Reinsurance broking
Intermediation between cedents and reinsurers, a highly concentrated activity whose players supply modeling, capital analysis, and structuring advice on top of placement.
On July 26, 2021, Aon and Willis Towers Watson called off their merger, a month after the US Department of Justice sued to block it, citing excessive concentration in reinsurance broking. Gallagher bought Willis Re right after, closing in December 2021, and the top of the market narrowed to three groups, Aon, Guy Carpenter and Gallagher Re. The reinsurance broker's offering has moved so far upstream that placement is where it ends. It models the cedent's catastrophe exposure, prices the effect of several structures on regulatory capital and earnings volatility, produces the analytics that serve as the common basis for negotiating with the lead, places the program and services claims. Concentration gives the big brokers an aggregate view of rates and retentions that no single cedent or reinsurer has. Compensation raises the other question: historically a brokerage commission deducted from the reinsurance premium, hence paid by the reinsurer, while the structuring advice goes to the cedant. Fees, increasingly common on large accounts, answer that conflict of interest without having removed it. On treaty business the commission historically ran at around ten percent of premium, and it has been falling since. What the broker sells first is access: a mid-sized cedant does not know the fifty markets that might write its top layer, and no reinsurer can afford to analyze every portfolio in the world. The broker also drafts the slip and the wording, and administers accounts and claims for the life of the treaty.
Gallagher's acquisition of Willis Re, completed in December 2021 after the Aon and Willis Towers Watson merger was abandoned, reshaped the top of the reinsurance broking market and left three dominant groups. The consequence for a cedent is concrete: choosing a broker now means choosing a set of models and a capital analysis as much as a contact book. A French mutual mandates a broker in 2026 to place its 300 million euro program, against a commission of 8.5 percent on 12.7 million of premium, about 1.08 million. The broker produces an exceedance curve model, restructures the tower into six layers instead of four, and obtains a total cost 1.6 million below the expiring program, a net saving of 520,000 euros after commission.
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