Sign of the Times – Brokers vs. Carriers on a Classic Soft Market

Chief executive officers of property/casualty insurance brokers and P/C insurance carriers called each other out in June for engaging in activities they said were “classic signs of a soft market.”

During a session of the S&P Global Ratings Insurance 2017 conference in New York, carrier CEOs attacked brokers for setting up soft market “facilities” and competitors who give brokers the authority to do so.

“We don’t need the broker to be underwriting or accepting risk. And I think it’s a major mistake for the industry for us to delegate that authority to a broker. It’s like giving the keys to the inmates,” said Tokio Marine HCC Chief Executive Officer Christopher Williams.

That was hardly the most pointed comment to come during the two-day conference. A day later, brokers shot back that a crescendo of carrier complaints about them — and their levels of compensation — were simply typical byproducts of the carriers’ frustration about the competitive market, and they challenged carriers to manage expenses other than distribution costs.

“I recently was part of a panel in London, and people were talking about frictional cost — and both of the insurance company executives [participating] had flown over on their private planes,” said Steve DeCarlo, CEO of wholesale broker AmWINS, gearing up for a jab at carriers. “When you eliminate your private plane, I’ll reduce a little bit of what I make,” he said, at other times referring to the five cents out of every premium dollar he makes.

“We can have these debates, but I’m comfortable that we’re all in a very competitive environment that doesn’t let either the carrier or the retailer get out ahead of itself in terms of making too much money,” he said, later joining two retail broker CEOs — Greg Case of Aon and Dan Glaser of Marsh & McLennan Companies — to comment on carrier misstatements about “broker facilities” and about how these facilities differ from managing general agents.

DeCarlo alluded to the fact that his firm created a facility a few years back for a reduced commission. “We worked for no extra money, and we actually tried to reduce the frictional cost because we were given an exclusive,” he said, referring to an excess property insurance facility AmWINS put together for investment manager Nephila.

As DeCarlo’s private plane anecdote suggests, the carrier criticisms of brokers started surfacing well in advance of the S&P conference, with the likes of Chubb CEO Evan Greenberg, Validus Holdings CEO Ed Noonan and Sompo International CEO John Charman offering negative commentary about excessive commission levels of brokers, particularly in the London market, and about broker practices of packaging related risks together for portfolio placements with predesignated panels of carriers.

Referring specifically to Greenberg, Noonan and Charman, who were not present at the S&P conference, Julie Herman, an S&P director and moderator of the panel of broker CEOs, asked Case to talk about broker remuneration trends.

“The calculus is a little bit wrong. … This isn’t about brokers or carriers. It’s about client need and client value,” said Case, coming back to an idea that he repeated several times during the session — that there are great opportunities for both brokers and carriers to innovate to address top-of-mind client risks rather than battling against each other.

Going on to address the compensation question directly, Case said, “If you look at our yield as a percent of premium placed, that’s been relatively stable over that period of time. So, it’s unclear as to the diagnostic around cost that’s being described. But it’s not coming from Aon,” he said, speculating that it isn’t coming from Marsh either.

“Our focus is about value — delivering value for clients. Our aim is not to be the lowest cost. Our aim is to be the highest value. … That’s what we’re going to go for in a highly, highly transparent way.”

Glaser agreed with DeCarlo and Case. “If a broker was earning too much money, the risk is not a carrier. It’s another broker who would take the account. Competition works,” he said.

He continued: “You don’t hear much about broker remuneration when rates are rising. It’s a function of a soft market environment. I understand the frustration, but I view the environment largely where carriers have more angst versus other carriers than they do versus brokers. Oftentimes I get together with insurance company executives and a quarter of the meeting is spent with them complaining about other insurance companies and what they’re doing,” he said, noting that the struggles for carriers to differentiate themselves have become significant.

“I remember when I was in the business 15, 20 years ago, there were three or four insurance companies that did environmental insurance. Now there’d be 60 or 70,” he said, noting similar trends in other product areas that used to be highly specialized, such as reps and warranties insurance.

Like Case, Glaser said long-term broker compensation trends don’t support recent carrier criticism. “You have to go look at facts, and if you take all the premium that Marsh has against all the revenue that Marsh has, and you look at it over a number of years, it has been relatively stable over long stretches of time. Even in A.M. Best data, over a 30-year period, the total brokerage level versus premiums has been remarkably consistent.

“I get the frustration, but I think it’s largely misplaced,” he said. “I think it’s a function of the competitive market environment.”

S&P Managing Director Kevin Ahern, moderating a panel of carrier CEOs, asked specifically about “broker-led facilities,” drawing almost the same words from Williams of Tokio Marine HCC as Glaser would speak a day later.

“They’re a classic sign of a soft market,” Williams said. “The only way that broker facilities come about is the agreement of reinsurers to delegate authority away. So, we create the problems ourselves, and the obvious way to stop that is to stop reinsurers from giving authorization to some of these facilities.”

