Hard Market Realities Test Broker-Underwriter Ties

Nevertheless, he thinks the culture between the Lloyds broker and the underwriter is still too incestuous.

It is wrong to suggest that cozy broker-underwriter relationships are purely a Lloyds-specific phenomenon, said David Shipley, active underwriter for MAP, a Lloyds managing agency in London. "That was absolutely the case worldwide. In fact, Id say that was led from the United States."

"The corporate culture in a number of underwriting organizations around the world was such that they believed the most important thing was the good will of the major brokers," he said. "Everybody now understands that the most important thing is to build a profitable book of business."

Mr. Shipley said underwriters had their fingers burned in the soft market via the prevalent use of volume over-riders (also known as contingency fees), which brought in a lot of business from brokers that had extremely bad loss ratios. He said such arrangements are much less prevalent today because underwriters are no longer buying business. "They dont have any need to. They can write whatever business theyve got the capacity to support," he continued.

"The balance of power between the broker and the underwriter fluctuates," according to Stephen Catlin, chairman of Catlin Underwriting Agencies Ltd., a London-based Lloyds managing agency.

"Only three years ago, the balance of power was in the brokers hands. Ive seen that swing backwards and forwards probably four times now in my career, and Im quite certain its going to happen again in the future," said Mr. Catlin, who also is chairman of the Lloyds Market Association. "At the moment, the balance of power is largely in the underwriters hands because of the hard market."

"We can pontificate about who has the most power, but at the end of the day, its really a matter of looking after our clients interests," said Ross McKenzie, chairman of Aon Re International in London.

Mr. McKenzie, who is also chairman of the London Market Insurance Brokers Committee, said that "if any power formerly rested in the hands of the brokers, it is no longer the case," noting that this is not only a function of the hard market. "These days, underwriters pay a lot more attention to the requirements of their owners and their financial performance than perhaps was the case in previous years," he added.

"Sure, the big brokers have got a lot of business, but there are some bloody big underwriters at Lloyds now as well," Mr. McKenzie said, noting that the five biggest groups at Lloyds are all owned by international corporations, "so there is equal leverage in the market."

How does an underwriter resist the power of an intermediary in a broker-driven market, or, indeed, when the insurance market again becomes soft?

Mr. Catlin said the alleged power of the broker is in peoples minds. "Its there if you allow it to be there," he said, noting that an underwriter has to be prepared to say, "'No, Im going to leave my pen in my pocket.'"

At the end of the day, he continued, brokers need the underwriters as much as the underwriters need brokers. "Its really a question of the strength of the business and the strength of the character of the underwriters," he said.

"You have to manage the broker-underwriter relationship in a disciplined way," said Mr. Cooke. "You have to create the right sort of relationship between the people who bring you the business and the people who employ you to write that business."

This is done, in part, through the compensation culture, he explained. "We reward them strictly on an underwriting profit, excluding investment income," he said, noting that Markel is trying to reinforce through compensation the fact that underwriters cant afford to write business that isnt going to be profitable.

When the broker comes to an underwriter and says, "'I took you to Wimbledon last week, its my sons birthday and youre his godfather, and, by the way, can you help me out on this risk,' the underwriter should be able to say, 'I wont be making a bonus if I write this account, and, secondly, I probably wont have a job,'" Mr. Cooke emphasized.

In the past, Mr. Cooke noted, when underwriters lost their jobs, brokers used to help them find new ones, he said. "Right now, there arent a lot of jobs available for underwriters, and there are a lot of former underwriters who are looking for employment," he said.

"Youll always find brokers who will try to find jobs for underwriters who have done them good deals," said Mr. Catlin. "You can be pretty certain that if a broker is working very hard to find an underwriter a job, that the underwriter has done rather more for the broker than he has for his shareholders."

Mr. Shipley acknowledged that brokers still get underwriters jobs, although on a much more limited basis. "The entertaining thing about that process is that these underwriters, having suffered through a long soft market, become brokers and now have to suffer through a hard market," he said.

Mr. Shipley said he could name names, "but that would be unkind."

Mr. Cooke emphasized that it isnt just compensation that gets the job done. "What youve got to do is create a culture where in fact there is a greater incentive to get it right and to reward your shareholders, and do the right thing every day," he said, noting that this is accomplished by communicating a corporate ethos. "Frankly, thats one of the things that Ive been most positive about at Markel over the last two-and-a-half years because we have now achieved that kind of culture," he said in a July interview.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.