On Wholesalers Endangered

The heydays of wholesale broking into the London Market may be over

The heydays of wholesale broking into the London Market may be over

The increasing dominance of the global brokers and the economic leverage that this provides is a strategic challenge for all insurers dependent upon them for significant premiums flows. Responses in the industry have varied but a growing number of companies are re-engineering the way they procure business from the big three; either paying to obtain data services or participating on proprietary risk placement platforms and in some cases offering automatic facilities to capture portfolio slices, or all of these things.

The big boys are making no bones about their desire to radically shorten the list of carriers they use so being viewed as a ‘strategic partner’ is becoming a necessity for insurers if they are to avoid being commercially marginalized. Yet in the London Market many underwriters enthusiasm to wholeheartedly embrace the big three has been tempered by a loyalty instead to the independent wholesale broker network. At least that was arguably the case until recently but attitudes may soon change.

In October it was reported by Insurance Insider that wholesale broker Miller, strongly independent in character, was in advanced discussions about selling to the Willis Group, the world’s third largest broker. This followed the news that JLT, a large but predominantly wholesale business was re-entering the US retail market to get closer to the customer. Those clinging on to wholesaling for their revenue are recognizing the need to scale up in order to survive as evidenced by the tie-up deal that RK Harrison and Hyperion are reportedly working on. This rush of activity led Tom Bolt, Lloyd’s Performance Director speaking at the Xchanging conference last week to declare the heyday of the wholesaler to be long gone and not coming back any time soon.

In a world of cross-border connectivity, enabling technology and stricter customer conduct regulation, the pressure to engage more fully with the end-client and deal directly with their retail broker is likely to lure underwriters away from wholesale and towards shorter channels of distribution. To the extent that this might also repair a perceived cost disadvantage of trading with London, then it is a trend that most will find hard to objectively argue against. However, the problem for underwriters is that there is a vast amount of specialist product expertise, market acumen and deep relationship history residing within the independent business producers. If the market moves too aggressively away from wholesaling, the danger is that a key source of competitive differentiation for London and Lloyd’s may disappear along with it.

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7 Responses to On Wholesalers Endangered

  1. There will always be times when the greatest pressure is on access to carriers and others when control of the customer is key. In a soft market it is not surprising that wholesalers come under pressure. The paradox is that as we have increased transparency and broadened access to Lloyd’s we have taken away the status of the smaller wholesalers as “insiders”. Now that we are all invited into the tent we see that there is actually a smaller inner sanctum where the real deals get done… And the global brokers are the door keepers. Of course, skilled brokers can persuade some carriers to do deals outside but we have to remember that the more people that we have inside the tent the less status there is attached to being there.

    • Isaku Murakami says:

      Torquil-san, What you mentioned here is indeed so true that the only professionals dedicated to their life(a little exaggerated), a pride to capture their clients and its market to provide the best risk solutions by taking such risk exposure on behalf of them to be placed via syndicates and beyond depending on the terms/conditions and its capacity.

      I always mentioned that it was exactly the same as the Tsukiji Fish Market which was the world biggest fish market to do the wholesale their fish like Tuna started with the auctions at 5am in the morning to 11am to finish their day for a cold beer.

      There is approximately 1,000 wholesalers who can recognize the market value of the fish on the day(knowing a risk exposure of the risk-taking) via auction(at Lloyd’s), then to sell them to the retailers coming to the market from fish shops, restaurants, sushi bars, super market, etc..,
      like Lloyd’s syndicates dealing with brokers for the terms/conditions and the premium negotiations.

      Everyday, more than 30,000 got together around the Tsukiji to form the Living Market in town like the City.

      The ordinary people as the end-user(consumer or foreign tourists) can have a Sushi in Ginza where is only 5 minutes’ walking distance from Tsukiji at tripled or sometimes more at a famous Ginza Shushi Bar for the cerebreties with an extreme Omotenashi hospitality by a national treasure-kind-of expert Shushi Cook like a late Andrew Beazely to accept the risk at his syndicates, I assume!?

      Anyway, make a long story short, the carrier’s market and the global broker’s market is availavle to purchase at GDB560,000 or more and yet they cannot capture a real risk exposure of the customers(clients) but the insiders can!

      Good to know who knows the risky business in the City like you, McLusky-san!

      Please join me for the Sushi Lunch with a good sake at the Tsukiji Fish Market when you’ll have a chance to visit Tokyo in future or definitely in 2020 Tokyo Olympics.

      Warmest regards and wish all the best for you and your loved ones from Tsukiji, Tokyo….isaku

  2. Great stuff as usual Roger. The only thing that matters is that wholesalers have to add value – if they don’t they are just rent-gathering expense that deserves to be blown away.

