January 13, 2021
The emergence of star players at challenger brokers is a key theme for 2021, as I highlighted at InsTech London’s recent predictions podcast. But with the clock ticking to show results, and the human impact likely muted by the ongoing pandemic, it will fall to challenger brokers’ technology propositions to fill the gap.
As early as 2019, the Insurance Insider declared the death of Tier 2 reinsurance brokers, with Guy Carpenter’s effective acquisition of JLT Re leaving an enormous gap between Tier 1 brokers Guy Carpenter, Aon and Willis Re, commanding more than a billion in revenue each, and the Tier 3 brokers who muster around $500m a year collectively.
With Willis Re set to disappear into the Aon group, the competitors for fourth place will instead be fighting for a bronze medal roughly one tenth the size of its silver rival. Or, if as some commentators have suggested, Willis Re pairs up with the new Gallagher Re (and Capsicum Re) team, we will resume a scenario where the fight for fourth place is something of an anachronism.
But perhaps size won’t be everything in the new reinsurance broking world. Particularly when over the last two years, the big clubs have seen an alarming number of their star players go missing, likely anticipating the fallout of duplicated roles and the opportunity – as the European Commission has identified – of narrowing customer choice.
Senior members of the Big Three reinsurance brokers were presented in 2019-20 with a generous choice of big fish roles across an array of small but growing ponds. And, with handpicked junior team members earmarked to follow along, a number of Big Three teams (and their clients) may well be concerned with the gaps they leave behind.
When Lockton Re CEO, Ron Lockton, declared in 2019 that his firm was ‘going all in on reinsurance’, it echoed across the spectrum of Tier 3 brokers. While Lockton Re’s aggressive hiring and compensation strategy may have raised eyebrows, it was also a clear sign that the supply of investor capital was more than ready to compete for top talent.
Following the announcement of JLT Re’s acquisition by Guy Carpenter, it was perhaps GC North America CEO Tim Gardner’s ‘shock departure’ that signalled the floodgates had opened. Yet one would be remiss not to notice how the same transaction helped fuel ‘over 140 significant broking, analytical and actuarial hires’ into BMS and BMS Re, following their own new funding from Preservation and British Columbia.
Aon might have been laughing at first, but between Warburg Pincus helping Steve McGill to get the band back together at McGill & Partners and Gallagher Re doubling down on former Benfield chief executive Grahame ‘Chily’ Chilton’s 2013 venture, high profile Aon brokers found many old friends to tempt them on to pastures new. Flexpoint Ford’s investment in TigerRisk, too, ensured the current number four broker retained plenty of headhunting firepower.
Observing recent rebrands, one might also note some intention to capitalise on the kinds of vertical integration that have made the position of the Big Three seem so unassailable historically. Capsicum Re is now Gallagher Re, and as if to remind us of the acquisition of Beach & Associates by Acrisure almost exactly three years ago, we saw the announcement of their own rebrand just last month, to Acrisure Re. Formally aligning themselves to their respective insurance groups, challenger reinsurance brokers are reminding markets that when it comes to turning the primary taps on and off, they have their own liquid gold to offer: specialty portfolios where unlike Tier 1 client treaties, the broker hasn’t already done the underwriting for you.
With yet another broker throwing their hat into the ring as recently as last week, as Ardonagh unveiled its new North America Reinsurance team, enthusiasm for alternatives to a reinsurance broking duopoly remains in high supply. Nevertheless – and despite a slightly hard(er) market – detaching clients from the Big Two or Three will be as tough as ever, and infighting may distract the challenger brokers from growing meaningfully as a cohort. Clients of smaller rivals like Holborn, RKH Re, UIB and THB might seem to offer lower hanging fruit, but if we are to truly see the return of Tier 2, competition with the titanic Tier 1 players is inevitable.
Key hires will emerge from the garden in 2021, but the pandemic might just keep them there. With London declaring a major incident and the ONS estimating that 1 in 30 Londoners have the virus, it’s hardly surprising that the Lloyd’s underwriting room has closed once again to support the UK’s national lockdown.
With most brokers and underwriters forced to work remotely for the bulk of the past year, the impact of heavy hitters may feel muted, not only for clients and markets, but also for new teams looking for leaders to set culture, pace, and direction. With the ‘wine and dine’ strategy somewhat out of the window, perhaps until May here in London, revenue targets will look like a mountain to climb from within the walls of a home office.
On the flip side, with evidence that teams can work from anywhere – and not only from the comfort of skyscrapers in the world’s most expensive business hubs – many challenger brokers CFOs and COOs must be enjoying a huge sigh of relief. The prospect of replicating the top tier’s fifty or more global offices and thousands of employees did not look good on any challenger broker’s balance sheet.
Instead, they will be seeking ways to squeeze the most from every team member, maintain access to the best reinsurers, transform the analogue client experience, and deliver results to shareholders.
That we have thus seen almost every challenger broker shift their narrative towards differentiation through data and analytics technology is hardly surprising. It might seem like a lot of talk, considering for example that Aon claims to ‘have invested over $1 billion to build the world’s leading repositories of risk, retirement and health data’, but there’s certainly something in the saying that the second mouse gets the cheese.
Traditionally a huge barrier to entry, technology cost is set to be a substantially lesser concern for the new breed of challenger reinsurer brokers. With some napkin math, it’s not inconceivable that they could equal their larger rivals’ capabilities – if not data volume – with barely a few basis points of the investment highlighted above. Setting up with zero legacy in what BCG terms a ‘maturing’ InsurTech ecosystem, newer reinsurance brokers have an enviable and affordable opportunity to thrill clients and markets with digital value propositions.
