Reinsurance Outlook
The Reinsurance Market Needs More Distribution, Not Less
Opinion: Commenting on the state of the
reinsurance brokerage industry, TigerRisk’s
Mike Schnur explains why he believes a lack of
competition is hurting the industry and
advocates that primary carriers demand
innovative reinsurance solutions from
intermediaries, which recognize each carrier’s
uniqueness and individual needs.
I
By Mike Schnur
t is a well-known axiom that for free
markets to exist, access must be
unencumbered. The more players
there are, the more efficient a
market will be.
Unfortunately for those of us in the
reinsurance space, we have entered into a
period of reduced competition.
In fact, many would argue that
reinsurance distribution is significantly
less efficient than it was only a few years
ago.
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Why?
One reason eclipses all others: Today,
80 percent of reinsurance premium goes
through just three big brokers. Economists
call this unnatural state of affairs an
oligopoly. Oligopolies disrupt the
marketplace by limiting competition.
When choices are limited, prices go up—
and service goes down.
Here are some examples:
• The U.S. mobile telephone industry is
dominated by just four companies. Visitors
from overseas marvel at how primitive
(and expensive) the U.S. mobile system is;
this occurs even though the United States
invented the cellular telephone.
• Three airlines now dominate domestic
air travel in the United States. Anyone who
has been on a flight lately will tell you it
was hardly a pleasant experience.
• The once fiercely competitive U.S. car
rental business is now dominated by just
three companies. Remember that one
company whose slogan was “We Try
Harder”? It’s part of an oligopoly now.
Like other oligopolies, the Big Three
reinsurance brokers did not fight and claw
their way to the top. They were financially
engineered through mergers and
acquisitions, fueled with capital from Wall
Street. As publicly traded companies, their
loyalty (indeed their fiduciary
responsibility) is to their
shareholders.
Because of this
ceaseless imperative to
maximize shareholder
value, they can only
grow by increasing fees
or reducing levels of
service. Because of their
size, their actions can
negatively affect the rest Mike Schnur is a Partner at
TigerRisk with more than 30
of the marketplace.
years of experience in the
A good example is
contingent commissions. industry. Before joining
TigerRisk he held EVP positions
Only a few years ago,
continued on next page
at Benfield and Guy Carpenter.
57 | Fall 2013
Reinsurance Outlook
continued from page 57
the mere mention of the phrase was
enough to trigger an investigation by Eliot
Spitzer. Remember how the big brokers
made an elaborate show of backing away
from contingents—hand-wringing CEOs
swearing “Never again!”
Contingents are back—and in a big way.
The only difference is “transparency.” Now
it’s okay because brokers are telling clients
they’re taking contingent commissions.
Lately the big brokers have started
charging for services that were previously
included in the commission. For example,
they have developed “internal information
systems” that supposedly give carriers an
inside track on new business. But to get
access to this information, carriers must
pay an additional fee.
It all seems counterintuitive. Brokers are
supposed to have a strong understanding
of the cost of risk, the nature of a risk and
which carriers are best suited for that risk.
It’s called broking. Carriers, meanwhile, are
supposed to know how much risk they’re
willing to take on and how much to charge
for it. It’s called underwriting.
So why would carriers pay for
information and “access” they used to get
for free? Is it because they fear they’ll be
shut out unless they cooperate?
It follows then that carriers paying for
this information will be getting preferable
consideration. But where does that leave
the insurance-buying client? By limiting
the carriers to those that are willing to pay
a fee to a broker, isn’t that limiting a
client’s access to the most efficient
capital? Does that sound like a free market
to you?
Some big brokers have announced
sidecar deals with certain carriers in which
a percentage of all the business a broker
writes will be assumed by the carrier. That
sounds good for the broker; nice for the
carrier too. But what about the insurancebuying client? Was the business placed
with the best carrier at the best price? Or
was it placed with the carrier willing to pay
more to the broker?
To reduce expenses, the large brokers
have started offering standardized
products like property-catastrophe
58 | Fall 2013
reinsurance. The buyer purchases multiple
layers at a set price, and if they have a loss
they are required to pay again for an
additional limit. Again, it’s good for the big
brokers but questionable for clients.
Economies of scale are good for making
flat-panel TV sets, not complex reinsurance
structures. It’s like giving a patient an
aspirin, regardless of what’s wrong. How
do off-the-shelf products improve capital
efficiency?
What can primary insurers do to foster
competition and improve reinsurance
distribution?
The obvious answer is to not acquiesce
to mega-brokers. But there is something
even more fundamental than that.
Start with the realization that your
company is a unique organization, with its
own problems and highly specialized
needs. Then demand your reinsurance
intermediary provide innovative solutions
that give your company a competitive
advantage.
Upping everybody’s game is good
for the entire market.
Fortunately, there are insurance
carriers and clients that demand
excellence and are sophisticated enough to
realize that bigger is not necessarily better.
Primary insurers that are serious about
competing often seek out specialist or
high-value-added brokers. These specialty
brokers actually excel in areas that big
brokers claim as their strong points:
placement and analytics.
• Placement. Large brokers like to boast
that because of their size they have “clout”
with the markets. That’s a myth. Risk is
risk. Specialist brokers, which go the extra
mile to understand and package a risk,
typically secure equal or better rates.
Indeed, many reinsurance markets actually
seek out business from the value-added
brokers because they know that plenty of
hard work has gone into understanding the
risks they are ready to trade.
• Analytics. Big brokers, because of their
size, are said to have better analytics. But is
that really true?
Many would argue that reinsurance
analytics has been rather moribund over
the last several years. Why? Lack of
competition.
Creating new technology is expensive.
Moreover, the big brokers prefer clients
whose programs they can easily renew.
They don’t want demanding clients; they
want clients that conform.
When it comes to analytics and
technology, the real advances are coming
from the specialist companies. For example,
value-added brokers have found there is too
much reliance on model output, particularly
the PML (probable maximum loss). For that
reason, they have been working on
developing more diverse risk indicators
tailored specially for individual companies
and simulation software that is much faster
and cheaper to run.
Forces For Better Distribution
While reinsurance distribution remains
constrained for the time being, I believe
two forces will ultimately restore
Why would carriers pay for information
and “access” they used to get for free?
competition and improve reinsurance
distribution.
The first will be smart, demanding
clients that want to compete and will insist
on a high level of performance by their
reinsurance intermediaries. The other will
be economic. Low interest rates will be
around for some time to come. The only
way insurers can make money in this
environment is by underwriting. Gaining
an edge by working with an insurer’s
broker to find customized solutions to
make better decisions will be the key. Mass-produced, off-the-shelf products
won’t cut it. Insurance underwriting
requires lots of hard work and creativity.
Many insurers will seek out the high-value
specialist brokers.
In the meantime, I urge primary
insurance carriers to demand the most of
their reinsurance intermediaries as well as
themselves. By striving for excellence, we
foster real competition—competition which
will be good for everyone.
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