Can You Afford to Get into This Business?

Insurance-linked securities transactions can expand the playbook for brokerages looking to stay in the game when clients consider nontraditional forms of risk transfer. 

Deals that bring the insured directly to the capital markets raise even more possibilities. There’s a caveat, though: this business may be beyond the reach of any but the very large brokerages. It’s a major commitment of resources for a market that currently is more potential than reality, with only a handful of done deals.

Aon Securities, for example, has a staff of about 50, with roughly a third of them handling insurance-linked securities (ILS) transactions, says Paul Schultz, the unit’s CEO. Those numbers may be minuscule in the context of a giant such as Aon, but building up the same headcount could be a daunting proposition for a smaller brokerage in a field that’s just begun to be plowed.

“The resources required to bring ILS transactions to market are considerable due to the breadth of competencies required for any particular deal,” Schultz says. “Our deal teams are staffed by legal professionals, bankers, accountants, actuaries and catastrophe modelers, to name a few of the skill sets necessary to be a trusted advisor.” Aon Securities also can draw on the resources of the entire parent organization to supplement the team’s skills.

“Finally, we have a large sales desk, incorporating trading and distribution and placement of securities,” Schultz says. “Our sales desk represents almost one third of our total ILS colleagues and keeps our firm at the pulse of market changes, with an ability to achieve differentiated results for clients by being able to access the broadest set of investors in the market.”

A large brokerage has more to offer those investors simply by virtue of the “magnitude and breadth of risk we can bring,” says Cory Anger, global head of ILS structuring at Guy Carpenter’s GC Securities, a division of MMC Securities.

While challenging, it may not be entirely out of the question for a smaller brokerage to venture into this emerging field.

“The big three are formidable competitors in the alternative insurance market, but opportunity still remains for other brokerages in this space, especially if a brokerage is willing and able to use alternative insurance to craft a better overall package of coverage for a lower overall premium,” says John Seo, co-founder and managing principal of Fermat Capital Management. “This is possible to deliver, but the incumbent brokerage is hesitant to do that for obvious reasons.”

There are, of course, other means of alternative risk transfer that may lend themselves to modestly sized transactions among smaller players. These would include mechanisms such as collateralized reinsurance and industry loss warranties. But those also involve a more traditional set of participants, including conventional insurers and/or reinsurers. Take them out of the deal, and it may be asking too much for most brokers to gather the pieces to fill the void.