Broker revenues reflect the firming. But what of the value in the chain?

In reporting their results today, two of the largest reinsurance brokers displayed growth in revenues and business opportunities in the current firming market conditions, which suggests their profits should increase further over the coming months, as the benefits of harder reinsurance rates globally begin to flow through to their bottom-lines.

The reinsurance brokers in question are Guy Carpenter, part of the Marsh & McLennan Companies, and Willis Re, the reinsurance arm of the Willis Towers Watson group.

Guy Carpenter’s reinsurance related revenues are broken out by Marsh & McLennan giving perhaps the best picture so far of how brokers will ride the wave of hardening reinsurance rates to ensure they boost their profits. Our sister site Reinsurance News’ full report on the MMC results can be read here.

Guy Carpenter earned MMC $433 million of revenue in the second-quarter of 2020, which is up by 9% on an underlying basis, the company said today.

For the first-half of 2020, Guy Carpenter’s underlying revenue growth was 8%, to an impressive $1.26 billion, again extremely positive for the company.

Of course, helping to drive the growth at Guy Carpenter is the inclusion of JLT’s reinsurance broking revenues into MMC’s. But after breaking this all out the growth is impressive at this close to 8% level for the first-half of the year.

Also reporting today was Willis Towers Watson (WTW), full results review over on our sister site Reinsurance News.

WTW reported a 2% organic growth increase for its Investment, Risk and Reinsurance division, where Willis Re sits.

“Reinsurance and Wholesale growth were driven by new business wins and favorable renewal factors,” the company explained.

The organic revenue growth of that division at WTW doubled for the first-half to 4%, as these favourable renewal results and business wins drove higher profits for the firm.

There’s further evidence of broking businesses being driven by renewal and rate trends in the results from BGC Partners today as well, the owner of Ed Broking.

BGC explained that its insurance brokerage related revenues were up 11% year-on-year in Q2, reaching $45.9 million.

BGC Partners said that its re/insurance broking revenues were drive up by, “previously hired brokers and salespeople ramping up production and favorable pricing trends for insurance renewals.”

Brokers tend to ride the wave of renewals trends, especially in hardening markets.

Given the continue to charge lump-sum, percentage and commission type rates, for placing reinsurance in particular, as reinsurance pricing hardens broadly the broking community has a time to make hay.

This is also true in the capital markets and insurance-linked securities (ILS) arena, where brokers will also have benefited from activity in the catastrophe bond market over recent months, as the pace of issuance will also be driving some of these reported reinsurance revenue increases, for Guy Carpenter and WTW at least.

Aon reports tomorrow and we’d expect similar, although a recent changing of the guard at that company has perhaps been focused in its reinsurance division which could hit production to a degree over the shorter-term.

While the market hardens and brokers grow their revenues, while the percentage of every reinsurance and major risk transfer transaction that goes to intermediation and brokerage fees doesn’t change, it once again raises the question of whether it’s time for a new way of pricing for a broker’s services.

Perhaps a broadly hardening reinsurance market is the appropriate time to again question how broker fees and commissions are broken down? As the market and cost of capacity could be so much more efficient if brokers charged for the value they add, rather than continuing to base fees around the placement or transaction, especially when so many of the placement aspects (the matching of risk and capital) can be more effectively achieved using technology platforms these days.

We’ve questioned this before, when we discussed the fact that in the modernising insurance and reinsurance marketplace, it’s increasingly vital to be able to identify the value you bring to the risk-to-capital chain and to be able to monetise it effectively.

Two years on, the market hasn’t really changed in this respect. Parties continue to be compensated even when they aren’t bringing maximum value to a specific piece of the chain or transaction and, at the same time, in many cases value isn’t being charged for either, at least not properly.

That’s the problem with a bundled costing approach. It often overcharges, or it under-compensates.

Will we ever get to the stage of sophistication where a broker charges based on the actual range of services it brings to a program or placement?

The origination, risk analysis, portfolio and capital modelling, relationship building, structuring, and vast array of other services that modern brokerages provide, are all valuable and deserve to be monetised properly.

Yet still we see blanket percentage-based charging in the market, which is part of what helps brokers ride the wave of a firming market as well.

This dynamic has become a driver of the desire to own and hold onto the entire transaction lifecycle, rather than relinquishing control of areas of the chain that technology can ultimately do much more effectively (placement, syndication, distribution and the like).

It also leads brokers to assume that their technology will always win out, given it is bundled with everything else they’re offering. However, in the majority of cases, it just isn’t the best technology in the marketplace. In fact, any really widely used piece of tech in the reinsurance market is unlikely to be the best available any more, except perhaps in a few niche areas.

How (if) brokers transition to sustainable pricing and charging methods, to ensure that the value they bring to the market chain is fully compensated, while allowing modernisation to accelerate and their clients to be more platform agnostic (which will be better for them all) remains to be seen.

The unbundling of the market chain and hence the unbundling of the transaction lifecycle and placement of risk to capital, should benefit everyone, but it also sets up new fields of competition.

As I’ve discussed before, the coming “great unbundling” of the reinsurance risk transfer chain is needed before efficiency can truly flow through the transaction itself, down the chain, to the benefit of client and savings be passed on.

While at the same time allowing those actually adding value and that are able to clearly demonstrate it to recoup some of the margin they could otherwise lose through the developing service tier of the risk transfer marketplace.

This still appears to be the way we’re headed, as advanced technologies take on specific pieces of the chain and the ambitions of capital providers begin to force greater efficiency into the system as well, which has always felt like an inevitable change that’s coming from both traditional and alternative capital sources (speak to the leading PE firms and hear how repetitive they are finding so many of the same old reinsurance start-up pitches right now).

Hence the brokers may be keener than ever to maintain their hold on the client relationship and transaction, or program, lifecycle while the market hardens and they benefit from rising organic revenues over the coming quarters.