An International Perspective
Canada's only indigenous reinsurance brokerage, Beach and Associates has only recently started concentrating on its home market
Last April at the RIMS conference in Vancouver, the top executives from Marsh and McLennan Companies held a special roundtable briefing for journalists in which they outlined how client expectations and demands in the primary insurance space are changing.
“In the past, risk managers would use their experience, their time in the industry their reliance on insurance brokers to make calls,” said Marsh’s US CEO, David Bidmead. “They’re still doing that, but now they’re saying we want you to demonstrate the efficacy of those decisions by the use of analytics. Prove to us that those retention levels and levels of transfer based on detailed scenario analysis stand up to independent scrutiny.”
In an interview this past February at the Toronto offices of reinsurance brokerage Beach and Associates Ltd., senior vice president and managing director for Canada Matt Wolfe echoed Bidmead’s comments almost exactly when talking about what the firm’s international insurer clients expect from their reinsurance broker.
“They demand that you really understand the original insurance coverages, and the optimal way to reinsure those. And they expect you to be prepared to defend your recommendations with empirical backup.”
It’s an approach to reinsurance that Wolfe says is taking hold in the Canadian market, and it’s one that he and founder Jonathan Beach think will set them apart from the other major reinsurance brokerages in this country.
Beach and Associates is unique in that it is the only wholly indigenous Canadian reinsurance brokerage, unlike Guy Carpenter, Aon Benfield, Towers Watson and Willis, which are all subsidiaries of international companies. At the same time, however, Beach and Associates established itself by serving mostly US and international clients, making it the most outward looking of the reinsurance brokerages operating within Canada. Now, Beach and Associates have their sights set on building their “domestic” book of business through their unique analytical approach. This will be a considerable challenge, given the current environment of low rates and poor investment returns that may drive some Canadian insurers to increase net retentions and reduce reinsurance premium spend.
The story of the founding of the company has its roots in one of Canada’s landmark sporting palaces: the SkyDome (now the Rogers Centre) in Toronto. London-born Jonathan Beach was working in the Toronto office of Sedgwick in the ‘80s when he was approached by Greg Belton and John Hawkrigg, then of Muntz and Beatty, to help obtain insurance for the new stadium. Through Belton, Beach met the chairman of the corporation building the SkyDome, and from that, derived the financing that got Beach and Associates off the ground in 1988. The company began as a specialty reinsurance brokerage doing individual business risk retentions before developing into a more conventional property and casualty reinsurance brokerage in the late ‘90s. Throughout the last decade, Beach and Associates expanded its international business significantly, and now has over 75 employees in offices in London, England (opened in 2002), Sydney, Australia (2004), New York (2008) and Bermuda (2010).
“We’re growing (globally) at about a 20% annual rate. That’s purely organic,” says Beach. “We believe we are in the top ten treaty reinsurance brokers in the world now. We see opportunities to grow very significantly up that ladder.”
Canada and The World
Beach and Associates grew its business servicing what Beach describes as well-known, US-based, global specialty lines insurance companies, most of which were concentrated in the Northeastern US. A few of these American clients have entered the Canadian market in the last few years, and they naturally continued to turn to Beach and Associates for their reinsurance needs, allowing the company to start building a significant book of Canadian business in the process. Thus, despite being headquartered in this country for its entire existence, it was only in 2011 that Beach and Associates actually established a dedicated Canadian unit to target the reinsurance needs of domestic Canadian insurers.
Managing director for Canada Matt Wolfe says that Beach and Associates is well-positioned to offer a unique approach to reinsurance for Canadian companies based on the experience gained serving demanding US and international insurers.
“Our core clients are amongst the most sophisticated reinsurance buyers in the world,” he says. “They have their own actuaries, their own modellers, their own analytics department, and they expect their broker to come to them with fresh ideas rather than simply execute a well-worn program.” In Wolfe’s experience, many Canadian companies still purchase reinsurance in a more traditional way. “They will tell the reinsurance broker, ‘here’s what we want you to go and place, now go and do it, you’re going to deal with these reinsurance markets, go and execute what we want.’ Whereas, increasingly in the global market buyers look at you and say ‘what would you do,’ and now defend what you’re thinking. They’ll have their own ideas, and they may or may not agree with you.”
One of the reasons for the difference between Canada and, say, the US, argues Wolfe, is the relative complexity of US insurance markets compared to Canada.
“They’ll have a number of different catastrophe exposures, a number of different systemic exposures. They’ll write multiple lines of business, and remember; the US is in some ways 50 separate countries. Each state has different laws, different litigation trends.” He points to the example of trucking to illustrate how portfolios can vary, even in a single line. “Trucking in New York State is very difficult. Trucking in Ohio is generally very profitable. You need to understand how much of your portfolio is in Ohio, how much is in New York. That is going to dramatically affect how many large losses that you’re going to see. So they demand a very granular analysis of their portfolio.”
Much like a primary insurance placement, Wolfe describes the Beach and Associates’ approach to reinsurance as a customized solution based on factors including the insurer’s balance sheet, risk appetite and tolerances, and other performance metrics to determine optimal retentions and cedings.
