A.M. Best Weighs In With New Concerns on Aon-Berkshire Type Deals

September 4, 2013

Underwriting risk management practices could loosen up as insurers join forces with major brokers on what A.M. Best calls “mega” whole-account broker deals in the London market, the rating agency said in a report Wednesday, highlighting some potentially worrisome implications of the trend.

Echoing similar commentary by Moody’s Investor Service last month, Best said that any relaxation of underwriting resulting from “the movement toward insurers automatically taking a share of business through broker arrangements” could eventually mean deteriorating financial results.

Adding a new item to the list of potential negatives, A.M. Best suggests that this movement provides “further opportunity for nontraditional capital” to enter the insurance space—in this case, the primary insurance market, further pressuring rates at a time when “excess capacity is chasing static volumes of business.”

The A.M. Best briefing, titled “London Market Placement Deals Represent New Stage of Evolution,” details a deal struck between Aon Risk Solutions and Berkshire Hathaway earlier this year as well as a Willis partnership with several insurers that is now in the works. Scale is one of the characteristics distinguishing these two arrangements from similar ones that have existed in the London market over the years, the briefing notes.

“It is thought that the facility will provide capacity for approximately 20 percent of any single placement on [Willis’] London market specialty book,” the report notes regarding the developing “Willis 360” arrangement, which is described as an insurer-broker partnership designed to provide enhanced commercial insurance coverage, increased limits and integrated risk management solutions for medium-sized U.K. businesses.

Under the Aon-Berkshire arrangement, Aon’s managing general agent has delegated authority to grant coverage on behalf of Berkshire Hathaway globally across all industry segments. The Best report, like previous reports, notes that Aon will automatically cede 7.5 percent of its Lloyd’s business placed in a sidecar facility to Berkshire Hathaway, but Aon’s clients will have the opportunity to opt out of the arrangement.

The report says that the actions of Aon and Willis “suggest that mega brokers are looking to make placement more cost effective and to maximize whole-account commissions.”

In a media statement announcement about the report, Stefan Holzberger, managing director of analytics for the rating agency, says: “A.M. Best would regard it as a negative development if insurers became over-reliant on whole-account broker deals as a source of business flow and if they become even more dependent on large brokers.

“Insurer margins may also be squeezed if brokers take some form of block commission on deals,” he adds.

In addition, Holzberger says that although “brokers’ management information has generally improved in many aspects over the past decade, there are potential questions over their ability to capture [some information] accurately,” citing reserves as an example.

On the other hand, Yvette Essen, director, industry research-Europe and emerging markets, who authored the briefing, said: “Insurers that are part of the facilities may benefit from a reduction in acquisition costs. Such partnerships with brokers can result in good business flow and provide risk diversification.

“Furthermore, insurers may welcome the assistance of broker management information, such as historical data on portfolios—provided the information can be verified.”

As for potential negative implications, the first one listed in the report is the potential loss of underwriting control for insurers. “Should history repeat itself—as was the case in the late 1990s and early 2000s when many specialty companies in the United States and several Lloyd’s syndicates gave their pens to U.S. managing general agents, which were volume-driven and not focused on underwriting profits—the consequences could be disastrous,” the briefing states.

The report also lists as negatives the potential for nondisclosure resulting for pooled risks as compared to per-risk placements and the possibility that small Lloyd’s syndicates and following markets will get cut out of placements.

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