Broker ‘side car’ deals – are they in the interests of buyers? The controversial arrangement whereby Aon automatically writes 7.5% of all business it brokers at Lloyd’s unless the client stipulates otherwise comes under the spotlight.

The controversial arrangement whereby Aon automatically writes, on behalf of Warren Buffett’s Berkshire Hathaway, 7.5% of all business it brokers at Lloyd’s unless the client stipulates otherwise came under the Airmic Live spotlight. The member phone-in took place a day before Willis announced they were also setting up a ‘side car,’ as the system is known, and they were also on the panel.

Side cars have been criticised for weakening the market by effectively piggy-backing off its expertise without paying any of the costs of underwriting. As well as diluting the franchise, critics say this type of arrangement could encourage new capital into the re/insurance market that has no long-term commitment and will disappear as soon as the going gets tough. With the possibility that other brokers might set up similar arrangements, there are fears that more and more business could leave the Lloyd’s building and so undermine the expertise located there.

The issue revealed a sharp division between the two brokers on the Airmic Live panel on one hand and Vincent Vandendael, Director, International Markets at Lloyd’s on the other.

Andrew Laing, Chief Broking Officer at Aon’s Global Broking Centre, defended the deal as one that brought new capital into the market, offering greater choice to clients and ultimately strengthening Lloyd’s. He likened the side car to well-established practices such as writing business through MGAs, which account for nearly a quarter of Lloyd’s business.

Alastair Swift, CEO of Global Placement at Willis, was broadly supportive, though he was not in a position to announce that his company were on the cusp setting up their own side car know as Global 360. He hinted, however, that the rumours may be true saying that clients had shown “a huge amount of interest in this type of facility”.

He acknowledged that any facility needed to be sustainable, and said they were taking a long time working out the best way to do it. Far from undermining the market, he said it would bring additional efficiency and capacity. The idea was similar in principle, he said, to the following market, where other insurers rely on the expertise of lead underwriters to determine which risks to accept.

Vincent Vandendael of Lloyd’s took a quite different view. He felt the side car trend was driven by a need for brokers to find new income streams, and he queried whether it was in the best interests of customers. He said brokers using side cars would effectively be serving two masters. The new types of capital provider would take flight in the event of big claims experience and the emergence of more profitable opportunities elsewhere, he suggested.

“The danger is that the interests of customers are diminished,” he said. It would be better use of capital to develop new products, such as those relating to reputational risk and supply chains.

This issue of sustainability was raised by some of the many listeners who emailed in their questions. The two brokers argued that the capital was there for the long term, whilst Vandendael asked to see the evidence for this assertion. 

One can only wonder whether he had spoken to his colleague Tom Bolt, Lloyd’s director of performance management. A day after Airmic Live went out he gave an interview to Insurance Day in which he described the Aon side car as a positive move for Lloyd’s, one that brought additional business to the market. Love them or loathe them, it would seem side cars are here to stay.

The October Airmic Live can be downloaded from http://www.airmic.com/events/airmic-live/broker-controlled-market-capacity