In the currently challenging, softened and perhaps structurally changed for good global reinsurance market, it is tougher, right now, to be a provider of reinsurance capital and capacity than a broker, according to Marsh & McLennan President and CEO Daniel Glaser.
With rates and pricing depressed, due to over-capitalisation of the market thanks to excess traditional and growing alternative reinsurance capital, while major losses remain low and the investment side of the business also hard, providing reinsurance capital while maintaining a sustainable business is certainly a tough task.
Speaking during broking and advisory powerhouse Marsh & McLennan Companies third-quarter earnings call, CEO Glaser implied that he feels more comfortable on the broking side of the reinsurance market, where subsidiary Guy Carpenter is a leading player.
“It’s tougher to be a reinsurance capital provider than a reinsurance broker,” Glaser said, “Because for us, it’s not about the premium, per-se, it’s about the value we create.”
That’s a really important distinction and one that may not be welcomed by large reinsurers who want to be measured on the quality of their service offering and product range, rather than on the cost of their capital.
But as the reinsurance market faces ongoing pressure from the capital markets, with large institutional investors such as global pension funds, family offices and endowments allocating capital to insurance and reinsurance risks, cost-of-capital and cost-of-capacity deployed become increasingly important.
Glaser is right, in many areas of reinsurance right now it is easier to measure the value provided by service providers and advisors, or brokers, than it is from capital providers.
However, the entire value of insurance and reinsurance is in the capacity, the promise to pay and the ability to back that up, so capital providers, traditional or alternative, should be greatly valued. But as capital itself has become more mobile, fungible and able to move in and out of the market with increasing speed, it’s become more difficult to measure and compare its value.
“In tough environment markets like this, companies want and need advice and we’re there to provide innovative solutions to help them cope with these difficult market conditions,” Glaser continued, explaining why the broker model remains valued.
So reinsurance capital providers need to take a leaf out of this book, focus on innovation, product design and development, meeting customer needs and excelling in customer service, while still accelerating the rate of capital movement in the space, embracing technology and new structures, as that is just not going to stop.
One thing that could upset the broker apple cart though is the trend for capital to want to get closer to the ultimate source of risk.
This trend, driven by the structural changes in the market as the capital markets converged and brought efficient capacity into competition with traditional, is set to accelerate. It will break down the risk to capital value chain, part of which is the insurance and reinsurance brokerage role.
That will make the advisory piece of broking increasingly key, with an agnostic view to solutions, structures and sources of capital or capacity set to be the reinsurance brokers mantra in years to come. Whether brokers can continue to marshal capital as well, through facilities etc, remains to be seen, without them coming more and more into competition with underwriting firms.
Large traditional reinsurers are also going to sell themselves on value-add, advisory, innovation and technology led product development. Insurance-linked securities (ILS) players and capital market investors are set to do similar.
At some point, we could see a reinsurance market focused on service, innovation, advice, value, with expert advisors or underwriters able to pick and choose between products, capital, structures, domiciles and other factors, which could bring reinsurance capital advisors into a position of increasing value as they learn to provide these services too.
It’s all part of the sea-change going on in reinsurance, with roles and services set to become increasingly blurred, capital set to become increasingly mobile, risk set to become increasingly understood, technology set to accelerate the market and capacity set to get increasingly close to the ultimate source of risk.
Interesting years ahead, clearly Glaser recognises that right now the brokers have it particularly good (compared to the reinsurance capital providers), but that may not last for ever.