Aon blurring lines. Case points to Marilla & Client Treaty as growth drivers

Insurance and reinsurance broking giant Aon will continue blurring the lines between broking and underwriting capital provider as it looks to replicate the success of initiatives such as its Client Treaty at Lloyd’s and the Marilla catastrophe reinsurance facility.

CEO Greg Case highlighted these two initiatives as future growth drivers and a way for Aon to leverage its extensive analytic and data capabilities to deliver growth and innovation.

These kinds of initiative do blur the lines though, with Aon becoming a conduit for matching capital and risk, using pre-agreed and underwritten capacity from reinsurance companies and capital market investors.

Speaking during the brokers’ fourth-quarter earnings call recently, CEO Greg Case explained that Aon targets further growth and expects to leverage its advantage in terms of data analytics to help it achieve this.

“We continue to accelerate our innovation strategy, by using our Aon United operating model to replicate successful solutions and applying those capabilities to new client bases, paving the way for innovation at scale.

“We’re incorporating our data, analytics and insight, to direct existing capabilities to previously unmet client needs.

“This allows us to serve existing clients in new and customised ways, bring existing solutions to new clients, and expand our addressable market,” Case explained.

Aon has perhaps the best view of true global reinsurance market pricing and transaction activity, at any one point in time, thanks to its leading market share and the significant effort it has put into making its data advantage more useful to it.

Aon has developed systems that help it to monetise its data advantage as well, having utilised data to help its clients gain enhanced execution, while also using it to innovate and create new solutions.

One particular area of success, has been in channelling capital into reinsurance markets in a more efficient manner, with facilities a key initiative and one that is likely to become increasingly important to the company.

This blurs the lines, between broker and underwriter, as Aon is now bringing capital on an almost automatic, in future we expect algorithmic, basis, alongside more traditionally sourced capital through the reinsurance syndication and placement process.

The best example of this is likely Aon’s Client Treaty facility in the Lloyd’s market, which offers guaranteed 20% following capacity to Aon’s clients from Lloyd’s secured underwriters.

The Client Treaty followed on from what was called Aon’s Sidecar, which also offered guaranteed co-insurance capacity, for qualifying placements.

Discussing how Aon intends to put its data advantage to work, Case discussed the Client Treaty.

“Let me highlight a few examples that demonstrate how we scale innovation to help our clients, both in new ways and from new sources,” Case said.

“Historically, you heard us talk about Aon Client Treaty, pre-underwritten insurance capacity we established at Lloyd’s, that we use to offer clients more easy and efficient access to capital for their placements.

“When we designed this program over five years ago, we analysed every historic placement, quantified the risk parameters around business we placed in Lloyd’s and then pre-arranged capital to back those risks.

“Aon Client Treaty provides more efficient access to capital for clients and insurers, and we see ongoing opportunity to apply this concept to different geographies and risk classes, using the same proprietary data and analytics backbone supported by Aon Business Services.”

Another example of Aon leveraging its data to more efficiently channel capital to risks, effectively blurring lines, is the Marilla catastrophe reinsurance facility.

Aon set up Marilla as a global catastrophe reinsurance facility towards the end of 2020, seeking to bring efficient capacity to its clients in time for the end of year renewals.

It involves capacity being marshalled on an automatic following basis to take up to a 5% line on global catastrophe excess-of-loss reinsurance program renewals that Aon has brokered.

Backers of the Marilla facility included global reinsurance players Swiss Re, PartnerRe and AIG owned Validus.

But capital markets players were a also involved as capacity providers for Aon’s Marilla catastrophe reinsurance facility and the broker has gone to significant lengths to turn this into a capital management as well as distribution strategy.

In fact, Marilla has a collateralized reinsurance vehicle, Marilla Reinsurance Ltd., an investment manager, Marilla Investment Management Ltd., and also a dedicated reinsurance fund, the Marilla Global Reinsurance Market Fund.

While Marilla is, like the Client Treaty, a way that Aon can offer guaranteed following reinsurance capacity for risks that meet certain pre-defined requirements, it is also an ILS investment manager operation, bringing third-party investor capital to certain catastrophe reinsurance programs.

So this really does blur the lines, with Aon acting as an investment and capital manager, although we have no idea what type of fees, if any, are charged on the Marilla reinsurance fund.

Case explained that Marilla is an innovation that Aon derived directly from its Client Treaty.

“One new offering derived directly from this capability is a solution the team designed called Marilla, which enables reinsurers and investors to invest across our global reinsurance client portfolio,” Case said.

“This provides a broad entry point into global reinsurance risk that benefits our clients, by enabling capital to access markets more efficiently.”

The CEO went on to highlight the link to Aon’s data analytics advantage and the chance to replicate these initiatives across the brokers business.

“This first of its kind solution could not have been designed without a proprietary analytic capability and we see important opportunities to build on this platform for future growth across Aon.”

Which suggests we should anticipate Client Treaty and Marilla replicas to pop-up for other market opportunities and perhaps specific lines of business, which could be compelling for insurance-linked investors in particular.

With Aon’s data advantage, the broker could create particularly compelling Marilla-like collateralised facilities for other classes of risk, especially short-tail and emerging classes such as cyber.

That could be a very interesting way for investors to back a portfolio of risk in a new class of business, which would meet Aon’s ambitions of innovating while providing its clients with efficient access to underwriting capacity.

Of course, Aon has a long-history of blurring the lines between broking the risk and channelling the capital to match with it.

The company has its own investment management capabilities, so providing a facility through which third-party investors can access the returns of the portfolio of business it brokers makes perfect sense.

But it does raise questions and despite its scale Aon will still have to tread carefully with these initiatives, for fear of alienating its core client-base.

Aon has relationships to manage across the insurance, reinsurance and investment industries, given its reach and scale, meaning it can’t just flood the market with low-cost capital backed capacity without risking disappointing other markets it works with and relies on.

But such arrangements do speak to a continued blurring of lines and also the need for brokers to stake their claims on the segments of the market chain they can truly add value to, while leveraging their own data and capabilities, alongside other services that can assist in reducing the burden of capital cost in the industry.

Major global insurance and reinsurance players need to do the same, which is why you do see carriers leading underwriting facilities and working with competitors to augment their capacity capabilities.

In years to come, the blurring of lines will likely accelerate, as technology and capital fungibility break down the boundaries between broking, distribution, underwriting, syndication and capital, which are really distinct parts of the process that many companies can provide more than one of.

Some of those are best provided by a traditional broker or underwriter, some by an outside specialist or disruptor. As capital sources become increasingly diversified in reinsurance, we suspect the blurring of roles will accelerate too.

Finding the right balance, between adding value for clients on both sides of the trade and risking alienating one party or another, will be key to Aon’s ambitions here.