By Cyril Tuohy
For Aon Benfield, Guy Carpenter & Co. and Willis Re, the oligarchs of the global reinsurance distribution industry, gobbling up smaller competitors over the past several years has led to the good life.
The three companies now sit firmly atop the industry food chain, and they have only gotten bigger despite a market in which overall reinsurance premiums have remained flat.
It was Aon Re Global's blockbuster acquisition of Benfield back in 2008 that kicked off the most recent wave of mergers. Guy Carpenter & Co. LLC followed less than a year later with the purchase of John B. Collins Associates Inc.
The megamergers led to a raft of other acquisitions and pressure on smaller players. As part of the scramble to survive, smaller broker Cooper Gay bought competitor Swett & Crawford last year. One reinsurance broker, RK Carvill & Co. Ltd. went out of business in 2009.
New reinsurance brokers have been born from the turmoil. Recent entrants include Greenwich, Conn.-based Tiger Risk Partners LLC., and Edison, N.J.-based Cornerstone Re Advisors, both of which were launched in 2008, and Bloomington, Minn.-based StoneHill Reinsurance Partners LLC., which was launched earlier this year.
The merger and acquisitions trend, in effect simply represented the latest cycle in tie-ups among reinsurance brokerage houses, and had been going on in the North American market for more than 20 years.
"I joined Holborn in 1989 and at that time there were at least 30 if not 40 capable reinsurance intermediaries for U.S.-based business," said Frank Harrison, CEO of Holborn Corp. "Now I would say there are about 10, and only five or six of them really matter."
The consolidations have meant a concentration of power among the largest reinsurance brokers who have spent the past five years competing by offering a variety of analytic tools to insurance company clients.
Corporate risk managers can benefit from the risk analytics, human resource services and benefits consulting that may be offered by a global broker engaged in multiple businesses, on multiple platforms in multiple geographies, Harrison said. Another market is the significant number of insurers, like Holborn's clients, who have needs for specialized risk advisory and treaty reinsurance brokerage services.
For the time being, that kind of reach and scale has served the largest reinsurance brokers well. They've signed up new clients, deepened their relationship with important ones, or dropped their smallest, least profitable accounts.
"I have been here nearly 35 years and know from experience that being part of a large, financially sound and diversified family of client-focused businesses has enabled us to help our clients meet their challenges," said Britt Newhouse, chairman of Guy Carpenter. "We are able to take a longer-term view of client relationships than smaller, fragile firms."
Guy Carpenter posted revenues of $1.04 billion in 2011, up 7 percent from the previous year, and Aon posted 2011 reinsurance revenues of $1.46 billion, up 1 percent from 2010.
So powerful has the concentration at the very top of the distribution chain become that the big three now control nearly 80 percent of global brokered reinsurance volume, according to Rod Fox, CEO of Tiger Risk Partners LLC, as quoted in an article published last year.
Fox, who launched Tiger four years ago, calls the big three a conflicted "oligopoly," in which the "front-door" relationship of the retail broker is complemented by the "back-door" relationship of the reinsurance side serviced in some cases by the same brokerage house. "There are multiple tentacles of that conflict," Fox said.
Executives with big reinsurance brokers said they offer unparalleled scale, unequalled depth of analytics, and a local footprint everywhere you turn. And since they already often own the primary insurance relationship to begin with, it makes sense for buyers to give that same broker the reinsurance business.
"Placement, which is where some of these small brokers were originally founded, is only a small component of what we deliver now," said John Cavanagh, CEO of Willis Re. "What a client seeks from us is a second pair of eyes on everything they do -- risk management, cat modeling, dynamic financial analysis, Solvency II."
Small, medium, large, local, regional or global, multiline specialty, commercial or personal lines insurers need brokers with resources, experience and reach to handle unanticipated challenges, and "some you hope you may never face," Newhouse said.
Even if a big broker comes up short, large accounts don't switch easily. "You couldn't steal Travelers' reinsurance business if you were Houdini," said long-time reinsurance consultant Andrew Barile.
Because smaller brokers don't have anything unique that the big three don't already offer, there's no reason for risk managers to move the account, Barile said. "That's why the next tier is always the next tier," Barile said. "You don't have another big stick to use."
