Interesting news today as an announcement comes from broker Aon saying that they have signed an agreement with Warren Buffett’s reinsurance giant Berkshire Hathaway which will see the two firms team up to bring sidecar style capacity to retail customers of the broker at Lloyd’s. The first sidecar of its kind in the industry this arrangement will bring new capital to the Lloyd’s market and enable access to Berkshire Hathaway’s capital for Aon’s retail clients.
According to the Insurance Insider the facility works like a quota share agreement between the broker and reinsurer and will see Warren Buffett’s reinsurer take a 7.5% share of all of Aon’s subscription business running through Lloyd’s. The sidecar style deal is said to involve Aon brokered business with a retail premium in excess of $2.5 billion.
Aon said that its Aon Risk Solutions global risk management arm has signed a unique co-insurance agreement with Berkshire Hathaway that will provide its clients with fast and efficient access to Berkshire Hathaway AA+ S&P rated capacity on all eligible business where the Lloyd’s market participates.
Aon said that this is the first sidecar facility of its kind in the market and is globally available across all industry segments, bringing the kind of benefits usually exclusively available to reinsurance markets to the brokers retail clients. The capacity from the facility provides dedicated Berkshire Hathaway International Insurance Limited capital through a fixed participation structure on a full follow form basis.
Aon Underwriting Managers, Aon’s Managing General Agent business, will manage the solution and has delegated authority to grant cover on behalf of Berkshire Hathaway.
Steve McGill, group president, Aon plc, and chairman and CEO of Aon Risk Solutions, said; “We are constantly looking for ways to empower results for our clients and this landmark solution provides a unique way for them to access high quality capacity efficiently. No other firm has been able to deliver a solution of this scale to their retail clients across all industry segments on a full follow basis. We are proud to be able to offer our clients unprecedented access to the financial strength of Berkshire Hathaway through this transaction.”
This is an interesting deal for a number of reasons. It sees Berkshire Hathaway making its capacity available to a new segment of the re/insurance market. It seems to suggest a more permanent sidecar structure, rather than the perhaps more typical opportunistic nature of sidecars and also Berkshire Hathaway’s normal business. The type of clients that will benefit from this facility are not the type to be looking to place their risk into opportunistic sidecars and are more likely to seek security of a longer relationship. This is a change in the Berkshire re/insurance strategy which will be interesting to watch.
Lastly it marks a new way for capital to play in Lloyd’s, with an external investor backing a capacity facility managed by a broker. It is something that we and the ILS and collateralized markets have discussed for some time, that Lloyd’s could operate like a sidecar hub with third-party capital backing the underwriting syndicates (or sidecars). It’s an innovative initiative which will help Aon to grow its business in the market with a source of dedicated capacity and give Warren Buffett’s Berkshire Hathaway a new segment of the re/insurance market to profit from.
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