Broker's report

Paul Markey
Chairman Aon (Bermuda) Ltd. and Aon Benfield, Bermuda

Clients are increasingly seeking to spread their risk across a number of underwriters, how do you see this affecting the subscription market in 2010 and into 2011?

The financial crisis led many cedants to re-examine both their exposures and the way in which they spread their risk. This is especially true for those cedants that had placed their business on a direct basis, as they became concerned about risk concentration and whether they should be utilising a more diverse panel of reinsurers. Although no pure reinsurer failed during the financial crisis, the value of spreading risk became apparent, and also the value of utilising the services of an experienced intermediary that could oversee all the global markets and advise on the most appropriate forms of risk transfer and structure the very best reinsurance solutions. In this way, the subscription market is a very effective method of spreading risk and, bar any regulatory intervention, we think that it will continue to be an important part of the risk transfer process through 2010-2011 and beyond.

In which areas would you expect to see the market developing, and why?

In line with the answer above, we see a shift away from direct business and a move towards intermediated business. This trend is already in action and, in this regard, the US market is ahead of the EU market, but the latter is catching up. We also see opportunities in Asia, including China, where growing gross domestic product, increases in personal wealth and ever-increasing asset values will help drive expansion of the re/insurance market there. Better modelling of China exposures will help give re/insurers confidence in entering into the country.

One of the issues surrounding such a market is the validity of contracts. How much of an issue is this and what steps have been, or will be, taken to address this?

Since contract certainty was introduced to the market, there has been a tightening up of the contract process.

Given that brokers are the lead figures in this arena, what are the criteria you use to establish working relationships with underwriters, and how feasible would it be to work with underwriters outside of Bermuda?

Aon Benfield is unique in that it is the only truly global intermediary and capital solutions provider. We have offices in more than 50 countries across the world, and more than 4,000 colleagues who include experts in treaty reinsurance, facultative reinsurance, investment banking solutions and analytics. This means we can provide global capacity for our clients, and we are agnostic to its source as long as it is the most appropriate solution for their individual requirements. We also open up new routes to capacity through innovative solutions such as FAConnect—a unique electronic platform that allows our clients to quote and bind their own facultative placements from their computer desktops in less than five minutes. Relationships are still all important in this business, and we place a premium on our communication skills and our transparency in our dealings with clients and markets. Our huge range of capabilities allows us to extensively assess risks andexposures, which makes our clients and markets very comfortable in dealing with Aon Benfield.

What do you anticipate as being some of the main challenges ahead for the subscription market?

Thomas P. Cechini Regulators have recently been scrutinising the market, and so the industry will be paying very close attention to any comments the regulators make. Ultimately, we all want to achieve a transparent process that benefits our clients. The market has worked extremely well in the past 20 years and has had to deal with some of the biggest re/insured events in history—such as hurricanes Katrina, Rita and Wilma, as well as Ike, and devastating earthquakes such as the one in Chile this year. The market has remained strong and robust, and whatever decisions are made regarding its future, we would hope that this strong track record and good reputation are maintained. With regard to regulation in the international world, Aon Benfield works very closely with BIPAR, the European Federation of Insurance Intermediaries, advising on the benefits of common term placements and/or verticalisation with regard to the regulatory approach in certain international jurisdictions.

Managing director Bowring Marsh (Bermuda) Ltd.

Clients are increasingly seeking to spread their risk across a number of underwriters, how do you see this affecting the subscription market in 2010 and into 2011?

As rates within the global insurance marketplace continue to soften, we have seen and expect to see further consolidation of programmes. While large risk management clients continue to spread their risk throughout the world and utilise the diversity of subscription markets (read: shared and layered programmes), insureds continue to look for advantages over their competitors, and insurance costs are not an exception. Large multinational programmes with significant premium spend can have their own line item in financial reports, so it should not come as a surprise to anyone that insureds continue to leverage their existing carrier relationships to yield an overall lower cost of risk. Subscription markets have seen, and are expected to continue to see, pressure to accept additional exposures across multiple lines of coverage in concert with reduced pricing and expansion of coverage.

In which areas would you expect to see the market developing, and why?

