Lockton has set an ambitious target of generating $400mn in annual reinsurance broking revenues from newly minted Lockton Re by the time it reaches maturity, The Insurance Insider can reveal.
Sources who had been briefed on the plan said Lockton Re intends to go up against the big three brokers and will target a broad book of business including large accounts to reach that $400mn revenue figure.
In March, family-owned US retailer Lockton signalled an aggressive push into reinsurance – where it has previously been a small player – by hiring Guy Carpenter’s North America CEO Gardner, along with the big three broker’s global innovation chief Claude Yoder and managing director Nick Durant.
Confirming the hires the day after they were reported by this publication, CEO Ron Lockton stated that the company was “going all in on reinsurance”, describing it as “a critical pillar of Lockton’s aggressive growth plan”.
Gardner is considered a highly credible leader, and is extremely close to AIG, one of Guy Carpenter’s largest clients, while the old Towers Re London book is among the stickiest in the market.
However, the revamped Lockton Re has had a vexed start, with a distracting and damaging lawsuit from Guy Carpenter that has led to a temporary restraining order against Gardner.
The firm’s approach to staff remuneration has also raised eyebrows, with a number of reinsurance broking sources telling this publication that they were aware of staff offered upwards of double their compensation to join, including three-year guaranteed bonuses.
One senior source said they had been told that the Lockton plan showed the business making a loss beyond year five, reflecting the front-loading of costs, the accounting within reinsurance broking and the long sales cycle.
Lockton has an estimated $6bn-$10bn US retail book that rivals and cedants expect it will look to leverage to secure a share of outwards programmes.
However, in looking to leverage this book within the US, it will face rivals with much bigger retail platforms.
In addition, Lockton is likely to face an uphill struggle in establishing the kind of centralised placement guidelines and structures that are possible within more centrally controlled and corporate broking environments.
Lockton will also come up against the challenge of having to compete with reinsurance brokers that have the scale to fund much larger investments in analytics and which can utilise bigger stores of data.
As reinsurance brokers continue to move away from providing transactional and placement services towards higher-end advisory work around capital and risk management, the benefits of scale are only likely to grow.
The combination of this scale advantage and access to higher-margin mega accounts may explain the consistent margin advantage the big three – which are believed to book margins in the 30s – have over their smaller peers, which are believed to be broadly 15-20 percent margin businesses.
This is an extract from a longer analysis of the reinsurance broking space. Click here for the unabridged article.