Reinsurance brokers who previously stuck to their limited roles as middle men between their insurance company clients and reinsurers are increasingly using expertise, technology and analytics to drive prices and terms, the leader of one of the global reinsurance brokers said recently.
“The brokers have historically been ‘transactors’ of business. Historically, we’ve been an intermediary. We’ve introduced risk…and stayed in the middle,” said Paddy Jago, global chairman of Willis Re and chairman of Willis Re North America, during an interview at the Rendez-Vous de Septembre in Monte Carlo.
“Now, as a consequence of the environment and a need, we’ve become far more analytical. We’re able to better measure that risk far more deeply than ever before.
“I think that helps us be able to represent our clients and go to either the insurance market, and especially the reinsurance market, more ably equipped to have a debate about what the right price of the product should be.
“Previously, we simply transacted. We simply took one and presented it to another, and then we waited for the terms and conditions to come back.
“Now, we’re in a position whereby I think we start forcing and driving terms and conditions and, indeed, driving price. I think we better understand the product as well as our counterparts, the insurance and indeed the reinsurance companies,” he said.
Willis Re is the reinsurance division of Willis Group Holdings plc, which announced its intention to merge with Towers Watson in late June. Asked about the benefits of the pending merger, Jago said, “It’s going to take us to a new level in terms of the analytics that we’re going to be able to provide to our customers.”
Jago also offered his own personal insights on the state of the reinsurance market based on his 40-plus years of experience. He predicted that some of the capital that has entered the industry will drift away when returns fail to live up to their expectations.
Capital has entered the reinsurance industry at an extraordinary pace—some people will say with unbridled enthusiasm. I rode a horse once with unbridled enthusiasm. I’ve still got the bruises,” he said.
As for return prospects that will inevitably rein in the enthusiasm, Jago noted that Willis Re’s calculations put the return-on-equity for reinsurers captured within a Willis Re Index at roughly 7.8 percent for the first half of 2014 and 5.0 percent for first-half 2015. That’s the reality in a sector that talks about double-digit returns, he said, noting that the Willis Re figures reflect typical rather than actual (benign) cat activity but still include the impact of significant prior reserve releases.
What does he predict going forward?
“When that stops, which I promise you it will, and…when the cat activity starts to increase and go back again, which I promise you it will….those returns will fall away much further,” he said.