On both sides — carrier and broker — the executives were careful to point out their need for one another in bringing value to customers.

“The broker is an integral part of what we do. They obviously bring expertise to the table. They bring the client to the table. We absolutely need the broker,” Williams said.

But “we don’t need the broker to be underwriting or accepting risk. And I think it’s a major mistake for the industry — for us — to delegate that authority to a broker.”

Constantine (Dinos) Iordanou, chair and CEO of Arch Capital Group, provided some historical analysis to suggest that brokers running underwriting facilities and underwriting management teams running brokers are recipes for disaster. Iordanou offered insurers associated with Alexander Howden and Frank B. Hall to illustrate the former and St. Paul-Minet the latter.

“What history tells us is that the underwriting mind is different than the mind of the broker. The two don’t mix. If you’re a broker, you think differently. If you’re an underwriter, you think differently. When you try to cross, disasters do happen.”

These days, Iordanou asserted, the broker facilities have “gotten to the point that basically, they’re asking underwriters to give [them] the pen.”

“Brokers don’t know how to underwrite independent of saying that somebody else will and we’re going to follow in their footsteps. And [in] doing that, [the broker] says we’re going to increase the placement cost significantly because we can’t really justify to the client more advisory cost. So, in essence, we’re trying to hide behind efficiencies,” he said, echoing comments made by Greenberg and other carriers not present at the conference.

“At the end of the day, we’re producing a product that is not sustainable in the marketplace, and, in my view, I would never run an underwriting facility that is willing to give its pen to a broker, independent of how much we love them. … At the end of the day, without brokers, we have no business, right? It’s our distribution channel. But I strongly believe that the good underwriting companies will keep the underwriting pen within their walls and then continue to negotiate what is a proper compensation for the placement of that business and the advisory function the brokers do on behalf of the client.”

Iordanou concluded: “In the history [of the business], I have not seen any of these facilities produce profits in the long run. If somebody has one, maybe I missed it. I’m on the internet; send me an email. Maybe it was an education I didn’t have.”

During the broker CEO panel at the conference, MMC’s Glaser said that reports he had read about remarks by Williams and Iordanou about “facilities” suggested that the carriers were misinformed. “There’s some level of talking about an MGA and a facility like they’re the same thing. I’m not aware … of broker facilities where the pen has been given to the broker and the broker is underwriting the risk and perhaps even taking things on their balance sheet.

“Let me make myself perfectly clear as it relates to Marsh & McLennan. In our facilities, we don’t want an underwriter’s pen, we don’t want to underwrite on their behalf, and we do not want to put risk on our balance sheet,” he said.

“An MGA is different. An MGA might be that you have a specialized niche capability where you actually think you can underwrite the risk on behalf of the carrier. We do have some MGA businesses. They are far different than facility businesses,” he said, citing Victor O. Schinnerer, a Marsh MGA that has had a relationship on architects and engineers insurance with CNA for 60 years. “We do underwriting on their behalf. That’s very different from facilities.”

Glaser described four operating principles for facilities:

• “One, there has to be a tangible and demonstrable client value. The client has to benefit
• “Two, that has to be the cause of creating the facility in the first place — to benefit the client.
• “Then, there’s got to be some level of sound process in selecting the carriers because typically on a facility, you may get 50 carriers who want to participate, and there may only be five or 10 spots. There has to be a process that’s fair and open and transparent in terms of carrier selection.
• “The fourth thing is there has to be a lot of transparency and disclosure with clients. The clients have the capability of either participating or no participating based upon their own desires.”

Glaser attributed the ability to make portfolio placements to increased data analytics and predictive insights. “My sense is that in every market environment, some level of facilities will still remain and be effective. The idea that it is brokers underwriting and actually possibly taking risk I think is misunderstood and incorrect.”

For his part, DeCarlo noted that his firm has been in the MGA business for years. “I started my career in the MGA business, people trusted our underwriting skills, and we made a fee doing them. If that’s what people call a facility, there are many of them, it’s been around for a long time, and the carriers trust these individuals to underwrite.”

Like Marsh and Aon, he said AmWINS tries to build capacity through analytics and data for its clients — small retail brokers. “We take no balance sheet exposure, so we’re never in competition with our insurance companies. But there is a level of trust that we can provide the analytics necessary for them to price the product correctly, and we work as a team on that.

“Facility is the new buzzword, and it could be defined many, many ways. We have one program where the premium on the dec page is $140 million, and we’ve been doing that one account for years and years and years. We cover an amazing amount of insureds, and we’ve done an amazing amount of capital building on that.

“Is that a facility? Is that a broker driving price for commission benefit? Or is that a way to solve clients’ problems?

“The client bought it. They’ve been buying it for years; it solves their problems. It allows them to have one claim organization instead of many. It allows them to get one set of wordings instead of many.” DeCarlo concluded, “The client is demanding these things. People can criticize us for these, but they’ve been in the market forever.”

“Soft markets drive interesting questions,” he said.