Perhaps no avenue of reinsurance technology shows the cost of being the first mouse more readily than that of placement platforms, where funds sunk into developing mono-broker platforms have historically led to disappointing results. Following early efforts to launch TigerRisk’s own globalRemarket platform, even CEO Rod Fox conceded that an industry dealing with a handful of broker systems ‘doesn’t make sense’ as multi-dealer platforms start to emerge.
Moreover, whilst Guy Carpenter and Aon could leverage their sheer size to impose in-house placing platforms on the market, this looks unlikely to be the case for smaller reinsurance brokers, unless they can truly win the hearts and minds of underwriters fed up with bouncing between several broker systems and traditional emails. More than likely, the challenger community will take advantage of third-party plug-and-play solutions that have already been approved by Lloyd’s.
Growth targets for the new breed of reinsurance brokers are substantial: Lockton Re, for example, set out a punchy $400m ambition requiring a near quintupling of their already substantial 2020 target of $85m. A grand long-term milestone for any tier 3 broker to aim for, it will still see them remain a far smaller firm than the billion-dollar Tier 1 brokers, but could precipitate the reinstatement of a nimbler Tier 2 category.
Technology is not a silver bullet for growth, and even with the most cutting-edge reinsurance technology, aspirations like these will remain a challenge for the challengers. That said, the right technology could be critical for creating the bandwidth that enables new brokers to compete with their larger rivals efficiently.
Take staff, for example; while a challenger broker is unlikely to (want to) match a Big Two or Three broker on headcount, we’ve already seen that with star players positioned well, they can compete like-for-like on talent. The trick is leveraging every one of these superstars to count for at least five traditional operators, something only imaginable through the automation of repetitive tasks bogging down reinsurance teams today.
Hiring and retaining the next generation of new talent will also rely on a seamless internal user experience that teams are excited to engage with. For TigerRisk CEO Rod Fox, ‘there is no reason we should be operating in a circa 20th-century model with emails and things like that’, and the rise in popularity of group chat threads, such as those used in Slack, WhatsApp, and Riskbook sets out a clear alternative. With placing platforms cutting out the noise, brokers can focus on delivering their true value; where ‘we’ve only scratched the surface in what is possible’ according to Acrisure Re CEO Jason Howard.
Finance is another compelling angle, with platforms like Riskbook costing brokers nothing and enabling them either to operate at a higher margin or to compete more effectively from a lower cost base. Sinking cost into internal IT development, six-person account teams, and international office expansions are just not going to cut the mustard for anxious shareholders hoping to avoid buyer’s remorse on their challenger broker investments.
And speaking of office expansions, access to markets requires at least some mention, given the instant worldwide interactivity afforded by modern digital communications technologies and the recent conditions under which they have become necessary. Leading placing platforms like Riskbook can enable brokers to share risks instantly with selected markets anywhere in the world, or even to make programmes available for searching and filtering based on underwriter appetite.
Perhaps during the 'new normal', our industry will shake off the habits of doing business only over luxurious meals, flying senior executives all over the world and holding conferences only in the most affluent settings imaginable (reminiscent of an idea floated by the Insurance Insider in 2019 to consider holding Monte Carlo somewhere else). One imagines how much more efficiently star players might be deployed in a digital world, without even a commute to worry about.
After all, that’s what it comes down to. Do cedents really care whether the broker stays up past midnight doing things the old-fashioned way?
The short answer, we had to conclude, was probably not.
Whilst placement platforms are, at least in Riskbook’s case, brilliant for staff, shareholders, and markets, they are largely invisible to the client. The ceding insurance company, sat listening to a challenger broker in the RFP and resigning themselves to continue with a Big Two or Three as normal, is unlikely to redirect placements to a new broker simply because that broker has a new system for trading with its underwriters.
So, we began our research. Months of interviews and working sessions with cedents, brokers, and reinsurers, to understand what new technology brokers could bring to the table, that might actually make a difference to their cedents' choice of partner.
We dug deep and interrogated the specific pain points and bottlenecks faced by ceded re teams. We saw how difficult it was to get data out of cedent systems and into the hands of brokers and reinsurers, complete and error-free. We heard the frustrations of outwards teams wanting to answer simple questions about their own portfolios, but waiting months for exhibits and results.
And so we set to work, with a potent combination of reinsurance, actuarial, and software engineering talent, iterating a groundbreaking solution in stealth mode. A solution that would be a game changer not only for cedent and broker collaboration, but also for reinsurers receiving data downstream via connections into our existing, ultra-secure placing ecosystem.
The result has changed our view on whether technology could make a difference to a cedent’s choice of partner; and accordingly, whether it could materially influence the growth of challenger brokers. The evidence from our pilots with cedents suggests we can make their lives so much easier, their placements so much faster, and their analytics so much richer, that the market might well be prepared to try something – or someone – new.
That’s why next month, we’ll be announcing something rather special. Because Riskbook won’t just be a top-of-the-range reinsurance placement platform anymore.
In fact, we’re about to create an entirely new category: an underlying force that will help the entire reinsurance ecosystem run faster, more smoothly and with better data than ever before.
But that, reinsurance friends, will have to wait for the grand unveiling in February.
Thanks for reading, and see you then.
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