Reinsurers, forced to cut prices for four years in a row, should target brokers’ fees as the industry seeks to reduce costs, according to Lloyd’s of London Chairman John Nelson.
The brokers need to cut profit margins as the industry struggles with low interest rates, declining rates and expenses related to the U.K.’s vote on leaving the European Union, Nelson said in an interview in Monte Carlo, where the industry is discussing rates for 2017. Prices have been eroded so much by competitors including pension funds that a typical year of claims could make the industry unprofitable, executives said last month.
If broker fees “keep on rising, they will begin to find that they will be” cut out, said Nelson, who has been chairman of the world’s oldest insurance market since 2011. “While in the short-term the more margin they can create the better, they have to make sure they don’t kill the golden goose.”
Brokers including Aon Plc., Marsh & McLennan Cos. and Willis Towers Watson Plc. help primary insurers to buy reinsurance coverage through the Lloyd’s of London market. While bigger firms such as Munich Re and Swiss Re can keep costs down by doing business directly with clients, smaller companies including Lloyd’s members rely more heavily on brokers, leaving them with higher costs.
Cutting commissions to brokers is a “very difficult thing to do,” said Andy Worth, head of the U.K. specialty insurance unit at EY. “Brokers are very powerful and manage a lot of premiums — they may just say: if you want to play with us, you need to pay.”
The reinsurance industry’s expense ratio has risen 4.1 percentage points since 2011, weighing on profits, according to S&P Global Ratings Inc. “Those who control expenses will have a competitive advantage,” the ratings company said in a Sept. 6 report.
Brexit has had a limited impact on Lloyd’s and their preferred option is that passporting rights for financial services are maintained with the European Union, Nelson said.
“If that doesn’t happen we would just write business onshore in the EU, and we have plans to do that,” the chairman said, declining to name preferred locations for a hub.