“Many people come at this by saying, ‘what’s the minimum amount of premium we have to spend to get our reinsurance?’ ” says Wolfe. “The right question is ‘what’s the minimum amount of profit we have to give away to get the optimal reinsurance program?’ ”
In addition to considering the expected scenario of a typical underwriting year, a good solution needs to take into account the adverse circumstances of a 1 in 50 year or 1 in 100 year event. Beach and Associates is an accredited Lloyd’s reinsurance broker and Wolfe notes that Lloyd’s has been at the forefront of demanding its reinsurance buyers subject their programs to the analysis of a Realistic Disaster Scenario (RDS). To illustrate the concept, Beach points to the Deepwater Horizon catastrophe as a situation where an insurer could be impacted by the first-party property claims for the drilling platform as well as massive third-party liability exposures.
“We can have the same thing very readily here in Canada,” says Beach. “Indeed, the market was really hurt by the Enbridge liability claim in 2010. It was $650 million in clean-up costs.”
Other elements that Beach and Associates bring to the table, say Wolfe and Beach, are alternative placement solutions such as collateralized reinsurance covers. Collateralized products bypass traditional reinsurance companies and the reliance on their ratings as the promise of payment. Instead, limits are fully collateralized in cash by non-rated entities such as a hedge fund.
“The Canadian market is really just starting to look at that as a source of capacity,” says Wolfe. “We have placed over a $1.5 billion of collateralized reinsurance globally as a firm.”
Collateralized reinsurance is starting to play a particularly important role in the aggregate property and catastrophe markets, as more companies begin to feel the effects of the accumulation of smaller CATs as opposed to larger, single events that trigger higher layers of coverage in the vertical structure of reinsurance “towers.” Beach points out that 2011 was particularly painful for insurers around the world that were “side-swiped” by the sheer number of CAT incidents. Consequently, aggregation became a more important issue.
“In addition to that, the regulators internationally are applying more pressure to insurance companies to be thinking in terms of their aggregation exposures,” Beach comments. Moreover, the necessary stress-testing of domestic insurers needs to take into account events around the world. If an insurance company operating in Canada “is a subsidiary or a branch of a foreign-based company, if its reinsurance is part of a global or international treaty and if the limits can be exhausted by claims outside of Canada, then that must by definition be a concern to the Canadian entity,” he says. It’s an issue that brokers in the primary space with larger commercial property clients should be paying close attention to. As early as last September at the NICC conference in Vancouver, reinsurers warned that January 1 property and catastrophe renewal rates would go up, and they did—as much as 10% on a per-risk basis, Beach notes. These increases will inevitably have to be passed on to insureds.
Beach praises Canadian regulators for demanding that insurers be capitalized for the 1 in 390 year event. However, “we also want to know what happens in the 1 in 390 year when we have a whole sequence of catastrophes and/or substantial risk losses. That is not a commodity (solution),” he says. “That requires some thinking. That is the part of the market where we believe we have the most to add.”
Another area of potential concern in the Canadian market that Beach and Associates hopes to highlight is protecting against potential large liability exposures that Wolfe refers to as systemic risks. A systemic risk is an event that affects a vast number of policies under a number of different lines of business. If it were conclusively determined, for example, that electromagnetic fields (EMFs) cause cancer, then insurers could suddenly find themselves incurring large losses from “the manufacturers of cell phones, the owners of the cell towers, the retailers who sold those phones, and perhaps even the companies that gave them to their employees,” Wolfe explains.
Beach and Wolfe both point to hot topics like toxic mould, Chinese drywall and important Canadian industries like oil and gas extraction and mining as potential exposures.
“The total cost of asbestos litigation in the US alone is expected to reach US$200 to $275 billion,” notes Wolfe. “Think about the rest of the world (where further litigation may also occur). The number is just staggering.”
Beyond these big-picture issues, Wolfe argues that systemic exposures exist even at the individual account level and that many in the Canadian industry do not fully appreciate these risks.
“For instance, an insurer may provide a large securities dealer with an E&O program that might cover 200 agents. Each of those agents might have $1 to $2 million in limit. And often the insurance policies do not have an aggregate cap. So you could have a scenario where you have 20 agents, each with their own dedicated million dollar limit, and have a claim on an account for which you received less than a million in total premium.”
Beach notes that casualty reinsurance rates are rising, which is bound to have an effect on areas like Canada’s hyper-competitive and perhaps over-saturated D&O market. Wolfe observes that the financial services sector is the one of the biggest danger zones for systemic liability.
“We still think that Canadian insurers are not necessarily looking at their casualty reinsurance closely enough with respect to how it will respond in the event of an RDS,” he says, pointing to the massive number of lawsuits that were launched in the US following the 2008 financial crisis. As in the property market, Wolfe thinks that innovative placements for aggregate covers are one potential solution insurers will need to look at—and that Beach and Associates can provide.
Beach and Associates has come on strong in the Canadian market in the last few years, winning the highly-coveted business of a number of insurers that have recently entered the country. It’s clear that the company’s reputation is based on getting good results.
“As an independent broker, Beach has a unique position in the market that helps them be creative and innovative,” says Bill Jonas, vice president and chief agent for Canada at Everest Re. “I have a great deal of respect for their management and staff. They have grown to be much more than a niche independent and I applaud their success.”
Copyright 2012 Rogers Publishing Ltd. This article first appeared in the March 2012 edition of Canadian Insurance Top Broker magazine.