The Analytics Conundrum
But as the big brokers consolidate their power, the crush of the institutional reinsurance brokerage steam roller is opening cracks in the very model that the big brokers relied on to grow, veteran reinsurance industry sources said.
Big reinsurance brokers are designed to serve big clients, said Andrew Pyle, president of Cypress Creek Intermediaries Inc. in Heathrow, Fla. A prospect with a catastrophe reinsurance program of less than $100 million isn't going to register with Guy Carpenter.
A big broker ignoring your calls "doesn't make sense if you are supposed to be providing a service," Pyle said.
Then there are the whispers -- that even the large, important accounts are being tended to by the cadre of junior executives as the senior brokers get "kicked upstairs" to be groomed for senior management.
"Their push is to control costs and to have junior people service the client," said one reinsurance brokerage executive. "They are all about size and leverage. It's a formula for creating unhappy clients."
Huge insurance carriers have consolidated their internal reinsurance buying programs, a stagnant economy has lowered insurance and payroll amounts, reinsurance supply is plentiful, and insurance-linked securities and catastrophe bonds offer buyers an alternative to reinsurance, Harrison said. The result, he said, is that growth in reinsurance premium volume has remained more or less stagnant.
Property/casualty reinsurance premium volume growth in industrialized countries, which shrank by 0.4 percent in 2011, is expected to grow by only 2.6 percent in 2012 and then by 4.6 percent in 2013, according to Swiss Re Economic Research & Consulting.
That meager benefit balanced against formidable costs is one of the reasons Carvill called it quits, according to its former CEO.
"We came to the conclusion that the demands of our clients were increasingand the level of cost that we would have to take on board to address that meant that we didn't think we were going to be a sustainable business," said Cavanagh, former CEO of Carvill.
Cavanagh said size and scale in reinsurance brokerage is often an irrelevant metric by which to judge ability. "Whether we're big or small makes no difference to that job," he said. "It's the capabilities you have within the broker that's the relevant thing."
Smaller brokers stress the attention they give client service, often a casualty of the mergers and acquisitions. Dan Koshiol, a former broker with John B. Collins and now president and CEO of StoneHill, said the marketplace is ready for "a broker who will solely invest time and resources on their client."
"As brokers consolidate and look for additional revenue growth, some clients are being asked to purchase, at an added cost, products and services which historically have been included in the brokerage relationship," said Koshiol, in a statement announcing the launch of StoneHill on June 18.
Bill Panning, senior adviser to Hanover Stone Partners, LLC, a Jersey City, N.J.-based network of risk management advisers and risk management services firms, said he's seen changes in the way the big brokers offer analytics to customers.
The changes are most noticeable around catastrophe and enterprise risk management modeling, he said.
For quite a few years, reinsurance brokers have offered buyers expensive analytics which were typically unaffordable for all but the largest insurance companies. The powerful analytics sweetened the incentive to use one broker over another.
But with rapid and continuing advances in computing power, programming tools, and relevant scientific knowledge, the brokers themselves soon discovered that maintaining the models turned out to be an open-ended and expensive proposition, particularly as brokers had to pay high prices to compete for the sparse technical talent capable of maintaining and adapting state of the art models.
Brokers, Panning said, have discovered that for some very demanding clients "the cost of providing analytical and other services exceeds the brokerage revenues received from them."
"Strategies for redressing this imbalance between revenues and costs tempt clients to demand a menu-driven fee based on unbundled and separately priced services, a fee structure that would typically reduce profit margins and draw unwanted attention to rival providers of specific services," Panning said.
Some time ago catastrophe modeling became so data-intensive and expertise-dependent that "it ultimately exceeded the capabilities of all brokers, no matter how large or profitable," he said. Brokers now help their medium and small clients apply these models, but the models themselves are licensed from several independent firms that specialize in their development and maintenance. "The same process is now occurring in the areas of enterprise risk management, data mining, and predictive modeling," he said.
Reinsurance brokers who adhere to the current business model "will gradually experience growing pressure to either lower their profit margins or narrow their analytic offerings," Panning said, ceasing to be all things to all people.
CYRIL TUOHY is managing editor of Risk & Insurance®. He can be reached at firstname.lastname@example.org.
August 22, 2012
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