ROd FOX, CEO of tigerRisk partners, a reinsurance intermediary and capital solutions provider, makes the case for more distribution.
While the world has become smaller and more connected, it has also become riskier. Meeting these risk challenges requires new solutions, greater creativity and more choices. Yet paradoxically, today’s reinsurance buyers have fewer solutions, creativity and choices, not more.
Today, thanks to a very aggressive campaign of consolidation, nearly 80% of the world’s reinsurance is placed through just three very large reinsurance intermediaries. Oligopoly? Yes.
Who really benefits from this kind of market domination? Does a reinsurance buyer get the best ideas and service when options are so limited?
Insurance companies buy reinsurance to protect their earnings and ultimately their capital. Each company is unique and has a complex set of issues. This inherent complexity demands solutions that are custom made for that client, not cookie-cutter, one-size-fits-all products which, at best, can only be average.
As the reinsurance buyer contends with questions like how do I protect my company from natural disasters, how can I be sure that rating agencies will recognise the quality of our financials (on a pre- and post-loss basis), and how do I most effectively man-age our capital, he or she will naturally turn to their reinsurance intermediary for the best advice to help think through these and other issues. These are complex questions. Smart buyers want ideas from multiple organisations. They want to know for themselves (and for their management) that they have drawn on the best talent to confirm they are making the most informed and cogent decisions.
As our business has become more sophisticated, so have reinsurance buyers. Clients understand that the inevitable result of consolidation is commoditisa-tion. They understand that the consolidated megab-rokers made acquisitions not to improve the services they offer, but to reduce expenses. But while economy of scale may work for flat screen TV sets, it is com-pletely antithetical to a sophisticated risk product. Nevertheless, the big reinsurance intermediaries continue to standardise the products they offer. Indeed, they have even begun using the Model T rule: “Yes, you can have it in any colour you like…as long as it’s black.” In the big broker’s view of the world, clients should conform to their brokers’ needs rather than expect a broker to address a client’s needs. Consolidation also encourages the big brokers to trim staffs. As their remaining senior people are asked to cover more clients, the real work is being done by more junior, less qualified brokers.
And rather than relying on industry knowledge and experience, the big brokers have defaulted to the over-utilisation of models and the inevitable misinter-pretation of modelled results. Running more and more models doesn’t necessarily provide the best answer – it just makes it appear that the reinsurance intermedi-ary is working harder.
By definition, expanding distribution in today’s market means bringing in additional reinsurance intermediaries. Clients ask for and want choices; their insureds want the same thing. Clients understand that some smaller brokers are typically more experienced, entrepreneurial and more focused on the key issues that they face. Smart clients realise that just spinning models is not the answer and that working with sea-soned brokers and genuine analysts that understand the models is far more valuable.
There are several other reasons why today’s smart clients want multiple distribution sources. Regardless of market conditions, clients want to know they are spending their reinsurance dollars in the most effective way. They fully appreciate that “working the market” and exploring responses from multiple reinsurers is essential. It is not possible for one reinsurance broker to have superlative relation-ships with every reinsurer. Therefore, the answer is hiring multiple brokers who bring different relation-ships to every negotiation. Similarly, today’s smart clients know that a single broker has only one set of experiences; working with more than one broker mul-tiplies those experiences resulting in a much broader array of solutions.