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Brokerage is not an expense, says Willis Re Deputy Chair Hvidsten

11th September 2019 - Author: Steve Evans

Reinsurance brokerage costs and commissions are not an expense for reinsurers and Willis Re sees little demand for substantial change on broker remuneration, according to Deputy Chairman Mark Hvidsten.

mark-hvidsten-willis-reSpeaking to Reinsurance News in an interview, Hvidsten laid out the value that he feels a reinsurance broker brings to its clients, in services provided, advisory and access to risk capital and risk transfer solutions.

On the subject of the need for efficiency in reinsurance and where broker commissions sit in terms of expense, Hvidsten does not see a big demand for a restructuring of the way costs are apportioned and revenues flow.

“Frankly, we see little demand for substantial change. Reinsurance transactions occur between sophisticated buyers, all of whom are aware of the brokerage and who pays it. Brokers exist only because clients are prepared to pay their freight; plenty of direct writers trade in the market (and when the distribution value brokers bring to most reinsurers is considered, it is easy to make a case that they should pay the brokerage),” Hvidsten explained to us.

Adding that, “Year-on-year the intermediated market continues to grow, which proves this.”

Underscoring the importance of the role of reinsurance brokers, Hvidsten said that even among the very largest of insurers, which as a result are the best equipped to go direct if they wanted to, an intermediary still tends to be utilised in almost every interaction with the market.

Hvidsten went on to lay out precisely why he feels the broker remuneration model is not broken and remains fit for purpose today.

“In reinsurance, because the web of value is often tangled, commissions or overrides typically offer the most efficient methodology, which is why the sector has always operated on that basis. If reinsurance broking services could be delivered more cheaply, they would be – the reinsurance broking market is a fiercely competitive free market based on the delivery of value.

“Brokerage is not an expense for reinsurers, since it is priced into every deal, and therefore has little effect on them,” he stressed.

Willis Re’s clients understand that they pay this indirectly to the broker and that the costs cover the full range of services reinsurance brokers provide, including the all-important broker knowledge of the market and access to the range of solutions for optimising risk and capital efficiency.

It’s not the same for all clients though, as depending on where in the market you sit your view of broker remuneration may be very different.

But Hvidsten believes that even lower down the distribution chain there is still an acknowledgement of the value provided by the broking role, meaning that “the aspiration of some market participants seems to be to bypass some of the players in the chain entirely, rather than pay them less,” he told us.

On the topic of unbundling broker services, to enable clients to elect to pay less by using fewer of them, Hvidsten is adamant that this isn’t going to happen.

“Reinsurance brokers provide a complex mix of services, all of which are interrelated,” he explained.

“Its components – including consulting, analysis, modelling, structuring, execution, and claims services – form an integrated offering which cannot be unbundled with a process as simple as clicking ‘ungroup’, nor should they be.

“Good luck to those who try; it would be like hiring a chef to make your dinner, but getting another supplier on board to grind and add the seasonings independently.

The entire end product is reliant on all its constituent services, and since every client is different, each of those services is delivered to all of them, in different ways to different degrees, to deliver the specific outcomes they seek.”

Overall, Hvidsten sees the brokers role in reinsurance as safe, as long as their role is warranted.

“Distribution is only a very small (if important) component of the value reinsurance brokers provide. They will not be removed, allowing reinsurers to lower prices or their customers to save on cedes, unless they cease to provide value. That is unlikely, since reinsurance programmes are never vanilla.

“They demand the expertise and the breadth of tools and interconnections that reinsurance brokers provide, and risk carriers value,” he said.

Adding, “Our entire job is to create and secure value for our clients. Continuity, integrity, and sustainability are major components of that promise, so we treat all our trading partners with respect, but our primary duty is and always will be to our clients.”

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