By STEVE TUCKEY, who has written on insurance issues for a decade for several national media outlets
The $1.75 billion merger between Aon and Benfield nearly three years ago promised to be a game-changer, portending a rapidly shrinking reinsurance brokerage field where the rest of the players would have to scramble to keep up.
But so far, that has yet to happen. About 15 players are still thriving and have found their niche to compete against the Big Three (Aon Benfield, Guy Carpenter and Willis Re).
In the most recent figures available, the range in the top 10 reinsurance brokerages is considerable. Aon Benfield is on top with $1.4 billion in revenues. Holborn is at the bottom with $26 million. In the unranked bottom 10, annual revenues can dip as low as $500,000 for some operations, which for the most part are one or two man shops with as many clients.
James Hole, 17-year industry veteran and managing director of New York City-based Towers Watson's reinsurance brokerage business, believes that the Big Three will always have the inherent advantage of their big retail operations behind them, but that there are great opportunities for smaller brokers where clients want personalized service and, in the case of his firm, leading global-grade analytics.
Towers Watson, as a unit of the one of the leading property/casualty research and analytics firms, can provide those services on a first-class basis, Hole believes, whereas the Big Three may tend to add these services more for "defensive" reasons. After all, their market share and margins are so inherently large because of their retail distribution advantage.
Two other brokerages today providing alternatives to the Big Three have roots in the Aon Benfield behemoth.
In 2009, the former head of Benfield's U.S. operation, Rod Fox, formed TigerRisk Partners with the expressed aim of making up for the shortcomings he knew existed in the giant firms. That year, the firm he started with former Renaissance Re executive Jim Stanard just narrowly missed making the top 10 ranking, putting its revenues somewhere just north of $25 million, according to A.M. Best.
"The larger brokers were just offering commoditized services and not giving their best level of service or creativity," Fox said. "Our focus is on the very large, sophisticated insurance companies that want to get a handle on their catastrophe risk. In addition to reinsurance solutions, we take an overall risk management approach in advising clients in the best way of diversifying risk."
The Big Three executives would probably say much the same thing, but the main difference, Fox said, is how much time the executives with the most years of experience under their belts would focus on their clients.
"The Big Three (may) offer the advice of senior people, but only for a very limited time," he said. "For the most part, the client work will be handled with people with two or three years experience."
Stoney Creek, N.C-based Axiom Re traces its roots to the dissatisfaction of several Aon executives who in 2000 got together to form a reinsurance brokerage, free from what they saw as the strictures of the big bureaucracy. Six years later, Brown and Brown, the top 10 retail insurance broker, acquired the company.
Axiom President J.J. Johnson said that Brown and Brown's sizable balance sheet was one of the reasons the company made the move.
"We thought perhaps we could leverage that balance sheet and go the acquisitions route to growth," he said.
But no deal made as much sense as sticking to the organic growth strategy. "Whether it was a structural reason, such as the company was an ESOP (Employee Stock Ownership Plan), or other cultural reasons, we decided the best way to grow was acquiring key people and expanding organically."
Dallas-based EWI Risk Services ranks somewhere in the middle of the bottom 10, with between $5 million and $10 million in revenues. Started in the 1950s, the operation was acquired in 1998 by a nonfinancial services firm, NL Industries, which was looking for a place to embed its insurance program.
Today, its Vermont captive constitutes about 40 percent of its business and gives the firm, according to CEO Steve McElhiney, a leg up in attracting that business.
"Most of the bigger firms don't want to touch any clients with less than $250,000 in annual revenues. They have an expense structure that will not allow it," he said. "As a smaller firm, we can compete with that business."
McElhiney sees the rise of captives and other alternative risk transfer methods as an avenue of future growth. But on the other hand, the inevitable disappearance of some of the current 1,700 primary insurance companies will in turn more than likely trickle down to the reinsurance brokerage field.
"But this is not going to happen anytime soon," he said. "I am talking 20 to 25 years."
SAME AS BIG GUYS
Executives like Fox, Johnson and McElhiney feel they can provide the same level of services in areas such catastrophe models and dynamic financial analysis that the big guys can.
"I played that game at Benfield all the time," Fox said. "You end up putting lots of pieces of paper in front of the clients, but you really don't provide the same level of insights and analysis that senior people can provide that makes the difference."
Johnson said the decreasing cost of technology along with the strategic alliances Axiom has created with providers for the most part obviates that Big Three purported advantage.
Big Three champions will make the argument sometimes ever so subtly that, because of the amount of business they place, they will have a certain clout in the reinsurance market to get a better deal for their primary clients.
Alex Fox, vice president of Dallas-based Advocate Re takes issue.
"On the deals I have co-brokered with them, I have yet to see this effect."
Johnson agreed that that claim fails every testing.
Aon Benfield co-Chief Executive Officer Dominic Christian turned the tables on the commoditization argument, noting most of his prior career was spent with smaller, independent brokers. "Essentially, the smaller broker argues that they have a closer relationship with the client. If that is truly so, then of course some commodity business, that requires essentially a placing role only, will deservedly go to he or she," he said in a statement. "However, the sustainable, the complex, the large, the thought-intensive and the customized are unlikely to do so."
Christian noted that Aon Benfield spent $100 million on analytics this year. "Interestingly, today many clients want an integrated approach to risk appreciation and growth. We can provide this, or we can provide the specific, segmented answers."
Reinsurers have a vested interested in maintaining a vibrant brokerage community outside the Big Three, which today control more than three-quarters of the market, precisely to avoid being held in a vice grip, brokers argue.
So what does the future hold?
Fox sees the Big Three continuing to hunger for acquisitions because "it will become more difficult for them to get the growth they need organically."
Johnson may agree with that in principle, but in looking at the current landscape, he does not see too many deals being done in the near future.
As for new operations such as Tiger Risk and Advocate Re coming on the scene, Hole said, primary brokerages looking to start reinsurance operations may find entry barriers dauntingly high because of the cost of all the analytics demanded by clients today.
But one hopeful sign he noticed was the Big Three's hold on the Florida market declined from an 85 percent share in 2008 to 77 percent this year.
Representatives for Willis Re and Guy Carpenter did not respond to requests for comment.
August 1, 2011
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