Lloyd's has obviously changed its mind. The Berkshire-Aon deal (which will expire at the end of this year as Ajit Jain is not renewing it) obligated Berkshire to write 7.5% of Aon-placed Lloyd's business.  The outcry from opponents to that arrangement is seeming to pale now in comparison to the reaction to the ACT deal. The new arrangement will place 20% of all Aon-placed London market wholesale client business into a follow form facility of approximately six risk bearers. Reports indicate that the facility could write as much as $600 million in 2016.

Anticipating opposition from critics that facility participants will have no control over the business placed into the portfolio, and that they will need to follow the price, terms and conditions negotiated by the lead, Aon noted that its sophisticated data and analytics supporting the portfolio underwriting had modelled the book and shown it would have delivered strong profits from 2012-2015. In other words the broker is saying claims of "blind underwriting" are groundless as not only will the lead underwriter be involved but underwriting will be buttressed by the Aon tools. However, what the facility participants obviously won't know is what other business the lead has with Aon as part of their portfolio and the extent to which they are following obliged lines or accommodations.

Aon was right to expect opposition. It was fast and furious.  Observers, who truth be told chose to remain anonymous, noted that if a "normal" CAT loss experience was factored in with the current lower premium rates the deal would begin to look marginal.

Insurance Insider's Adam McNestrie's article had some descriptive reactions. "There is no underwriting with ACT," one senior market source said. "The approach taken here is at odds with the way Lloyd's has always transacted business," explaining that participating carriers would be forced to accept any risks Aon produced. Another observer said "This has the stink of the soft market. Writing it is crazy".

Clearly there are strong feelings about ACT although most of its presumed strongest defenders, the six or so markets subscribed, are bound by Aon confidentiality agreements from commenting.  Aon isn't saying much either other than what was said at a November 11 briefing at its Cheesegrater headquarters. Lloyd's, apparently, is not offering any comment.

How good or how bad this eventually may be is anyone's guess. The bottom line is that if the largest broker in the world approaches XL Catlin, the overall leader for the facility, and the five following markets, to form a program that will price and underwrite 20% of the $5 billion in premium Aon places into the London market any market is certainly going to listen to the proposal.  In a time of falling premiums, combined with promises of increased efficiency from the program placements, it's not as if agreeing to the deal is the craziest thing we've ever heard.

Obviously it made sense to people like Mike McGavick at XL Catlin, the lead underwriter and Hank Greenberg at CV Starr, said to be one of the follow on markets. We would be hard pressed to think of two others who could be more trusted to ensure adequate underwriting and proper pricing if we were a market approached by Aon.

All of which leads to a renewed analysis of the reasons that prompted Berkshire Hathaway's withdrawal from not only its facility arrangement with Aon but also from smaller, similar arrangements with Willis and Marsh. Berkshire's investment returns remain enviable; their cost model is an industry "gold standard" and they were said to be charging only a 3 percent commission on the facility placements.  If Berkshire pulled out it meant that they didn't find the returns attractive enough. 

We didn't mention underwriting in connection with the factors which may have affected Ajit Jain's decision. Maybe we don't have to. Read this quote from Berkshire's 2nd quarter report back in August: "We continue to decline business when we believe prices are inadequate," Berkshire said. "However, we remain prepared to write more business when more appropriate prices can be attained relative to the risks assumed," the company added. The next month Jain pulled out of the facilities.

It may all go back to what James Vickers observed with his "banana futures" example. Companies like Berkshire can deploy their capital elsewhere internally but other insurers and reinsurers don't have that luxury. They need to focus on the only product they have to produce returns. In that case the Aon deal could look attractive to some.

The other Aon news is something called Aon Carrier Link (ACL).  On this one Lloyd's was perfectly prepared to comment and why not?  ACL would open the over $78 billion in premium that Aon places globally on behalf of 450,000 retail clients to Lloyd's syndicates. Currently it's thought that only about $1.8 billion of this premium reaches Lloyd's.

ACL has been a long time in the making. The first time we heard Eric Andersen, CEO of Aon Benfield, speak two years ago, he declared that his prior position, CEO of Aon Risk Solutions Americas charged with developing Aon's North American retail business, had led him to conclude that there were far fewer client-oriented products in reinsurance than there were in retail.  He noted that while retail was quicker off the mark to develop and service client needs there was often a lack of capacity to underwrite products servicing those needs. Reinsurance, he was surprised to learn, was the opposite.  There was ample capacity but fewer products.

And of course, with the increasing number of special purpose syndicates, being formed and financed by ILS entities, initiatives like ACL will open ever wider ranges of risk for them to underwrite.  It's a very big step for Lloyd's and for Aon.