    Back in mid-late nineties we all already thought the writing was on the wall – yet look how Hyperion and RKH have managed to grow virtually zero in that same period. They must have been doing something right to succeed seemingly against the odds.

  3. The consolidation and concentration that Roger highlights leads to business models that are more complex and business relationships that are more interwoven. This creates ideal conditions for ethical risks such as conflicts of interest to multiply. No wonder internal auditors at London market firms recently pointed to ethical risk as their number one emerging risk.

    Executives will of course point to their governance arrangements as countering such concerns. Unfortunately, that alone will not suffice, as several FCA/FSA final notices over recent years demonstrate. What the FCA will pay particular attention to over the next year or two will be a) ethical culture and b) whistleblowing. These will signal whether those in charge are indeed ‘walking the talk’ or playing a game of smoke and mirrors. The significant persons regime will then personalise the FCA’s response and be used to signal the seriousness with which particular behaviours are judged

  4. Paul McGee says:

    Roger, another excellent thought provoking article.
    Last week I gave a presentation which highlighted the point you make about the length of the distribution chain. Think local insured, retail and wholesale intermediary, MGA, Insurer, Reinsurance broker, Reinsurer ……
    In recent decades we might have profiled the multiplicative and so challenging effect of commission slicing off the original premiums making it hard for the eventual carrier to make sustainable profits.However ( and this exemplifies the real wind of change you can almost touch in 2014) now it is more the lack of proximity between end carriers and original insureds. Shortening that chain and making it more visible is an inevitability. Cost reduction is a motive and technology will help but regulatory pressure taking the side of the buyer seems to be the real driver.The questions, and i think these will drive transparency of services, is : what is the real value being added at each point in the chain and is the fee commensurate with that service? Honest answers are part of the new ethical culture and will define who stays in the chain.

  5. Pingback: Is the London market sailing in troubled waters?Ethics and Insurance

  6. Isaku Murakami says:

    Roger-san, highly respect your deep insight and warning to Our Industry from a personal view but not from your employment of course!

    What you mentioned here is so accurate and true as a person dealing a Risk Business in the Market(in the City and beyond as globally).

    In Japan, as you may know from your part of employer, ironically we are ending up to the monopolized Mega three Carriers occupied more than 98% domestic market and there was absolutely not a single broker in action due to the very strict/unrationalized rules set up by FSA(with Major Carriers to help them evacuate Foreign Brokers to do their business in Japan!)

    So, the Willis Networks never works in Japan, Assurex, Globex, WBN and even Owned-Networks never worked in the way they should due to the above monopliy carriers with their Agencies to obey their orders 100% without hesitation as a sub-contractor to earn an agent commision.

    We do have a retail shop in Ginza street or via Internet to sell the Insurance Products(mostly a Life Insurance and Automobile Insurance) out directly to the customers as a kind-of-a-multiple insurance agencies to give customers a comparison data sheet to choose what is suitable for them with a little help from the agency staff. (FSA recently gave penalty to such a retail shop for guiding customers to the higher commision products as it was occurred back in US many years ago as so-called ‘Bid Rigging Incident’.

    Anyway, make a long story short, I still want to believe that the London Market with Lloyd’s should be the only living underwriters market for our industry, not the retail market both for a business nor a personal like the Tsukiji Fish Market where more than 40,000 fish wholesalers/retailers gathered every morning from 5am to start their bidding for carrying out their business as professional to know what is good and what is bad for their end-user as their true customers and Our Fish should be a Risk Exposures, not a Money to put the company for bail-out!

    We all need to remeber what kind of Industry we have been for more than three centuries around the world.

    Mr. Tetsuya Minakata was the only ‘Name’ at Lloyd’s London as a Japanese from when I joined Konan and his ancestor Mr. Kumagusu Minakata as a frist Japanese worked at the British Museum in 1895.

    Well, history may be repeated but we need to know who are carrying their Risk Files at the Pub around the City from morning to evening like Tsukiji Fish Market!

    By the way, Roger-san, you’re always welcome to have the Sushi Lunch at the Tsukiji Fish Market whenver you’ll visit Tokyo for the Management meeting with your parent company or in private, definitely in 2020 Tokyo Olympics which I’m one of the core Management team of the Tokyo 2020 Olympics Task Force which I extend my invitation to this group either at your work or in private.

    Warmest regards and wish all the best for you and your loved ones from Tsukiji, Tokyo,
    Isaku Murakami
    Senior Risk Consultant
    Konan Insurance Brokers
    Tsukiji, Tokyo

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