An economic recession. A highly competitive property and casualty insurance market. A lawsuit from a competitor and our CEO's former employer. Kinsale Insurance has managed its way through these and lots of other challenges in its first year as it worked to establish itself as a go-to market for hard-to-place E&S accounts.
But by far the company's biggest challenge and success to date has been recruiting the 50 experienced and motivated employees who today make up our team.
In late 2009 and early 2010, prospective Kinsale employees faced a tough choice—to stay with an established firm or quit their jobs and take a chance on a new company with no A.M. Best rating, limited capital, no policy- or claims-processing system, no regulatory approval and few employees.
Many candidates were too risk averse. But for the entrepreneurially minded, Kinsale was the chance of a lifetime—an opportunity to help build a new company from scratch and to build wealth at the same time. Each employee at Kinsale participates in the company's restricted stock program. Shares in Kinsale have had limited value early on, but if the team builds a good business over time, then these shares have the promise to become a tremendous wealth-building vehicle.
Kinsale, now fully capitalized and with an A.M. Best rating of A-minus, wrote $18 million in its first 12 months. The company has set up 13 underwriting divisions, each one organized around an industry segment or a unique coverage.
In addition, Kinsale has implemented a highly automated underwriting system that not only allows for an efficient operation of the business, but also collects vast amounts of statistical information at the transaction level to allow for better management of the business over time.
OWNERSHIP MENTALITY
Now in its second year, Kinsale is still culturally operating like an entrepreneurial startup. Since the employees have ownership in the company, they are encouraged to treat the company's money as their own. After all, it is their own. And each employee's compensation is tied directly and indirectly to the performance of the business.
Examples of how this ownership mentality affects the behavior of employees abound. For instance, after starting the business in June 2009, the IT staff priced phone systems. After receiving quotes from vendors that ranged from $65,000 to $135,000, we found an open-source VoIP (Voice over Internet Protocol) system that fit our needs and cost roughly $10,000.
Another example centers on branding the company. An advertising company's branding package for a client can be tens of thousands of dollars. Our marketing officer worked with a local graphic artist and created the Kinsale brand for less than $1,000.
The company's first office was sublet from a distressed mortgage company which agreed to less than half the going rate and gave Kinsale its furniture at no cost to get the deal done. This year Kinsale moved to a larger space that had also been vacated by another distressed mortgage company. Once again, we were able to negotiate all the furniture and fixtures for free, thereby saving several hundred thousand dollars in cost.
OPERATIONAL EFFICIENCIES
Part of Kinsale's business plan is to use its technology and management focus to eliminate as much expense from the insurance transaction as possible. Kinsale uses an intuitive and automated system—largely built in house by our IT team—to allow underwriters and adjusters to do their work as efficiently and accurately as possible with a minimal amount of support staffing. Such operational efficiency is important in eliminating redundant positions and providing strong service levels to the company's brokers and claimants.
Once it achieves a mature run rate of business, Kinsale expects to operate with an expense ratio below 25, compared to its competitors who are in the 40-range. Such an advantage not only accrues to the benefit of the customers in the form of lower prices, but also to the benefit of investors in the form of higher margins and to employees in the form of higher compensation.
As an entrepreneurial startup company, you would expect the Kinsale team to have its share of optimists—and it does. While we have started an insurance company at a very competitive time in the insurance cycle, we see trends that make us hopeful that we will see a slow upward turn in commercial pricing over the next year or two.
With that said, even if the market stays competitive for a longer period, Kinsale is in a great position given its focus on hard-to-place accounts that many companies—even E&S companies—shy away from. With fresh capital, efficient systems, experienced staff and a solid business plan, the Kinsale team is ready to roll.
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