Masojada challenges risk managers to help tackle broker costs in London market

Bronek Masojada, CEO of Lloyd’s insurance group Hiscox, has challenged risk and insurance managers to help the market tackle its bloated cost base as it embarks on a reform strategy under new CEO John Neal. Mr Masojada, a member of the Future at Lloyd’s London Advisory Committee announced this week, said the attack on costs needs to be carried out throughout the insurance chain. Individual insurers, Lloyd’s and the wider London market need to play their role, he said. But he also told Commercial Risk Europe that Lloyd’s customers – corporate risk and insurance managers – are best placed to pressure brokers to reduce their costs and improve transparency. Lloyd’s published its bold new The Future at Lloyd’s strategy at the beginning of May, after Mr Neal was forced to reveal a market-wide loss of £1bn for 2018 on the back of a combined ratio of 104% and gross written premiums of £35.5bn. Lloyd’s had already embarked on a centrally driven purge of loss-making businesses, which was kicked off with a letter to just over 20 syndicates in May last year. The letter threatened the syndicates with closure if they did not implement strong plans to return to profitability. Action has been taken. Capacity has been slashed in certain loss-making lines and prices have been hiked. As these dramatic short-term measures were taken to try and return Lloyd’s to decent profitability, Mr Neal and his senior team have carried out an exhaustive review of the market to set the new strategy. This was followed by news last week that Lloyd’s has created global and London advisory committees to support that plan. Airmic said it is discussion with Lloyd’s on the topic. Customers have told Lloyd’s they want more comprehensive cover, the highest-quality protection and a simpler process for accessing products and services at Lloyd’s, as well as lower costs of doing business with the marketplace. One of the biggest costs at Lloyd’s, and within the wider London market, is of course, broker commissions and fees charged to customers, insurers and reinsurers. It is estimated that brokers take as high as a 40% cut of business placed in London. To maintain an adequate cost ratio and ultimately combined ratio, the carriers have to pass the cost onto customers through higher prices than they would normally pay with their standard national carriers. This is particularly annoying to risk and insurance managers in continental Europe, who are not so used to the practice. When the new strategy was launched, Mr Neal raised this point. “Today, costs can eat up 40% of the premium paid at Lloyd's. Potentially, this could halve the cost of doing business… The customer has got to feel there's a value proposition – 40p in the pound is not good. It should be 20p or 25p,” he said, referring to the overall cost of doing business, including broker fees. Mr Masojada was asked how this cost problem can be tackled. He said the best way is for risk and insurance managers to demand more transparency from brokers, as well as their carriers, and ultimately a net price. This pressure from customers would hopefully, over time, reduce the cut that brokers take out of the chain, argued Mr Masojada. This would help Lloyd’s become more efficient, especially if, at the same time, the market adopts digital technologies to deliver a leaner and more efficient underlying system, he added. “The managing agents at Lloyd’s are pretty efficient with total cost of about 7% across all lines of business. So, apart from adopting more efficient administration, which we are doing, the main focus has to be to make sure the brokers take less out of the chain,” said Mr Masojada. “A question that I would ask your risk manager readers is: If a broker is asking for a 2% increase in remuneration, then who is going to pay the new price of 102? The only way to tackle this is for the customer to ask the question of their broker, demand transparency and a net price. We all have a responsibility to tackle costs in this market, everyone has a role. Part of it is customers putting pressure on brokers and carriers and calling for more transparency,” he added. Mr Masojada also said Lloyd’s has to become more accessible, efficient and cheaper to deal with if it wants to be able to offer its products across Europe and the world. The Lloyd’s veteran, who is also chairman of the London market’s electronic placing platform PPL, also believes Lloyd’s must continue the recent trend towards consortia of carriers offering more meaningful capacity to risk managers. “The Lloyd’s market does not compete directly with the leading international industrial insurance carriers such as Allianz Global Corporate & Specialty, AIG and AXA XL for the main international programme business, and it should not. It is difficult to make a profit in this market and you need a global network to service customer needs through risk engineering and loss-prevention services and the like,” explained Mr Masojada. “Lloyd’s has always been a specialty player within that corporate and industrial space, focused on the new, unusual and difficult risks. This is what people look to Lloyd’s for. The key is to make the market more accessible. The market needs leaders who deal with the complexity of these risks and need to be rewarded for that through fees,” he continued. “I also think the recent rise of consortia – such as our recently launched excess D&O consortium with Beazley – provides a needed increase in capacity and recognisable brands for brokers and customers. If the market is to provide solutions for larger corporate risks then they want to be able to place £1bn risks, not come to the market to gather together large numbers of individual lines for £10m each,” added Mr Masojada.

Masojada challenges risk managers to help tackle broker costs in London market

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