Advantages and Disadvantages of Reinsurance Brokers

In the previous article, we have already seen what reinsurance brokers are and why they are so important to the reinsurance market.

There are a large number of reinsurer companies that only deal with reinsurance brokers. These companies do not provide any direct service to their clients.

The number of reinsurance brokers is increasing day by day because of the various advantages that they provide.

However, one needs to have a closer look at both the advantages as well as the disadvantages before making a final decision.

This article explains the various advantages and disadvantages which are commonly associated with the use of a reinsurance broker.

Advantages of Using a Reinsurance Broker

The advantages of using reinsurance brokers are as follows:

1. Optimal Loss Coverage: The amount of risk on the balance sheet of an insurance company can be very high and it can also be very complex.

   The insurer has to make complex decisions about which risks need to be reinsured and which need to be borne by them. This decision needs to be taken in mind while trying to minimize the total amount of claims which will be paid out. This turns out to be a very complex calculation since there are several types of reinsurance products available in the market and cost-benefit analysis needs to be done for all of them.

   Reinsurance brokers have readymade mathematical models which help them figure out the optimal way to cover a risk with minimal expense.

2. Cheaper: Successful reinsurance brokers have access to the business of a lot of insurance companies. This provides them the bargaining power that they need to obtain a better deal for their customers.

   There are several reinsurance companies that deal exclusively with reinsurance brokers. As a result, reinsurance brokers are able to obtain deals that are not available to the market at large. This helps them save money for their clients even after the reinsurance brokerage is taken into consideration.

3. Better Services: Not only are reinsurance brokers cheaper but they also provide better services. They have dedicated representatives at their end who continually follow up on behalf of the client. Many reinsurance brokers also ensure that the reinsurance company gives them priority treatment. This means that claims and other administrative tasks related to reinsurance brokers are processed at a faster rate as compared to others.

4. Reduced Administrative Work: The reinsurance business involves a lot of administrative work both for the insurance company as well as the reinsurance company. Both sides have to maintain a lot of documents.

   Some of this administrative work is done voluntarily by both parties whereas some part of this administrative work is mandated by the regulators. In either case, the reinsurance broker is able to ensure that the paperwork is seamlessly managed and both parties are compliant in the eyes of the regulatory agency. This helps both parties reduce the amount of manpower that they require to operate their business. As a result, the cost of operation is also reduced.

5. Arbitration Duties: Reinsurance brokers are responsible for ensuring that appropriate information about the risk is provided to the reinsurer. The intermediary cannot pick and choose or omit any kind of information. If they do so, the intermediary can be made liable for the same.

   Also, the intermediary is considered to have the full record of the transactions which take place between the reinsurance company and its clients. Hence, in the event of a dispute, the reinsurance brokers are often called upon by regulators to obtain communication and resolve any ambiguity.

Disadvantages of Using a Reinsurance Broker

There are certain disadvantages to using a reinsurance broker. The important ones have been listed below:

1. Conflict of Interest: First and foremost, many people believe that the business model of reinsurance brokers is flawed. This is because of the fact that reinsurance brokers are expected to act in the best interest of their clients. However, at the same time, their remuneration is dependent upon the reinsurance company which pays them a commission.

   Hence, it is highly likely that reinsurance brokers will try to steer the business toward a particular reinsurance company if it offers them a high commission regardless of the type of service that they offer.

2. Limited Choices: When an insurance company decides to use the services of a reinsurance broker, they end up limiting their options. This is because of the fact that not all reinsurance brokers have tie-ups with all reinsurance companies. Reinsurance brokers will help the client meet their insurance needs based on who they have a tie-up with. This creates an unnecessary barrier for the client who may be able to a better deal with other service providers who do not deal with their reinsurance broker.

3. Emphasis on Closing the Sale: Theoretically, reinsurance brokers are industry experts who put the interest of the client first and help them obtain better coverage at a cheaper cost. However, in practice, the reinsurance brokers are more concerned about closing off the sale. This means that many times, the suggestions that they provide to their clients are actually not in the best interest of their clients.

4. Dispute or Runoff Scenario: Lastly, reinsurance brokers are known to stop providing good service to their clients once they know that they will not get repeat business. Hence, if the company plans to terminate its relationship with a particular insurance broker, the exit can end up being quite messy.

To sum it up, there are several pros and cons of using the services of a reinsurance broker. However, most large reinsurance brokers are aware of these cons and are actively trying to mitigate them. This is what makes the services offered by reinsurance brokers a good value proposition.

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