Brokers are lazy.
Allow me to rephrase that – brokers are always seeking productivity gains.
After all, brokers are here to serve clients and negotiate them the best quality insurance with the most appropriate security at the lowest possible price.
The quicker and more efficiently they can do that, the more clients they can serve and the better they can perform. Higher volumes mean more market leverage and more leverage means better discounts. Better discounts mean improved outcomes for customers.
Such brokers find ways of doing more with less manpower and their profits surge.
This is why facilities and schemes have always been with us. If you can package a product to get the best deal with less work you have an absolute business imperative to do that.
The same goes for underwriters.
Their job is to generate income at a target rate of return.
If underwriters can do that in an efficient and predictable way, they too have an absolute prerogative to do so.
If a facility looks a good write, it should be written.
But while facilities will always be with us, they are subject to market forces just like anything else. If they don’t produce the ultimate returns underwriters require they will have to change.
The bigger the facility, the more it approximates towards a proportional treaty.
When stress occurs it is not the underlying premium rates that take the strain, it is always commissions that flex first. They are the only taps and valves that can be tweaked on the otherwise monolithic and binary underwriting machine.
You’re either on or you’re off – but if you’re on with a couple of points of commission out of the broker’s pocket and into your net premium account you may start feeling a bit better about the arrangement.
This is why our story of carrier pushback against Aon’s Client Treaty (ACT), while a great piece of journalism to shed light on one of the most opaque corners of the market, can hardly be a surprise to anyone who has been observing the accelerating deterioration in London market results of the past two years.
Indeed, the correct response might be, “What took them so long? –”
Back in the early teens, when the facilitisation boom was upon us, a moral panic swept over the global wholesale, specialty and reinsurance market.
At the time we cautioned that as long as these arrangements were transparent, they had a legitimate place. We also noted that they always arrive in soft markets and tend to depart in harder ones.
In harder markets broking becomes more difficult. Facilities get squeezed and all big lines tend to shrink.
What was one quote and two clicks into a facility with excess layers taken 100 percent by a couple of global carriers can become a multiple negotiation with 25 counterparties and a patchwork quilt of layers, each with differing opinions to be accommodated before the firm order can be cleared.
It is labour-intensive and client budgets take time to adjust upwards, but in the final reckoning the increase in pricing more than pays for the squeeze on brokerage.
Brokers that slim down too much in the soft phase can miss out on the uptick.
When it is all hands to the pump, having enough hands to get the job done suddenly becomes extremely important.
The best brokers are never institutionally lazy – just lazy when they can get away with it.
Right now, it is all hands to man the phones and the broker with the most hands is going to do very well indeed.