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Large broker M&A is 'damaging' to the insurance market, says industry CEO

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Large broker M&A is 'damaging' to the insurance market, says industry CEO

Large broker mergers and acquisitions "could be damaging the structure and health" of the reinsurance and specialty insurance markets, according to Jason Howard, CEO of insurance and reinsurance broker Beach & Associates.

Speaking Jan. 17 at an Insurance Institute of London lecture, Howard suggested that as large brokers get bigger and competition dwindles, their ability to push insurers and reinsurers for higher commissions is enhanced.

"In my opinion, whilst pricing can have a cyclical element to it, this M&A is structural, and represents a greater threat to underwriters' profits," he said. Brokers, he added, "will do all they can to control their costs, but they are unlikely to lower their commissions any time soon. And if the number of distributors reduces, there is less opportunity to get the business elsewhere."

The debate about the biggest brokers' market influence reignited after Marsh & McLennan Cos. Inc.'s insurance broking unit, Marsh, agreed to buy Jardine Lloyd Thompson Group PLC in September 2018. The deal is expected to close in spring 2019.

'Inefficient' market

Insurers and reinsurers could combat this, Howard said, by finding a way to access risks without the "expensive frictional costs" of the current insurance distribution chain, which he said has "a whole lot of mouths to feed" and is "very inefficient." The chain often contains multiple intermediaries, including retail brokers, wholesale brokers, reinsurance brokers and underwriting agencies, in addition to the insurers, reinsurers and capital markets investors that participate in the industry.

Shortening the distribution chain, however, is easier said than done, he said, in part because "most technology initiatives, especially in insurance and reinsurance, don't look to disrupt this chain, they look to reinforce it."

But he added that "smarter reinsurers" were finding ways to get closer to the risks in a bid to cut distribution costs and improve profitability, as they cannot necessarily expect big price increases to boost profits in the same way they once did.

'Time to start planning'

As shown at the Jan. 1, 2019, renewals, reinsurers are increasingly unable to secure the price increases they expect following catastrophe losses. Property-catastrophe pricing was relatively flat outside loss-affected areas despite a heavy catastrophe burden in 2018 and a deterioration of claims from the 2017 catastrophes.

Howard said loss-hit property-catastrophe reinsurance prices increased by more than 10% at Jan. 1, but he added that according to Beach's conversations with reinsurers before the renewals, they had been expecting increases of around 20%.

Howard put the shortfall down to an abundance of capacity, the persistent presence of capital markets money, and catastrophe modeling, which he argues limits price movements to a specific range. He noted that catastrophe business continued to make up "the bulk" of the industry's profits.

If the ultimate bearers of the risk are unable to control pricing to achieve the returns they are looking for, Howard said, they would have to find a way to lower distribution costs.

"Some brokers are naturally reticent to engage in this conversation, because they see their earnings from the chain diminishing, but efficiency will come one way or another, so it's time to start planning," he added.