One of the main criteria Bowring Marsh requires when working with markets and developing relationships is the access to decisionmakers— for this reason, we have built an extensive global network to serve our clients. We’ve received a number of inquiries regarding the feasibility of working with underwriters outside Bermuda. From the Bowring Marsh (Bermuda) perspective, it’s very feasible and we have been accomplishing this, albeit indirectly, for years. The network that makes up the Bowring Marsh placement offices reaches around the globe and is one of the significant advantages that we provide to Marsh’s clients. Through our wholly owned network (Bermuda, Dublin, London, Miami, Sao Paolo, Singapore, Tokyo, Zurich), we are able to deliver real-time market feedback from various members of our global team. Our clients benefit from our nimble ability to marry subscription markets from around the globe in a cost-effective manner.

One of the issues surrounding such a market is the validity of contracts. How much of an issue is this and what steps have been, or will be, taken to address this?

One of the major steps forward within the insurance industry—and something Marsh has always advocated— is the commitment to contract certainty, prior to inception of programmes. Contract certainty advocates delivering final signed policies to the insured prior to the inception date. While contract certainty, by itself, has been a great step forward, there’s an even greater opportunity within reach for clients. The electronic age has catapulted this progress forward by leaps and bounds. More than a year ago, Bowring Marsh (Bermuda) Ltd. began an initiative to deliver as many policies as possible electronically. We have come along way from the days when every document contained a ‘wet’ signature.

Given that brokers are the lead figures in this arena, what are the criteria you use to establish working relationships with underwriters, and how feasible would it be to work with underwriters outside of Bermuda?

Only five years ago, who could have imagined an insurance document without paper? We can only imagine what will happen in the next five years.

Alan Waring
President Crump International

Clients are increasingly seeking to spread their risk across a number of underwriters, how do you see this affecting the subscription market in 2010 and into 2011?

An example would be the initial activity in this area, which was mainly a result of the AIG difficulties. Spreading risk among more carriers has subsequently developed into a pattern of buying behaviour that is more the norm. In doing so, markets have realised that they cannot all issue separate and different policies for each participation in a tower of limit. The proper following of form in a true subscriptionmanner has and will continue to become far more common, with carriers only insisting on some of their own distinct legal wording for some key clauses, e.g. arbitration.

The main casualty markets in Bermuda, London and Dublin have a comfort quota-sharing layers, including very large stretches of limit, e.g. $500,000 up to $500 million, and they have virtually all moved to a follow-form occurrence approach where requested. With the property carriers, there are players in Bermuda who participate in layers with Lloyd’s, the ultimate subscription market, as well as quota-sharing layers among just Bermuda markets.

US carriers are more likely to want their own discrete layer in casualty placements. In property placements, it has become more common to see all markets quota-sharing together, but with the US markets, they probably have more of their own discrete language. Looking forward, I believe markets in general will continue to streamline their participation methods, although it may be a long time before we see all markets signing up to a Lloyd’s stamping type participation on one single contract.

In which areas would you expect to see the market developing, and why?

I believe casualty is the area where the most development will occur. Property, due to Lloyd’s, is already well developed as a subscription market and it is probably just a case of continuing to refine the approach. Within casualty, the large towers of limit that are purchased need many participants and, given the very long-tail nature, carriers just don’t want to be putting the huge towers all on their paper with fac re [facultative reinsurance] support. The type of FM or Travelers’ approach to property is just far less likely in casualty. It can be expected that the co-ordination of terms and conditions in casualty placements will continue to be refined and, as a result, placing towers of limit will move closer to pure subscription.

One of the issues surrounding such a market is the validity of contracts. How much of an issue is this and what steps have been, or will be, taken to address this?

Within Bermuda, for property and casualty, there is very real contract certainty when covers are bound. In addition, carriers look to see the policies of the players below them and look for the consistency. This approach is not so clear-cut in the US, but that can be expected to gradually change.

Given that brokers are the lead figures in this arena, what are the criteria you use to establish working relationships with underwriters, and how feasible would it be to work with underwriters outside of Bermuda?

The real focus is on understanding the nuances of how the underwriters approach their risk analysis and working to provide submission data to them in a way that suits their methods. Technology has not replaced face to face, but it has meant that it is now very feasible for brokers to place business with underwriters in other countries as standard practice.

What do you anticipate being the main challenges ahead for the subscription market?

The main challenges are probably the desire of carriers to be able to differentiate themselves and seeing the subscription market as undermining their differentiation; and in addition, carriers, or at least their in-house counsel, being determined to hold on to their form of words for certain parts of contracts. There is no doubt that there are some poorly worded contracts in our industry. However, 50 versions of the same thing is not the way to go.

