The growth of broker facilities is quietly reshaping who owns the relationship with clients and Mike Abdallah (pictured), Liberty's chief underwriting officer for Australia and the Asia Pacific, argues brokers should be uneasy about where that leaves the client. The big question his argument raises is whether a facility placement will still hold when the market hardens and the panel starts to thin.
Abdallah, who retires at the end of this month after a five decade insurance career, identified facilities as one of the features that makes the current soft market different from earlier ones.
"What we face this time, more than ever before, is an onslaught of broker facilities (global and local), many involving larger and more complex accounts, and an eagerness and almost anxiety of insurers to support these for fear of missing out," he said.
Compounding that, Abdallah said, is the predictable re-emergence of managing general agents (MGAs), some of them broker-owned, driven by insurers looking for new routes to premium income.
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His objection is structural. A broker facility places a panel of insurers behind a pre-agreed set of terms, with lead insurers setting the pricing and followers taking shares of whatever flows in.
"I am not a fan of these facilities generally, because you are less connected with the direct client and it is difficult to build a strong value proposition, which in turn means that you are more in the hands of the intermediary," he said.
Abdallah said the model has outgrown the segment that gave rise to it. Broker facilities and the small and medium enterprise (SME) market are no longer as synonymous as they once were, he said, with facilities now extending to large specialist and corporate risks carrying no particular industry focus. He described these as effectively a tracker, requiring limited technical underwriting if any. That approach works in equity markets, where the index rises in most years, but he argued it has not historically been the case in property and casualty insurance markets, particularly where trackers are likely to carry a degree of adverse selection.
The traditional route, he said, sent larger and more complex risks to a lead insurer with others following behind, while an SME risk was typically absorbed in full by a single company.
"These days a much bigger percentage of SME, the small-medium business, because it's a churn and expensive to manage are placed into broker facilities,” he said. “Although these historically were SME, they are now much broader."
The consequence, he argued, is that the insurer stops underwriting the risk in any meaningful sense.
"It's kind of a dumbing down of the traditional underwriting process, because there is a lot less connection with the client, and therefore the ability to exercise our value proposition and enhance that client relationship to the extent that we did before," he said. He said this is the situation for insurers unless they are one of the leaders of the facility.
The market-wide effect, on his account, is a loss of control over pricing discipline. "So, the more that these proliferate all over the world, the less control that insurers have to effectively manage the market cycles," he said.
He sees an echo of the London market he worked in during the late 1980s and early 1990s, where Lloyd's and much of the wider market operated on small participations. Brokers could hold terms and conditions at competitive levels, he said, because those small lines were readily replaceable.
A major concern for Abdallah is what happens when capacity leaves. He points to the hardening that followed the arrival of the COVID-19 pandemic, when Liberty was among a small group still writing.
Capacity was scarce in Australia when COVID arrived, he said, with insurers either retreating from the market or waiting on authority from offshore parents.
“It was Liberty and a few others that were left to give appropriate support to our brokers and clients at a time when they needed it most,” said Abdallah. “We certainly did not gouge our clients even though we were in a very strong market position, but we were there for our client and broker, which won us a lot of favours."
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He said he has put that history to brokers since. "If the market turns abruptly for an unforeseen reason, how do we as an industry go back to our clients and say sorry, we're following the market down and prices are going to have huge increases again."
Brokers generally recognise the bind, he said, but they, their clients and their competitors are all carrying pressure to lift margins, which he regards as a continuing problem for the industry.
He said facilities and MGAs can bring specialist underwriting expertise, distribution reach and more agile, cost-effective technology than large organisations provide. However, the insurance leader said incentives need to be built around profit and around aligning the interests of client, broker and insurer, which makes partner selection critical.
Liberty, he said, will write facility business but only from a position where it sets terms. It will underwrite a facility where the account is closely tied to an industry and where Liberty leads or holds enough influence to determine pricing and apply what it brings to a risk, which he lists as claims, engineering and service.
"So we will be doing our best to make the underwriting decisions, and not in the habit of just following some other company,” said Abdallah.
