October 25th, 2010

Reinsurance Broker as Trusted Strategic Advisor: The new standard of performance

Posted at 1:00 AM ET

zaffino_013_croppedPeter Zaffino, President & CEO
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Not long ago, the primary responsibility of the reinsurance broker was the structuring and placement of reinsurance, the collection of claims and creating the legal documents for the reinsurance transaction. We were “transaction engineers” for the reinsurance placement on behalf of our clients. But times have changed, and it has dramatically altered the role of the reinsurance intermediary.

In the 1990s, the industry started expanding globally with large insurers and reinsurers assuming risk across greater geographies and lines of business. We viewed the emergence of new technologies, which changed the way risk was analyzed and managed. We also began to witness the emergence of a new market for risk transfer to investors in the form of catastrophe bonds.

Since then, the practice of risk management has become increasingly sophisticated and today’s environment bears little resemblance to 20 years ago. Perhaps the most significant change has been the development and emergence of models…models that quantify risk exposures, can support underwriting decisions and assist in calculating capital adequacy and allocation, as well as models that help optimize capital.

The influence of technology on our industry cannot be understated. Instantaneous access to information combined with the ease with which capital flows in and out of the industry have only increased the number of viable alternatives for effective risk and capital market management. The reinsurance buying decision is therefore, more complex, and buyers are likewise more sophisticated and more demanding.

Making the reinsurance decision more complex is the fact that regulators, rating agencies and shareholders have higher expectations about financial conditions and capital strategies. Solvency II in Europe is just one example. Consequently, it is vital for executives to demonstrate that they have addressed systematic risks, allocated capital appropriately, and can still produce an adequate consistent return over the entire cycle.

At Guy Carpenter our brokers have a deep understanding of their clients’ risk and capital management goals. As a result, we are increasingly being asked to compare reinsurance with other risk and capital market solutions. To support the delivery of leading edge advice for clients, we have invested in the development of proprietary tools that analyze risk, model portfolios and preview potential outcomes of decisions regarding reinsurance and capital management strategies.

Our objectivity and unique capabilities have made us trusted strategic advisors to company executives concerned with a broader range of issues in addition to reinsurance purchasing. We advise clients on ways to view excess capital that is consistent with their strategic objectives. This may include advice on M&As*, share buy-backs or increase in dividends or expansion of their current geographic footprint. We also assist clients with alternative forms of risk transfer - through cat bonds, side cars, and ILWs, to outline a few alternatives. Providing capital advisory services has become an increasingly important role for reinsurance intermediaries.

Preparing Guy Carpenter brokers to deliver value at a higher level requires a commitment, and ongoing investment in our people. We begin by hiring the best talent, and then provide ongoing training, and we provide the best analytical tools in the business. We believe our brokers are well equipped to advise our clients on the critical issues they face, while still executing the reinsurance transactions they’ve grown to expect. It’s a unique position, but our clients are growing to appreciate this broader expertise and offering, given our broad industry knowledge and deep understanding of their firm.

The times have changed for our industry. The challenges are more complex, and the role of the reinsurance intermediary has evolved to deliver more fully integrated risk and capital solutions. So we’ll say goodbye to the “transaction engineer” of yesteryear, and usher in the era of the “trusted strategic advisor.” It’s the new standard of performance for today’s reinsurance brokers.

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* Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.

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