You might be forgiven for thinking that only reinsurance underwriters are coming under pressure, due to the high-competition and high levels of capital in the market today, but actually reinsurance brokers are feeling it too according to MMC CEO Dan Glaser.
Marsh & McLennan Chief Executive Officer Dan Glaser discussed the prospects of the firms reinsurance brokerage arm Guy Carpenter in the firms first quarter results call last Friday. Glaser said that the firm does feel the negative impact of softer reinsurance pricing and the pressure applied by alternative reinsurance capital.
Guy Carpenter, Marsh & McLennan’s reinsurance broking arm, saw fewer large transactions in the first quarter that a year earlier, a risk that all of the major reinsurance brokers have faced at some time or another as insurance-linked securities transactional advisory business is not a regular stream of income.
Alex Moczarski, CEO of Guy Carpenter, said that the reinsurance broker had filled the gap left by a lower volume of transactional products and capital markets deals in the first-quarter with recurring business from smaller U.S. cedents where Guy Carpenter has been busy building relationships in recent months.
Guy Carpenter has been working through a new strategy to align itself with smaller buyers of reinsurers where demand remains higher, which as a result has reduced the brokers reliance on larger reinsurance buyers who recently have been retaining more risk. The broker hopes that this translates into more repeat business with new clients and as a result less exposure in future to the declining peak catastrophe rates.
On GC Securities capital markets transactions, such as catastrophe bonds and ILS, Moczarski said; “As regards to capital market transactions, we actually just closed a good one yesterday which I’m happy about. But it’s a lumpy business and so in the first quarter we didn’t see much of that.”
Glaser commented on the background to the pricing pressure which his brokerage also feels. “I think what you’re seeing would be multiple things. You’ve got higher levels of capacity. You have insurance companies, some of the large ones retaining more risk. You have increasing alternative capacity and that creates a bit of a competitive activity on how some of the traditional reinsurers are trying to maintain their book in the face of incoming capacity,” Glaser explained.
Marsh & McLennan had been expecting a tougher year in 2014 at Guy Carpenter, with an expectation that pricing pressure would be prevalent in the reinsurance market resulting in tougher conditions and a cut to margins for brokers.
Despite this Glaser said that some growth is expected at Guy Carpenter, particularly as the broker looks to secure new clients in the smaller reinsurance cedent space. As well as this client service is a key strategic aim for Guy Carpenter in 2014. Glaser said of the reinsurance broker; “It’s one of our finest businesses, it’s a true jewel and this is a year that we’re going to focus on serving clients and getting new ones.”
Glaser also said that as brokers are in the client business the current market conditions of lower pricing and broader terms is good for their clients and can encourage them to look at new products which they may not have tried before.
So the current trend for lower pricing, increasing levels of capacity and the resulting highly competitive reinsurance marketplace is not just a worry for underwriters, brokers are affected too. Marsh & McLennan’s example with Guy Carpenter also shows that brokers are taking similar measures to underwriters, in looking to expand to less competitive parts of the market where they can secure new, longer-term clients and business.
We should expect to hear more on innovation from brokers in quarters to come as well, as the pricing pressure continues to bite. Expect brokers, particularly those with capital market and investment banking abilities, to look to create new capital, income and risk protection products which may prove attractive to underwriters to help them navigate the current market environment.