The Value and Price of an Intermediary

by Antonio D. Vila, FSA and Peter M. Wilson, CPA, FLMI

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

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Reinsurers that charge one price for transactions with intermediaries involved and another price for without will not earn the trust of the marketplace.  The best analogy for this situation is akin to the manufacturer/wholesaler that sells his products through retailers.  When the manufacturer/wholesaler decides to also sell directly to consumers the price he charges is the same as the quoted price given to his retailers.  More often than not it is the retailers or intermediaries that will put downward pressure on quoted prices and lower costs to the ultimate consumer.  The ultimate price will be determined by factors in the competitive marketplace subject to the levels of return desired by the reinsurer.

The value of an intermediary is not just for negotiating the price for reinsurance or knowing reinsurance treaty language terms.  But rather knowing whether the reinsurer and intermediary will honor the spirit of the reinsurance treaty and are there for the long term.  We remember one particular reinsurance treaty where the ceding company had extraordinary claims for a particular year causing the reinsurer to lose money.  When the treaty came up for renewal the reinsurer could have walked away from this ceding company.  But rather the reinsurer renewed the treaty at the same terms and price.  

The "best price" is not always defined as the lowest in economic terms. The lowest price might come from a reinsurer that is financially unsound or an intermediary that offers little or no service and is not seeking a long-term relationship.

The flip side can also mean that an intermediary can also bring value to a prospective ceder that is not looking for long term relationship.  In traditional forms of reinsurance – YRT, coinsurance, stop loss, etc. there is value to establishing a long term relationship with your intermediary and reinsurer.  But there are other reinsurance transactions where a short term relationship is best.  The best examples are block divestitures or block acquisitions.

If you are a block acquirer we recommend the following steps:

Define your parameters. The first step is for management to define what they want to accomplish. Is it a build versus buy scenario for a new market?  Is it an economies of scale issue?  What type of block is appropriate?  Where will the capital for the transaction come?  Will it be internal capital, external, or reinsurance?  Prepare for analysis in the following areas: actuarial, asset/ investment, technology, marketing, and culture.

• Cast a wide net.  Talk to as many intermediaries, investment bankers, and reinsurers as possible.  Funnel all leads through one contact person to eliminate any question as to the original source of the potential deal.

• Be willing to pay a premium.

Assume every transaction will be a bidding war.  Having the second best bid earns you nothing, your bids will not be competitive if you use internally driven ROE and ROI goals to set your price.

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