Chris Klein
Global head of business intelligence Guy Carpenter & Company, LLC

Clients are increasingly seeking to spread their risk across a number of underwriters, how do you see this affecting the subscription market in 2010 and into 2011?

The speed with which the fortunes of some highly rated, large re/insurers deteriorated in 2008 was a cause for concern. The result was a renewed focus on the benefits of diversification of placements. The subscription market is an effective mechanism for achieving diversification and we expect it to continue to be an important part of buying strategies, subject to the availability of sufficient capacity.

In which areas would you expect to see the market developing, and why?

Many believe that the growth in market share of the intermediarybased subscription market can be attributed to its strengthening effect on the buying power of re/insurance consumers. This may be attributed to the ‘silent auction consensus pricing system’, the system of soliciting quotes for price, terms and conditions individually and independently from reinsurers in a closed market. This system allows buyers, with advice from their intermediaries, to determine their tolerance level for price and coverage variables and deliver an offer back into the market. The market knows and largely accepts that by custom and practice, co-ordinated by intermediaries on behalf of consumers at the buyers’ direction, that there is a very small chance that they can influence the terms once offered publicly. This seems to be a plausible explanation for why the subscription market is the market consumers have increasingly chosen.

One of the issues surrounding such a market is the validity of contracts. How much of an issue is this and what steps have been, or will be, taken to address this?

Subscription contracts with concurrent pricing, terms and conditions are well established and less problematic in terms of validity. In the UK, the drive to prompt contract certainty has greatly helped to reduce contractual difficulties. In recent years, a growing number of subscription placements have involved non-concurrent terms in which the subscribing re/insurers have terms that are different from those set down by the lead underwriter. Such subscriptions require greater attention to detail, particularly with regard to coverage, to ensure that the client has the cover they expect. Contract certainty provides a framework, but all parties, especially intermediaries, will need to devote more attention and effort to ensuring that non-concurrent subscription placements are contractually sound.

Given that brokers are the lead figures in this arena, what are the criteria you use to establish working relationships with underwriters, and how feasible would it be to work with underwriters outside of Bermuda?

For reinsurance placement of large risks, the subscription market has been established for several centuries in London. Lloyd’s was founded on the principle of syndicating risks and remains so to this day. There is, therefore, much experience in working effectively with underwriters outside Bermuda. Many, if not most subscription placements, especially in reinsurance, combine subscribing underwriters from several, if not all, of the principal subscription markets. The key criteria for choosing underwriters are availability of economically priced capacity, responsiveness, flexibility and good financial standing.

Stephen D. Standing
Vice president Kirkway International Ltd.

Seeking a balancing view, we approached casualty broker Stephen Stranding.

Given that brokers are the lead figures in this arena, what are the criteria you use to establish working relationships with underwriters, and how feasible would it be to work with underwriters outside of Bermuda?

We place long-tail lines of business such as healthcare, workers’ compensation and construction. Given the payout pattern on this type of business, we need to feel certain that our reinsurance partners are going to be around for the long term. It is imperative that we fully vet each potential reinsurer on behalf of our clients and that we place business with reinsurers that have impeccable security. We avoid companies with weak balance sheets, legacy issues and those lacking a long-term capital commitment to the industry.

As a Bermuda broker, we naturally try to support our local markets, but these days, most companies have global operations, so the geographic lines are somewhat blurred. That said, we do maintain working relationships with underwriters in the United States and we do access the London and European markets. Sometimes, there are regulatory constraints that limit who we can trade with, but short of that, there are no real limitations to working with underwriters outside of Bermuda.Beyond the financials, there are more subjective qualities that come into play when working with underwriters. There are the obvious considerations such as personality, accessibility, creativity, authority and so forth. However, it’s really important for us, given the nature of casualty business, to work with underwriters who can balance quantitative data with qualitative information when making decisions. The Bermuda market is particularly strong in this regard as there are many trained underwriters with actuarial backgrounds.

In which areas would you expect to see the market developing, and why?

Throughout the ‘credit crunch’ of the past few years, there has clearly been a reluctance in the market when it comes to providing financing to consumers, corporations and countries. Without lending, it becomes virtually impossible for organisations to fund growth and development. Given the continued unease in the global economy and the political unrest that now exists in certain pockets of the world, we see significant development in sovereign and trade credit.