline and that will lead to fewer reinsurers or fallout of quality?

Eric Paire: We are seeing a mixed picture. Again this is linked with ERM and the economic capital modelling and some reinsurance structures that do not really bring anything, given the metrics of the company may not be bought anymore. However, on the other hand, reinsurance covers that really help, depending on the metrics chosen, will be bought increasingly and catastrophe reinsurance in particular will increasingly be bought.

I will give you a concrete example. We have developed a tool for our discussions with CFOs which is basically a three-step process. Step one, we ask the company what their metrics are, and usually they do not give us just one metric. They will say they want to reduce their ceded premium, reduce volatility and so on. Usually they give us five or six metrics. One or two might be soft metrics, because they want it to be placed with reinsurers of good financial standing. Then we do all the modelling and the work and come back with a relatively simplified presentation of the various options according to their metrics. The advantage of that is to bring the conversation into the key metrics and what the main goal is. What we are trying to do with the modelling is to look at what is realistically achievable in the market. The dream of buying one single cover with a one-page contract for everything is not really achievable. In between that and 55 layers and 150 reinsurers you have room to have something more rationalised.

Alex Letts: I would like to come back to the differential pricing. If you want hard evidence of how that is going, we have had to change our trading marketplace to accommodate differential pricing in the last 12 months. There is an increasing demand for it from our broker customers. The second point is that we have had to make an already complicated, complex treaty structuring process even more complicated to enable multi-section, multi-line, multi-layer, differential facilities within a single treaty. From our perspective, the processes are getting more complicated and differential pricing is definitely something of the present as well as the future.

Helen Yates: We are drawing to the end, so I wonder if we could focus on the relationship side of things. When I think of reinsurance buying I tend to think of your typical cedant/broker/reinsurer relationships, but that is clearly no longer the case. Do you think there is still value in face-to-face relationships as much as there used to be?

Alan Fowler: I am not sure your statement is correct. I think the traditional cedant/broker/reinsurer relationships are very much still there. Sometimes it is cedant straight to the reinsurer. Even when there is a broker present it does not prevent them talking to each other and a lot of that goes on. The capital markets are coming in, but as far as I see it, the majority of the market is still operating in the traditional way.

Helen Yates: What about the role of the broker? Do you think that has changed?

Alan Fowler: From a purely transactional point of view, I do not think the broker exists anymore. The broker needs to add additional value to the proposition. For example, when we purchase catastrophe reinsurance there is an awful lot of work going on on the modelling side where the broker adds value for us. There are a lot of areas of consultancy work done by the broker, as well as their more traditional role. I think that is how they have had to adapt.

Jonathan Barnes: Is it not dissimilar to stockbroking where you can have an execution-only service and you can have a full service?

Alan Fowler: Certainly, and for some small covers you do not need much, maybe just the simple execution. For most of the intricate ones I think the broker takes on a broader role which includes the transaction.

Eric Paire: It is important to start with the transaction because that is what needs to be done at the end of the day. Brokers will not become advisers, because the key difference is we have to be able to execute what we have helped the client design and make a decision on. That is a really key element, and we need to be very good at that. Clearly, a lot of the emphasis has moved to the advisory modelling work. At Guy Carpenter we call it being a “capital idea provider”. If we provide something, it has to be helpful for clients to manage their capital in terms of what they want to do with it. In terms of a traditional relationship, I think you still need to sit face-to-face and work with people you trust. From our point of view, this is not going to disappear, and we are as strict as ever on the quality and integrity of our people, because they are the people we put in front of our client and in front of the market. However, it is the content of that relationship that has changed. There is far more time and effort put into work before and after the face-to-face meeting.

Andrew Brooks: I think the broker’s role has changed from a six-month-of-the-year job into a 12-month affair. The biggest change we have seen since the modelling change and people designing their own 100% aggregate systems is that the relationship with brokers has become more and more important. They understand the business fundamentally, so we think we get a better deal from the market because the brokers speak with a lot of confidence about our business. I think they will have an increasingly greater role in the purchasing of reinsurance and not only from the traditional markets but also from the capital markets. This is because they will understand your business far better. The first reinsurance broker that gets the capital markets to write UNL [ultimate net loss] business will be the broker that scores a big goal and gets a real competitive edge.

Jonathan Barnes: We already do write UNL and we are not alone in that. The relationship is absolutely critical. Choosing your counterparty, knowing they are competent and honest is absolutely critical. What will define the success of the capital markets’ involvement in the industry is their ability to adjust to the customs and practices of the insurance and reinsurance industry, rather than the other way around.

Gary Wells: Going back about ten years, I remember that we were asked to do some work for one of the major brokers which was to help them develop a model so they could go to their clients. That has now been fully embraced by the whole broking fraternity.

Simon Kilgour: I will direct this to Andrew because he is in the market, but I remember it was not that long ago that many insurance underwriters would deliberately place their programmes with more than one broker for reasons of reciprocity. I accept everything you are saying, but obviously a good broker gains intelligence on the market and if he knows your business he will be able to add value and bespoke the programme, as we discussed before. Does that mean life will become tougher for brokers who are not so big?

Andrew Brooks: Yes, I think that is a fair statement. You need to have a great deal of capital investment as a broker these days to offer a service. Going back to Alan’s point, the first process we go through is almost a questionnaire of what services they can provide us with away from the traditional placement of transactions in the marketplace for us. It is surprising how many brokers still lack many of the modelling capabilities that certainly the bigger brokers have. They will come under more and more pressure. I think the mergers and acquisitions we have had on the underwriting side will carry on through into the broking side over the next few years.

Alex Letts: You also have to consider that large brokers will not be charging their clients for distribution, which is currently a big part of their model. It is £50 for an electronic placement and off you go. It will make it very difficult for the smaller brokers to compete because they do not have a big resource of consulting capability and they are not charging for distribution. It is a real threat to the smaller companies.

Peter Grant: If you look at it from a reinsurer’s perspective, no-one professes to be running a relationship-driven business model. There is this contrast between a transactional approach or a relationship approach. To be honest, these days most of them are running some sort of a hybrid approach. Maybe in the past they were running a relationship business model because they did not have the technology, the capabilities or the data to discern who their profitable clients were from the not-so-profitable. Or even if they could, maybe it was just convenient for them to continue a relationship because it was producing top line and so on. However, on the flip side of that, none of them would profess that relationships are not important.

I think you need to look at the distinction between how much reinsurers are fighting to maintain their quality clients in renewals, and the differential on pricing between businesses going out effectively to tender a renewal in a business they are able to retain. There is such a substantial pricing differential there. They now have a better understanding of who their profitable client relationships are and I think they are keener to fight to retain those relationships. Equally, I think they have a better understanding of that part of their clientele that as and when prices soften they will be quite happy to let that business go because it is fairly marginal in terms of the profit it is able to generate for them. I think it has just enhanced the sophistication of the programme, but relationships are still critically important to their ability to retain the quality clientele.

Andrew Kail: It seems very behavioural because you speak to certain companies and the idea that they can move from reinsurer to reinsurer as the market changes seems to be very comfortable to them. Whereas other companies feel very much that this is a longer-term play and you are there through the cycle so the long-term relationship is important. How comfortable they feel about the relationship or not relates to the cultures of organisations and also individual behaviours of underwriters.

Helen Yates: I think that is a good point to finish on. Thank you all for your time and insight.