Soapbox: Berkshire Hathaway's recent agreement with Aon

“For better or for worse or, more precisely, to a lesser or greater degree, free riding is inherent to the structure of markets. Therefore, the real question here is not whether free riding is occurring, but how the structure of free riding within the insurance market itself is likely to change in the future.

“If we use capital markets for guidance, the biggest balance sheets should prevail in following markets. Furthermore, leading markets should not expect all newcomers to be light on expertise for long, as change will dislocate both capital and talent.”

John Seo, co-founder & managing principal, Fermat Capital Management

“Although in the immediate term it may be a good example of business and capacity consolidation I believe that if this works well it may lead to a number of similar transactions due to the competitive nature of the Lloyd’s market. So we will be facing nothing else than just moving into different scales of transactions, with an obvious decrease in underwriting and capital provision diversification.

“Besides, any ‘mega’ arrangements naturally lead to higher counterparty risk, which has to be considered additionally, making Lloyd’s an ordinary cedant rather than a market. In my opinion this example represents a threat to the diversified nature of underwriting and capital spread for market players.”

Kirill Savrassov, senior vice-president and chief underwriting officer, Phoenix CRetro Reinsurance Company

“The operation is clearly in line with the growing market concentration that prevails today. The three big brokers are certainly changing market dynamics and the logic of this move does not really call for sustained underwriting expertise. Could it be that in excess of a certain size the law of great numbers substitutes the need for underwriting? Is this the case of a snake eating its tail? I do not have an answer but I cannot stop thinking of the fable about the man who killed the goose that laid the golden eggs.”

Ingrid Carlou, chief executive of Patria Re

“Berkshire’s play is undoubtedly considered, and is a huge vote of confidence that average pricing will remain acceptable, even at the softest end of the cycle. The difference between hard and soft is much smaller than in my day—we’re not moving to the soft markets we saw in the 1980s. But we may be shifting to a more commoditised product—with standardised modelling and pricing, more homogenised systems and rules, the more possible it is to commoditise the product.

“What does that mean? Perhaps fewer underwriters and brokers, but maybe possibilities for ‘trading’ between renewals and even a new secondary market.”

Peter Hughes, director, Litmus Analysis

“This deal will enable Berkshire Hathaway to access Aon’s business placed at Lloyd’s or involving any Lloyd’s placement. Aon currently supplies more than 20 percent of all of Lloyd’s business and it will concern the market that some of this income will be hived off to Berkshire Hathaway. Hopefully, this will in time be complementary to Lloyd’s and Aon will grow its income to Lloyd’s and it will not be competitive to the market’s many subscription players.”

Statement by Hampden Agencies Limited, which represents and advises members of Lloyd’s

“Willingness to innovate has always been the strength of Lloyd’s. As such, if genuine, and long-term, new capital and capacity is created without impairing or devaluing the independence of the Lloyd’s market, and it is viewed as strengthening the value of the Lloyd’s proposition, then a cautious welcome may be appropriate. However, the fundamental question is whether there is true alignment of underwriting with the business ceded.

“Traditional binding authority arrangements, as opposed to a potentially open-door sidecar facility, succeed by maintaining underwriting discipline and integrity through rigorous parameters and safeguards, rather than simply providing a potential pricing advantage to attract business. Time will tell.”

Gavin Coull, partner, insurance and reinsurance, Locke Lord

“Berkshire’s move is the first light of dawn of a new era. The future world of insurance will separate underwriting, administration, settlement and the function of risk carriage. It is another step ahead in the division of work. Market participants will have to rethink their business models.

“It is a bright move from Berkshire’s perspective. I understand those who do not appreciate it. But looking from outside it emphasises that Lloyd’s is the place where future trends become visible first. I am impressed.”

Arndt Gossmann, CEO, DARAG

“In hindsight Aon may have preferred not telling the world what they had done with Berkshire, as I am sure it has not created the best of goodwill from some of their clients and other markets. Past practice has not involved this type of defined pre-placement so it will be interesting to see if catches on, or whether the controversy created by this arrangement will deter others. Somehow I doubt it, although a lesson in how to handle any publicity will have been learned.”

Hugh Price, chairman, Alwen Hough Johnson

“We are constantly looking for ways to empower results for our clients and this landmark solution provides a unique way for them to access high quality capacity efficiently. No other firm has been able to deliver a solution of this scale to their retail clients across all industry segments on a full follow basis. We are proud to be able to offer our clients unprecedented access to the financial strength of Berkshire Hathaway through this transaction.”

Steve McGill, group president, Aon plc, and chairman and CEO of Aon Risk Solutions