Spotlight on…wholesale broking
Wholesale broking has had some dramatic peaks and troughs of activity in the past decade, but does the combination of a hard market and a global pandemic mean 2020 is time to end the rollercoaster ride?
It has been hard work being a wholesale broker in the past 10 years.
In the frothy market at the start of the decade they were cast aside as unnecessary, only to end up as some of the few able to penetrate the hardest market in years.
But if there is one thing these businesses are good at, it is finding opportunity – and there has never been a greater one than today.
That was then
“Five or six years ago, there was a real trend for brokers to try and eliminate the use of wholesale brokers and do it all direct,” says Peter Blanc, CEO of Aston Lark. “Of course, when you're in a market where every underwriter wants to take on every piece of business they can possibly can, it's easy.”
Wholesale brokers have also seen business drift away from them, and London, for other reasons.
“We were seeing a year-on-year reduction of premium placed into the Global Broking Centre (GBC), UK,” says Nick Gillett, chief broking officer at Aon UK. “With increased appetite of some local markets in certain jurisdictions to retain more risk, along with the increased prevalence of some of the Asian carriers and Middle Eastern carriers to diversify their portfolio and write business from other areas of the globe, the overall wholesale premium number coming to London had diminished.”
Indeed, Aon’s GBC’s overall premium numbers down around to $3.3bn in the doldrums of the mid-2010s.
“It was only really about 24 months ago that we started to see a hockey stick increase,” notes Gillett. “And significantly more premium coming through GBC on a wholesale basis.”
In 2019, the GBC placed about $5.25bn into the London and European markets, from over 125 different countries – which is about 19,000 policies and 6,000 clients.
It’s clear that the market hardening all over the globe has provided a shot in the arm for wholesale brokers.
“We've gone completely full circle from a situation where everyone wants to write everything to a situation where nobody wants to write anything,” Blanc explains.
It is in this kind of market that the wholesalers come into their own, the brokers say.
“What gets business placed now is trusted relationships,” notes Blanc.
And wholesale brokers make it their business to have these relationships. It stands to reason that, with a limited book available, an underwriter will choose a broker they know and trust. A hard market, exacerbated by low investment returns, is no place to start choosing a new group of untested business connections.
It is vital that an underwriter knows the broker has their back, says Blanc, as reputations built over years can be destroyed by one poor deal.
This is now
These relationships have proved vital amid the lockdown environment.
“One of the reasons we've managed to continue to be able to place business into the market is because of the longevity of relationships that we have with our major carrier partners,” Gillett explains.
Relationships that have been built over decades are unlikely to fall apart in six months. Additionally, apart from sharing a coffee or after-work pint, they also don’t really need to change.
“You can communicate by WebEx, Zoom, Teams and still look into the eyes of the underwriter,” he adds. “Because of that longevity and relationship, there's trust on both sides.”
If anything, lockdown has served to strengthen the wholesale brokers’ hand, according to Blanc, as forging a relationship over Zoom is a challenge. And it has helped make business more efficient, too.
“Wholesale broker friends say they are getting better engagement with the underwriters now than before, because there's no time wasting, no half an hour's worth of coffee and chit chat before getting to the nub of what they're there to do,” explains Blanc.
This efficiency is something the sector needs to grab if it is to keep hold of some of this momentum. Luckily, many are already embracing the challenge.
“It's important to continuing to add value in the chain, by exploring innovative solutions on unmet risks clients’ face, and providing more cost-effective ways of accessing the market capacity, especially around smaller market solutions,” says Gillett.
Unlike banking, which went through the Big Bang in the 1990s, the insurance business in London has been transacted on a relatively antiquated system.
However, Aon, along with many others, has been digitising and streamlining much of its operations in London in recent years.
Initiatives like the Lloyd’s Placing Platform Limited (PPL) and other electronic placement devices have been proving themselves during the pandemic and could hold the key to the wholesale broker’s future.
Aon has seen PPL stats go up significantly in terms of firm orders and submission quotes, with the average response time for underwriters to firm orders reduced from four days to one and a half.
“It shows that we can evolve as the London market, and will need to push further electronic trading and digital solutions as it will assist in attracting more business to the London market, which will be recognised as a very cost-effective way of placing your business,” explains Gillett.
There will need to be some real face-to-face contact, however, as a new generation of brokers start to climb the ranks. If it is tough for one-time retail brokers to build a relationship with an underwriter, newbies to the business face the same challenge.
Overall, it is unlikely – in the short-to-medium term at least – that the world will return to how it was, so wholesale brokers need to bank their gains now and make plans for the long term while they are still playing an advantage.
Blanc at Aston Lark thinks the profits underwriters make in 2021 will trigger many of their currently absent competitors to return, which will shake things up immediately.
“It will be a relatively short-lived hard market,” he says. “But the crucial bit for underwriters and brokers is to not lose sight of the end clients. Because if you are seen to be price gouging and just extracting money because you know people have nowhere else to go, yes, you'll get away with it and they’ll pay the money this year, but, oh boy, they won't let you forget it next year.”
Many in the wholesale broking sector see the hard market and the impact of Covid-19 as an opportunity for themselves and underwriters to together to create long-term relationships with clients at sustainable rates.
“Let's go to the clients and say that we can see the market softening, so we're going to agree a three-year deal at these rates,” Blanc says. “Let's get out of this rollercoaster. Let's get something that's sustainable and that works for you and works for us.”
It might need a change of mindset, but to create a balance in the London market, it is important the shift is made.
“A skilful wholesale broker is one that actually keeps the interests of the customer in mind, while protecting the underwriter,” says Blanc. “It is a real tightrope walk to balance, but skilful ones can be worth their weight in gold.”
And as the gold price is on a bit of a tear this year, it could be a wise idea for the sector to listen...