The quota-share, that simplest of arrangement where premiums and claims are split by the parties in a pre-agreed fixed proportion, is losing its innocence. Traditionally constructed as a treaty between an insurance company and its reinsurer, a quota-share offers the purest alignment of interest and remains the favoured approach for those providing risk capital to risk takers. You win, we win. You lose, we lose. It generally works because the parties are pursuing a common objective; to make an underwriting profit.
Yet from the shadows a racier version of the quota-share is emerging where capital providers are said to be contracting directly with brokers rather than insurers. The challenge with doing that is fairly obvious. The broker’s loyalty is to his client whose interest clearly takes precedence over that of the insurer; the party taking all the risk. As any couple will testify, rowing in opposite directions is a sure route to a rocky marriage. Nevertheless, some very impressive companies are reported to be at it so the practice is a version of underwriting to be taken seriously.
The commoditisation with scale of capital delivery direct to distributers that by-passes specialist insurers is a long term trend that will unnerve the London Market if it catches on. An industry sector built upon the provision of tailored risk, product and class based underwriting might find itself heavily marginalised in such a world: all the more reason that the specialists must re-double their effort to ensure that they remain relevant and add value.
Credit is due therefore to Beazley, who announced not one but three interesting risk underwriting initiatives last week. Only time will tell whether forming a construction insurance consortium; offering an on-line cargo product to regional brokers; or opening in Miami to develop Latin American reinsurance business will prove to be worthwhile or profitable. Nevertheless in deepening product capability, using technology and extending market reach, they all are logical strategic steps towards Lloyd’s vision of 2025.
In a similar vein last Thursday a team of enthusiastic Kiln underwriters resisted the lure of the opening day of the Lords test and instead headed to Riga, the capital of Latvia. Open for business with a close affinity for international trade and transhipment, the Baltic States are high growth economies in the heart of Europe. Thirsty for product information and technical support, young and eager to learn, local intermediaries were easily drawn to the marine product seminar the Lloyd’s underwriters hosted.
Insurance remains a people business and London based players are better than most in cultivating commercial relationships that stick. Endangered maybe, but those risk underwriters who have the desire and play to their strengths with far greater vigour, have every chance of prospering even in a world that is changing around them.