‘Cut out the middleman’ is the slogan of many a self-proclaimed ‘disruptor’, calling into question the purpose of intermediaries between supplier and buyer. In the world of insurance, these middlemen are the brokers, often misunderstood as solely matchmakers, taking a cut for making introductions between insurers and insured. In an age of disseminated information and ease of communication, why should a broker exist? The fallacy of Chesterton’s fence teaches us to understand the reason why something exists before dismantling it – a study which often uncovers rational underpinnings for existing systems. In the spirit of this lesson, we explore how their deep expertise and connectivity enable insurance and reinsurance brokers to optimise risk transfers for their clients, increase market efficiency and act as a trusted adviser and actuator before and during the life of a policy.
Insurance/Reinsurance brokers are regulated professionals who act as intermediaries between the insurer and insured, acting on behalf of the policyholder to source coverage which best meets their needs. They work with their clients to assess their requirements, diligence the insurer landscape to recommend suitable matches for the risk, negotiate a policy agreeable to both parties and once signed, oversee administration of the contract. Brokers typically make money from commissions as a percentage of premiums written throughout the life of the policy. The advantage of using a broker is often positioned around relying on their market perspicacity to find the best price for the policy seeker but their role extends far beyond saving money for clients and encompasses all stages of the insurance cycle.
Optimizing risk placement: Brokers have broad expertise in their insurance sector including familiarity with the key insurers, products, industry trends and the most effective methods to secure the best contracts. ‘Best’ here comprises not only obtaining competitive rates but also maximizing coverage, optimizing excess structures and speeding up the entire process for clients. Like any good diagnostician, brokers thoroughly examine prospective policyholders, assessing their needs and risk profile. They then diligence the market to shortlist suitable insurers with a complementary risk appetite. Brokers subsequently assist their clients in assembling the (re)insurance proposal/placing information and in presenting premiums and loss data to the insurer. Optimized risk placement also benefits the (re)insurer by helping them acquire appropriate counterparties.
Technical skills: Broker expertise also extends to more technical skills like catastrophe modelling and risk management. Brokers may assess their client’s eligibility for risk management bursaries or premium rebates which further reduce the cost of their contracts as well as offering independent advice on risk management strategies. Reinsurance brokers (also called reinsurance intermediaries) can provide the reinsured multiple field-specific services including:
- Drafting treaties and slips in accordance with contract certainty guidelines
- Exploring and implementing alternatives to reinsurance such as captive insurance company formation if more suitable to the cedant’s capital needs
- Helping the insured to understand their reserve requirements under regulatory mandates
- Assisting cedants with buying back reinsured policies if their retention limit increases
- In some instances, particularly in facultative reinsurance, brokers are even able to do their own underwriting before approaching reinsurers
Market Intelligence: Brokers also use their unique vantage point to provide both clients and insurers market intelligence on sector trends, sources of claims and how these can be minimized and can relay learnings from conversations with insurers. These insights increase the probability of their clients’ risks being written.
Negotiating power: Brokers have extensive networks within the insurance landscape which afford them the ability to negotiate better deals than would be available to the general public through price comparison sites or through direct contact with the insurer or their agent. These latter avenues tend to be inflexible and provide a more limited selection of offerings. Brokers can considerably expand accessibility for their clients:
- Complex risks - Through their connections, brokers can source quotes from specialists unavailable to the general public or for idiosyncratic risks not usually covered by generic policies. Finding coverage for complex risks necessitates deep relationships with an insurer's BDM and underwriter and requires highly involved back-and-forth negotiations.
- International access - Reinsurance brokers, particularly those with transnational footprints are better able to provide access to foreign reinsurance markets for their insurer clients.
Assessment of Counterparty Risk: To supplement the credit ratings of agencies like AM Best, brokers are able to leverage their relations to provide insight into the trustworthiness of(re)insurers. Reinsurance brokers are obliged to diligence the financial health of the reinsurer and communicate this to the reinsured. In this way, brokers ensure business is placed securely.
Advocating for clients: Brokers can capture subtleties of the risk including reporting on the policyholder's overall disposition and highlighting measures they have taken to mitigate the risk. Brokers advocate on behalf of their clients and are able to effectively pitch proposals based on their experience with insurers in the space.
Division of Labour: Brokers handle the insurer diligence, contract negotiations and contract administration for the insured, thus freeing up the policyholder to focus on their core business and strengths. Using brokers can be a form of efficient division of labour ensuring work is outsourced to a party who is more specialised than the policyholder’s team. This is particularly true for reinsurance where the cedant’s in-house actuaries typically have less experience with reinsurance than brokers, given it is a relatively infrequent event only taking place with new policy developments or when a capital raise is required.
Increasing Market Efficiency: From an economic perspective, it could be argued that brokers help to make the insurance market more efficient. Brokers enable less expert clients to obtain competitive deals, help to promulgate information by increasing accessibility to specialist, boutique or foreign insurers and encourage greater competition among risk takers.
Ensuring Transparency between parties:
- Duty of Disclosure: Brokers have a duty to disclose all material information from the insured to the (re)insurer both in the proposal and during the life of the contract. They assist their clients in making appropriate disclosures and relay questions and requests for supplementary information from the (re)insurer. In doing so, they prevent unforeseen loss of coverage or fraud.
- Contract Certainty Guidelines: Brokers not only work on reinsurance treaty drafts but also help to uphold Contract Certainty Guidelines such as those stipulated by the London Market Group. They ensure contracts follow these standards to provide clarity for both policyholder and insurer prior to contract inception or renewals.
Regulation and Licensure:
Brokers are regulated by the FCA in the UK and by FINRA in the US alongside state licensure which requires biannual renewal. These standards help to maintain a high quality of service by the profession.
Reinsurance brokers will produce the reinsurance slip and later orchestrate finalization and signing of the treaty by both parties. Once signed, broker accounting and claims administration divisions continue to manage transmission of data from insured to reinsurer throughout the policy period, maintaining transparency on premiums, loss payments requested/dispensed and reserves. In addition, in P&C reinsurance and to some extent in health reinsurance, the broker acts as a trusted escrow, receiving and disbursing premiums and benefits to each party. Once the policy is bound, brokers continue to meet with clients and check on policy suitability as well as managing addenda to the contracts.
- Dispute resolution: In instances of disputes between insured and insurer, the broker may be subpoenaed or cooperate with an arbitration panel, testifying as an expert witness or as a source of information given their oversight of correspondence and negotiations between parties.
Far from being a redundant link of the insurance supply chain, the above discussion highlights the integral role of brokers in the (re)insurance market. By offering industry expertise, deep partner relationships and trusted intermediation, they are able to optimally place risk and streamline insurance at all stages of the policy life cycle. With increasingly complex risks and evolving insurance needs, brokers continue to occupy a valuable central position in the insured-broker-insurer trio.