Underwriters: Like Lambs To Slaughter?

One of my reinsurer sources knows a broker who years ago lined up gleefully (with many of his brethren) at the desk of a wet-behind-the-ears underwriter in the London company market, who was foolishly writing any risk that came his way.

That young underwriter was a popular man within the London brokerage community in his short career. The insurance company ultimately suffered–no doubt from a general lack of underwriting controls and not just from the activities of one underwriter. Meanwhile, the brokers laughed all the way to the bank.

When I told that story to a chief executive at a Lloyds agency, he laughed and said, somewhat cynically, “You could argue that some companies managers are so stupid that the predatory broker improves the quality of the herd by picking off the weaker players.”

Brokers are “simply hyenas living off the edge of a completely incompetent industry,” he said, with a chuckle. “If you put a [wolf] into a pack of sheep, its a bit unreasonable to criticize him for dismembering a lamb.”

But isnt there a better way than relying on the law of the jungle to ensure the strength of the herd, especially when insurance is based on a promise to pay?

In a post-retirement interview earlier this year, David Gilchrist, the former chief executive of R.J. Kiln, the Lloyds managing agency, said it is important for an underwriters senior management to instill a top-down ethos within a company. Success as an underwriting concern comes from “long-term, good planning and well-trained people.”

Its vital for Lloyds and other underwriters in the industry to have senior management focused “on the long-term welfare of the individual business” being managed. And, he emphasized, its important that a strong business ethos is passed down from the senior people to the younger people in the company.

Long-term vs. short-term thinkingAre you in the business to create a dynasty–an R.J. Kiln that has been around since the 1960s? Or are you driven by next quarters returns?

For example, Mr. Gilchrist said, with training and discipline, when younger people move into positions of responsibility, they will prudently decide that a better long-term plan would be to avoid expansion during a soft market. “When the tide is in, you go fishing, and when the tide is out, you cut bait,” Mr. Gilchrist said, explaining that top-line growth in a falling market might lead “to some rather uncomfortable results.”

But Mr. Gilchrist admitted this is very difficult to do, particularly if parent companies in other parts of the world are pushing for top-line growth and short-term profits. Then there is pressure from the equity analysts whose raison d'?tre is to recommend stocks that show the most growth.

So as we head inexorably into softening rates–because thats what always happens–how can the industry avoid a repeat of its pattern of the last 30 years of making a bit of money and then losing its proverbial shirt?

My source at Lloyds didnt think change was possible. “The industry in the end will carry on doing what its been doing, with certain companies committing suicide. Then another lot turns up with some money and says, We can do it better. They go out and write business for a few years and do it badly. They go bust and another lot turns up,” he said.

“I think the industry has a terminal death wish because its driven by people with stock options and egos, and its driven by intermediaries who will stop at nothing to get the brokerage,” he added. “If youd like to pretend the industry is filled with blue-suited, gentle conservatives and professionals, youre wrong. Its none of those things.”

He said insurance is the same as any other industry–except that it doesnt make money from its product!

Indeed, James J. Schiro, chief executive officer of Zurich Financial Services Group, told an audience at the recent meeting of the International Insurance Society that he joined Zurich after a career in accounting, where he had observed many companies over the years. He said he has never seen an industry other than insurance that doesnt make a profit in its core business.

What have the successful companies–the dynasties in the insurance and reinsurance industries–done to assure long-term success? My source at Lloyds says they stay out of American casualty.

Failing that route, I think it may be simply a matter of being nimble, moving in and out of lines that dont appear to have sound business fundamentals.

A case in point is Brit Insurance and its recent decision to exit the direct aviation business, although it is staying in aviation reinsurance, aviation war and space risks. “Despite opportunities, we do not feel that the aviation market has been able to sufficiently restructure its product offering to give us sufficient comfort that the account will provide a suitable return on capital employed over the medium and long term,” said Dane Douetil, chief executive of Brits underwriting in London. “There are a number of hurdles to the changes that we believe are essential to the way this business is insured if it is going to produce consistent return to insurers.”

Bravo to Mr. Douetil for doing some long-term strategic planning!

A Lloyds underwriter once told me that he gets nervous whenever he sees a line of brokers waiting to see him. It makes him feel he needs to harden terms and conditions.

A little healthy fear on the part of an underwriter who suddenly has become very popular with brokers strikes me as healthy. And if the underwriter is too stupid or na?ve to know the implications of a line of brokers at his door, then his underwriting manager should take note.

In this era, with the emphasis on corporate governance, it behooves insurer and reinsurer CEOs and chairmen to assure their company doesnt get picked off by market hyenas–who, after all, are only doing what comes naturally.

Lisa S. Howard is NUs international editor and reinsurance specialist, based in London. She may be reached at lhoward@nuco.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 1, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Underwriters: Like Lambs To Slaughter?

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