Reinsurance Broker Aon Benfield Puts Faith in Analytics

LONDON, Apr 22, 2009 (A. M. Best via COMTEX) -- BFLDF | Quote | Chart | News | PowerRating -- As Aon Corp. continues to integrate Benfield Group Ltd. into its operations, it confronts a market in which traditional broking functions have been partly supplanted by analytics.

That observation came from Andrew M. Appel, chief executive officer of reinsurance broker Aon Benfield, during a visit to London.

The acquisition in 2008 of Benfield by Aon for 935 million pounds (1.17 billion euros) led to the creation of Aon Benfield. The deal, the largest in Aon?s history, was a ?merger of equals,? Appel told a press conference.

Appel described the creation of Aon Benfield as ?great for clients, because they have single-source access to the only truly global reinsurance advisor. We?re really the only ones around the world that have a full footprint in every product and every market.?

Fifteen years ago, Appel said, 90% of the value produced by the broker was in the transaction. Today it?s probably 60% value-added analytics and advice and 40% broking and transaction, he said.

Appel estimated that Aon Benfield will spend up to $200 million this year on analytics, actuarial services and modeling technology. ?How,? he asked, ?is a smaller firm going to provide that level of technical expertise??

Asked about the possibility of further consolidation among reinsurance brokers, Appel said: ?I?m not sure there are that many natural combinations left. So we may have reached the end of the journey for at least reinsurance broker consolidation.?

Aon Corp., Appel said, has three priorities for growth: organic, margin and earnings per share.

As a broker and advisor, Appel suggested, Aon is not burdened by a large balance sheet. Last year the group enjoyed strong growth in insurance brokerage and consulting. ?If you looked at 2008, you probably couldn?t have scripted it any better in retrospect,? Appel said.

Aon?s stock did well in a difficult environment, Appel said, losing about 6% of its value by the end of 2008. This compared to a fall of 45% for the average insurance company. ?So it?s been a good run,? he said.

Aon?s sale, in May 2008, of Combined Insurance Co. to Ace Ltd. for $2.7 billion in cash was ?either incredible insight or fortuitous decision-making,? Appel said. Within months, he noted, Bear Stearns and Lehman Brothers were brought down by crisis.

Beginning in December 2007, Aon had entered into agreements to sell property/casualty companies AIS Management Group, Combined Insurance Co. and Sterling Life Insurance Co., to refocus the company around its brokerage, risk management and client consulting businesses (BestWire, Oct. 15, 2008).

Appel, who is a native of Los Angeles, joined Aon in 2005 as the chief executive officer of its global consulting business, which includes both pensions and benefits. He also led Aon?s global restructuring effort. Early in 2008, he was named chief executive officer of Aon?s global reinsurance operation, while retaining a chairman?s role over consulting.

Appel said insurers, particular property/casualty underwriters, have performed well through what he called ?an extraordinary period of economic dislocation.? This, he said, compared well with the banking industry. There is irony in this, Appel suggested, ?given the historic view that banks were more advanced than insurance companies.?

Appel blamed the problems of the banking sector on the failure of traditional risk models to anticipate the huge rise in the cost of liquidity.

Banks operate on the assumption that they can get out of all of their positions the next day, Appel said, while the insurance sector constantly lives with the unexpected. This, he believes, has brought a finer appreciation of risk management.

?In an event that is unpredictable, that is actually outside the standard deviation distribution, we need to be here,? Appel said.

The problems that did arise in insurance, Appel said, came from two or three organizations. These difficulties were either unrelated to insurance risk or tied to life contracts with a dependence on equities or long-term commitments to customers. Equities-induced stresses are now beginning to show themselves in the area of pension funds, Appel said.

Aon Corp. (NYSE: AOC) is ranked by Best's Review as the world's largest insurance broker

(By Robert O'Connor, London editor: Robert.OConnor@ambest.com)

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