Successful reinsurance brokers in the 21st century will not be those who just sip champagne or drink cup after cup of espresso entertaining dozens of clients at the Caféde Paris in Monte Carlo at the annual fall reinsurance Rendez-Vous de Septembre.
Reinsurance brokers these days are capital-markets consultants. Brokers working for the largest companies in particular have access to armies of financial analysts and sophisticated catastrophe and portfolio analysis models. Indeed, most of the big broker firms today offer an array of capital-markets services, advising on alternative risk options in addition to more traditional reinsurance brokerage. It all revolves around the relationship between the client and broker becoming increasingly consultative, not just focused on placement.
Of course, the relationship still remains the critical factor among clients and their reinsurance brokers, particularly because the reinsurance community is so small.
Look over the resumes of our Reinsurance Power BrokerTM winners and you'll find that most, at one point in their career, worked for a competing firm. One insurer says he still talks regularly with a broker who left his current intermediary to join a competitor two years ago.
"I'm sure if we ever wanted to look at changing brokers, I'd call him up right away to see what his new firm could offer us," says this insurer.
Still, it's trying times for reinsurers and reinsurance brokers. A number of forces have come together to make the business tougher this past year. The soft market has hit even the catastrophe reinsurance markets. Expanded capacity, new entrants and lower losses translate into lower reinsurance prices and less revenue for the reinsurance broker. In addition, more clients than ever are opting to increase the size of retentions and hold on to more risk themselves, eroding the commission.
Higher profits among insurance companies over the past few years--the ceding companies that are the broker's client--mean that these companies have seen their capital increase, giving them the financial wherewithal to increase their exposures, if they so desire. That could mean more reinsurance or larger retentions.
Of course, for some of the largest cedants, the recent subprime losses have eaten up any excess capital and forced them to raise more. But, for many midsize and smaller insurers, these past few years have been good times, with declining losses, higher profits and larger retentions.
A big event could change the status quo overnight, especially a major hurricane. Even the casualty markets, especially the directors' and officers' liability lines, could create loss problems, although the impact of D&O losses is probably some years away. But for the past year, casualty prices have been dropping.
A key service that a reinsurance broker must offer today is advice on how best to present the ceding company's reinsurance story to the market and to the ratings agencies. The latter, employing new analysis and portfolio modeling, have downshifted to a more conservative gear, according to a number of brokers. One broker recounts how an important client of his was told that an analysis showed that a segment of its policies caused its overall portfolio figures to go out of whack.
"We told the client that the portfolio models showed the company should drop 3,000 policies because the ratings agencies would question the underwriting," says this broker. The insurer, however, balked at the idea and the broker agreed: that part of the portfolio carried an acceptable level of risk and it was a profitable line.
"Where's common sense? Why should we give up good business in this market?" the insurer asked.
And what will the ratings agencies be asking for next, that broker wonders aloud.
JACK ROBERTS is editor in chief of Risk & Insurance®. Access the six Reinsurance Power BrokerTM categories here.
August 1, 2008
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