The Value and Price of an Intermediary

by

Antonio D. Vila, FSA

Peter M. Wilson, CPA, FLMI

 

An abridged version of this article appeared in the Summer 2008 Actuarial Digest

Page 1

 

Last October at the Annual Society of Actuaries Meeting we attended the session on The New World of Financial Reinsurance.  One of the speakers posed to the audience the question, “What is the most important factor in entering into a reinsurance transaction.”  In unison the attendees responded, “Price.”  This reminded us of a survey of the reinsurance marketplace that asked respondents to name the three most important factors in choosing a reinsurer.  Interestingly enough PRICE was a leading factor all three times.

Financial strength of the reinsurer was the second choice overall. Long-term relationship and general service were the third and fourth choice.

Price is always an interesting topic for an intermediary.  It's fair for a ceding company to ask, "Does the use of an intermediary add to or subtract from the cost of my reinsurance?"

As direct writers, ceding companies wrestle with pricing issues all the time.  Does my price cover my administrative expenses, mortality assumptions, overhead, distribution costs, tax considerations, reinsurance costs, my cost of capital, and does it achieve my desired rate of return?

How often does the direct writer arrive at his optimum price and later finds out that the price does not stand a chance in the marketplace?  Does he rework his assumptions or does he compete on the financial strength of his insurance company, his service abilities or his established relationships with his producers?

The same factors of price, financial strength, long-term relationship and general service apply to your reinsurance intermediary and your ultimate reinsurer.

Effective intermediaries must be knowledgeable of the pricing, financial strength and service capabilities of reinsurers.  Reinsurers, like direct writers with their producers, cultivate long-term relationships with intermediaries.

An intermediary to be effective with ceding companies must obtain the combination of the best prices and the financial strengths offered by reinsurers.  Intermediaries can differentiate themselves from other intermediaries by service capabilities and by establishing long-term relationships with ceding companies and reinsurers.  An intermediary will try to anticipate a client’s needs in advance and make recommendations that are in the client’s interest even if it diminishes his or her brokerage commissions.

An intermediary should deliver objective advice and foster competition among the reinsurers and expand new and alternative reinsurance solutions.  The common theme among intermediaries and reinsurers is trust.  Having worked both sides – as a reinsurer and as a reinsurance intermediary, the price for a reinsurance transaction should be decided by the marketplace and not by whether an intermediary is involved or not.

Continued ..... 1 2 3
 

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