from the publisher of reinsurance and fac magazines

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Crank the sausage handle

Dear friend,

What a privileged position I hold!

You might not get to talk to them much, but as your noble editor I’m constantly invited in to powwow with all of your bosses and board members. Cooler water, tea, coffee and, on occasion, chocolate biscuits are provided in displays of such wanton extravagance that they could make even the most hardened libertine blush.

I was having one such cosseted encounter courtesy of a head honcho at a major international broker the other day when I learned something quite surprising. This broker was talking to me all about expansion strategies and mentioned an interesting opportunity to break into reinsurance on the back of his broking house’s direct book in the United States.

He spoke earnestly of leverage and influence being brought to bear by his firm to extract lucrative reinsurance business out of markets for whom it produces significant inward premium volumes.

The bar-room conversation might go something like this:

Broker CEO: Hey Bill I wanted to talk to you we’ve been analysing our key relationships and we’ve identified you as a key preferred partner.

Insurer CEO: That’s great.

Broker CEO: You betcha, did you know we gave you $100m on your construction account last year?

Insurer CEO: You don’t say?

Broker CEO: Yeah — and you write a book of about $250m right?

Insurer CEO: Something like that, yeah.

Broker CEO: And it’s good stuff too. Your loss ratio averages 83% for construction, yet our business only costs you 60%. [Pause] And it’s growing at 15% a year. Compound.

Insurer CEO: Hmm, thanks!

Broker CEO: Anyway – we’ve just hired this hotshot reinsurance team and they’re in town next week. I was hoping they could come and buy you lunch…

Insurer CEO: [sighs] Hmm, for you Bob, I’m sure I could make a window in my schedule.

We may be in a post-Spitzer world, but leverage doesn’t have to be used explicitly in the black and white of over-riders and service agreements.

You don’t have to send round the heavy mob — just an introduction here and a helpful suggestion there.

Like mince going into a sausage machine — it’s only natural physics that some of what goes in one end comes out the other.

But this makes me wonder for intrepid Fac brokers from large global outfits effectively starting out on their own. It will only be when they are wholly without the support of the mother ship that they find out the true value of their own skills and contacts. The invisible hand of the powerful parent will not be around any more.

Only then will we see what they might be missing and answer the big question — will they let you crank the sausage handle if you don’t help load any mince into the machine?

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