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NEW YORK -- The insurance industry's new "megabrokers" should be careful how they wield their newfound clout with insurance markets if they want to serve their clients' best interests, an insurer executive cautions.
If brokers simply use the leverage to pry larger commissions out of insurance companies, policyholders will be the ultimate losers, warned Maurice R. Greenberg, chairman and chief executive officer of American International Group Inc. in New York.
In addition, a reinsurer executive says that if brokers raise the cost of buying insurance, clients simply will exit the traditional insurance market in favor of lower-cost alternatives.
Consolidation in the insurance brokerage industry should provide less costly service to clients, Mr. Greenberg said.
It should lead to lower expenses, and the savings should be passed on to policyholders, he said during a session at a conference in New York earlier this month. The conference, sponsored by Coopers & Lybrand L.L.P., addressed change in the property/casualty insurance industry.
However, if the large brokerages -- as some fear -- use their power to squeeze larger commissions out of insurers, the policyholders will suffer, he said.
"If the brokerage community tries to leverage that strength against the underwriting community, the ultimate loser is the client," Mr. Greenberg said.
If that happens, policyholders simply will turn to the alternative risk transfer market, said Heidi Hutter, chairman, president and chief executive officer of Swiss Reinsurance America Corp. in New York.
"One of the things that you have to remember is that when it comes to the ART market, we have created an exit ramp for people," Ms. Hutter said, referring to alternative risk transfer options.
If brokerages do not add value to the transaction of buying insurance but instead end up just increasing buyers' costs, their clients simply will bypass them, she said.
Consolidation among insurance companies also raises difficult issues, according to Mr. Greenberg.
Too many of the consolidations have created one large, weak insurance company out of two smaller, weak companies, Mr. Greenberg said.
"In many instances, consolidation is not taking place out of strength but out of weakness," he said.
Often merging companies do realize some expense savings, but that alone is not enough to turn around a fundamentally weak company, he said.
If both insurance companies have insufficient loss reserves, for example, the larger merged company still has to deal with those deficiencies, Mr. Greenberg pointed out.
While insurance companies can acquire the good will of another company, that again is not by itself a sufficient reason for making a purchase, he said.
"You can't pay claims out of good will," he said.
According to Gary W. Parr, managing director at Morgan Stanley & Co. Inc. in New York, the trend of consolidation in the U.S. insurance industry is largely over.
Although more insurers are looking to grow their operations globally, Mr. Parr said U.S. insurers should consider their positions very carefully before they make moves to expand overseas.
"Unless you intend to play in global business on a very large scale, it is not worth the effort," he said.
Already, numerous large financial services companies have become global companies, and U.S. insurance companies will have to be very strong in order to compete on that global playing field, Mr. Parr said.
"You either have to have a very good niche or you have to have a lot of clout," he added.