Insurers, Brokers and Clients Express their Views on the Industry

The Economist’s Insurance 2015 Conference, which took place on Tuesday, March 15, at the ornate Clothworkers Hall in London, featured a panel that expressed the views of insurers, brokers and their clients in a discussion on the current and future state of the re/insurance industry.

XL’s CEO Mike McGavick spoke for the insurers. Aon Benfield’s CEO Eric Andersen, spoke for the brokers, and Peter Den Dekker, who served as the president of the Federation of European Risk Management Associations (FERMA), and currently serves as the insurance and risk manager VimpelCom, a telephone service provider, spoke for the clients.

There were some points of agreement and some points of difference from the three men. “Commercial insurance has changed,” said McGavick in his opening remarks. “Globalization has affected all product lines; you have to serve your clients globally.”

“Brokers hold the balance of power,” he continued. They seek out the best underwriting, take advantage of the availability of ILS solutions, and make certain regulations are adhered to. The combination has resulted in commercial clients seeking out re/insurance companies “with bigger balance sheets.”

He also noted that “analytics” are now an integral part of the insurance world, and while this has been the case in the past it now “needs to be harnessed to better serve the needs of your clients.”

Serving those needs has led to a “consolidation in the brokerage community,” McGavick said, as well as the growth of alternative capital, or insurance linked securities (ILS), which has altered the face of reinsurance, while at the same time a spate of new regulations has made capital more expensive.

The combined result of these changes has been to further the growth of large companies, both through consolidation and through the expansion of product lines across national boundaries. “Outside of Lloyd’s, only big companies” are capable of providing the range of products and services increasingly necessary to properly write coverage for large commercial accounts, McGavick explained.

To be in a position to take advantage of these changed conditions requires that re/insurance companies explore and adopt new and innovative techniques. “They need to reinvent every step of the process,” he said, from policy issuance to claims handling. Underwriters have to take a “much more open role in finding solutions,” he concluded.

Aon Benfield’s Andersen also stressed the changing nature of the re/insurance industry, describing it as moving from primarily “concentrating on risk transfer” to a more creative role in finding solutions to address risks. This requires “getting together with insurance clients and understanding what their risks are.” The solutions may not result in a traditional transfer of risk through insurance. Good risk management considers alternatives, including captives, ILS, or self-insurance, as large companies with strong balance sheets can normally assume a good portion of their own risks.

A renewed commitment to transparency in client/broker relationships is also linked to the necessity of becoming more knowledgeable about a client’s risks. “You need to have a ‘factual conversation’ with the client,” Andersen said. You need to discuss what the broker does and how much the services cost. “Transparent firms are stronger,” as they perform a more consultative role for the benefit of their customers; they align their values with those of their clients, which creates a very positive relationship, even though they may have different ultimate goals.

Andersen echoed McGavick in stressing that today brokers have to meet the “needs of scale.” The broker has to be big enough to “meet global needs.” It isn’t just sheer size, however, that’s important, it’s global reach. “A broker has to be able to trade in many countries.” Asia and Latin America are becoming more prominent for brokers. Working in these emerging markets requires a knowledge of local markets and people on the ground who understand local needs and rules, and can help their customers.

Den Dekker’s point of view, speaking for insurance buyers, is a good deal more nuanced, and hasn’t changed significantly, even though the risk manager’s role has greatly expanded to the point that in most large companies it is an executive position at board level.

“Insurance is based on trust,” he said, and as far as “indemnity goes it’s neither better nor worse,” but in some respects the relationship between clients, brokers and insurers has become somewhat “superficial.” He agreed, however, that since the Spitzer probe “a lot has changed” in terms of “remuneration and transparency.”

But in Den Dekker’s view those changes have essentially required brokers “to look for different ways of receiving compensation, while remaining transparent. What do they do for it?” he asked; adding that that in many cases it “isn’t very transparent.”

As far as consolidation goes, he said “it’s not always best for the client, as it means there’s less competition.” It also creates situations where finding the ideal solution to address a risk becomes more difficult, as there are a great many solutions proposed, even from the same broker, and they often differ.

Just as brokers and insurers have grown in size and have become more sophisticated in analyzing risks, their clients have also become a lot more knowledgeable about those risks, and they are seeking practical solutions. This is especially true in a global context, as “global programs need to be consistent,” Den Dekker said.

The Q&A discussion among the three men expanded on these points. Andersen said that the problems in finding the right solutions for clients is “linked to company management,” in the sense that companies that “have a culture of sharing information” can present a more complete picture of what they do, and where their risks are. McGavick added that the challenge is to understand the real needs of a company, as “each company attacks a problem from within its own structure.”

Dealing with the risks faced by a global business requires an equally global approach. “You have to understand the complexity of the risk,” Andersen said. “You can no longer be a generalist. You have to know and understand the nature of the risks, such as cyber – what is it? How do you solve the problems involved?”

Both Andersen and McGavick supported the idea that large insurers and brokers are a necessity in order to adequately assess the risks global businesses face. “Having 10 [major] players is good for business,” Andersen said.

Den Dekker, however, isn’t entirely convinced that bigger is necessarily better. Having only 10 insurers in the global context raises the problem of consistency. “What if all 10 have a different approach to the same problem?” He asked. They “need to find consistent solutions, along with sufficient capacity,” in order to adequately address the risks. “And, don’t forget,” he added; “it’s the client who ultimately pays for it all.”

In that context all three men essentially agreed that closer cooperation with their clients, and achieving a greater understanding of their increasingly complex needs is absolutely essential. “You have to spend time with your clients,” McGavick said. “You have to find out what their needs are, and to compete for [better] risk mitigation. You need to work through the risks.”

“In order to build [appropriate] coverage, or to mitigate or transfer risks, you must find out what the problems are,” Andersen said. “You have to spend money to understand the clients’ needs, and then to develop a product to address them. That’s hard to do.”

For a broker to do that requires amassing a lot of data – “Our data,” Den Dekker said. In his view the enhanced power of the large brokers impacts the insurers as they are “building special facilities” using the data obtained from their corporate clients. As brokers become more proficient in risk management, they also “find ways to make money from their work.”

Andersen responded, that “yes, the client pays for the services, but they also push the broker hard on execution.” It’s no longer a question of simply transferring risks. The broker consolidates those risks, and is paid for doing so, but the broker also works with the client to find the best solutions for those risks – through insurance coverage or other, better alternatives. Overall brokers must “be efficient, and they must stay relevant in a global market,” he concluded.

While the main focus of the discussion dealt with the problems faced by large brokers, insurers and global companies, Den Dekker pointed out the “SME’s [small and medium sized businesses] are being squeezed,” as the costs of providing coverage rises.

He added that it’s understandable to pay brokers and insurers a “fair price” for their services, but the question then becomes one of the value of those services in determining what is a fair price. That question is somewhat more difficult to address.

Topics Carriers Agencies Reinsurance Risk Management