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Ajit finally Convinces Warren Not to be Chintzy Paying Commissions to Brokers


twacowfca
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A few years ago, Ajit stated that BRK had forgone billions of dollars of profitable business placed through brokers because they were unwilling to pay commissions.

 

Now, Aon, one of the largest brokers has announced that  Berkshire Hathaway will take a 7.5% quota share of all the business that Aon places that includes participation by Lloyd's of London.  Berkshire will pay a commission on that business to the broker(s).

 

This is a big big change that, when extended to other brokers, could go a long way to keep float increasing in the future.  :)

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I believe that this has been going on for a while.  For example, NICO has a agreement to take on 12% of all MM marine book with Ajit paying the standard commission +2%.  Brokers love it (BRKs AA rating) and so does NICO since they avoid having to staff and entire underwriting department (saving 7 points of expenses and 5 after commissions).  BRK structural advantage is that they can enter agreements like these on an uncapped basis.  I doubt anyone else could do the same.

 

In hindsight this all makes sense.  With $100bln capital to deploy and growing (BNSF is now the world's second largest reinsurer after NICO!), and the fact that pension funds are being lured by consultants to provide capital to the reinsurance market through sidecars etc. as an "uncorrelated asset", Ajit can no longer sit back and fill his book with opportunistic fat pitches due to market overreactions as in the past.

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I believe that this has been going on for a while.  For example, NICO has a agreement to take on 12% of all MM marine book with Ajit paying the standard commission +2%.  Brokers love it (BRKs AA rating) and so does NICO since they avoid having to staff and entire underwriting department (saving 7 points of expenses and 5 after commissions).  BRK structural advantage is that they can enter agreements like these on an uncapped basis.  I doubt anyone else could do the same.

 

In hindsight this all makes sense.  With $100bln capital to deploy and growing (BNSF is now the world's second largest reinsurer after NICO!), and the fact that pension funds are being lured by consultants to provide capital to the reinsurance market through sidecars etc. as an "uncorrelated asset", Ajit can no longer sit back and fill his book with opportunistic fat pitches due to market overreactions as in the past.

 

Thanks.  That's good information.  I overlooked the fact that they were paying a commission to Marsh on their quota share of their marine book and other business.  The economics as you described it makes sense as NICO keeps its  expense ratio down while foregoing the opportunistic mode of jumping in and out of specific markets as they exploit big changes in rates.

 

One downside is that some of these quota shares are uncapped, thus increasing BRK's risk from "black swans". However, most of the policies written today have caps on coverage. Thus the risk from taking a quota share of another insurer's uncapped policy is small.  Plus, these quota shares that BRK is taking are set up as collateralized side cars.  Thus, BRK's maximal risk on the Aon deal would be $2.5B. That's not likely to happen without a true black swan.

 

This should on average hugely expand their opportunities to continue to generate low or no cost float for many years and perhaps decades into the future.  :)

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In hindsight this all makes sense.  With $100bln capital to deploy and growing (BNSF is now the world's second largest reinsurer after NICO!), and the fact that pension funds are being lured by consultants to provide capital to the reinsurance market through sidecars etc. as an "uncorrelated asset", Ajit can no longer sit back and fill his book with opportunistic fat pitches due to market overreactions as in the past.

Does it? Isn't the story always the same in the insurance industry: "we just HAD to write more business!"

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In hindsight this all makes sense.  With $100bln capital to deploy and growing (BNSF is now the world's second largest reinsurer after NICO!), and the fact that pension funds are being lured by consultants to provide capital to the reinsurance market through sidecars etc. as an "uncorrelated asset", Ajit can no longer sit back and fill his book with opportunistic fat pitches due to market overreactions as in the past.

Does it? Isn't the story always the same in the insurance industry: "we just HAD to write more business!"

 

There's better underwriting discipline in the P&C industry now with low interest rates than a few years

ago.  If underwriting discipline slips in the market, it's very likely that they will not renew these deals.

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In hindsight this all makes sense.  With $100bln capital to deploy and growing (BNSF is now the world's second largest reinsurer after NICO!), and the fact that pension funds are being lured by consultants to provide capital to the reinsurance market through sidecars etc. as an "uncorrelated asset", Ajit can no longer sit back and fill his book with opportunistic fat pitches due to market overreactions as in the past.

Does it? Isn't the story always the same in the insurance industry: "we just HAD to write more business!"

 

The big difference here is on the expense side of the equation.  Ajit is using BRKs unmatched financial strength and capacity to gain a competitive advantage of 5 points or more on the expense ratio versus all of the competition. 

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