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Beazley looks to future
Published February 12, 2007
Beazley Group P.L.C. has had a whirlwind year, celebrating not only its 20th anniversary in 2006 but also expanding its admitted-market insurer in the United States, Beazley Insurance Co. Inc. The U.S. unit was launched in 2005, writing predominantly professional liability risks and this month adds commercial property business. From a single Lloyd's syndicate, 623, formed with business partners Nicholas Furlonge and, initially, Robert Hiscox, that had £12 million ($23.6 million) in capacity, Beazley Group has grown to become a publicly listed company with managed capacity of £860 million ($1.7 billion). Andrew Beazley, co-founder and chief executive, spoke recently with BI Editor Regis Coccia about the company's history, its culture and its future.
Q. What were the ideas behind the launch of Beazley Furlonge & Hiscox?
A. We set out with some really strict ideas of what we wanted to do. We looked at where other people failed and why did they fail, and we came up with two things. One was they were led astray outside their areas of competency. The broker's role is to do their best for their client, and in London they take that to an extreme. It's a very efficient market. The brokers are quite good at testing the underwriter's ego. It was key that we had to have really good people, experts in their field. The other reason people got it wrong is that they employed people who weren't necessarily as good as themselves. So over a period of time, it starts to degrade. So we said, "We've got to employ people who are not only experts but are better than us." They're people, therefore, who would quite like to run their own business. Therefore, the environment is absolutely key, the culture of the company has got to be attractive to people who are really good, and in an environment where they are quite happy to work together. That was the trick. In that case, we needed to keep it flat. We have a collegiate atmosphere. However, we have four businesses that are run as four businesses. They have their own P&L. The leaders are directors of the company. The whole culture is concentrated around the activities of risk-taking and settling claims. Those are our two core competencies.
The way we set out all those (businesses) 20 years ago is exactly the same today, even though we're a public company. If you look at our (public limited company) board, we've got six executives who are or have been underwriters. And that's a very strange thing. I don't think there's any PLC board on this side or our side of the Atlantic that looks like that. The reason is, we believe so strongly that that is what the business is about. There should be no gap between the management of the company at the board level and what really happens in the front (office).
We haven't bought anything. All we've done is say, "Here's an environment, does it attract you? We think you're great," but we're a bit picky about who we employ. We get offered a lot of people, a lot of businesses throughout the years. But we only make the moves where we think the people are generally very good at what they do and where the businesses fit within our portfolio. We're not a generalist; we're very much a specialist.
Q. How does Beazley approach underwriting?
A. The other thing we wanted to do (when we started) is build specializations where you have noncorrelation, where they're not all going to go wrong at the same time. If you take architects and engineers, the exposure there shouldn't fit with straight correlation to our lawyers portfolio, and those don't fit with straight correlation to our marine exposures. Our marine exposures don't necessarily correlate against our U.K. homeowners and jewelers block. Also, they're not tied to the same cycles. If you take the cycle of catastrophe, that's loss-driven. On the marine side, that at the moment is really keyed to the freight index.
So if the freight index is high, shipowners are rich. If shipowners are rich, they can pay the premiums. They would quite like the ships to trade, not be laid up. When the freight index is down, at the bottom, shipowners don't have any money. Therefore, premiums are really key to how much they pay for their insurance. Ships aren't necessarily wanting to be on the ocean the whole time, things like repairs happen. And the loss climate changes. That cycle isn't related to windstorm cycle.
Cycle spread is important to us, because it gives us the platform to do what we're trying to do. Investors should look at us more as a long-term value proposition instead of one year stellar performance. If you look at our history, there have been periods when it's flat. There are going to be periods again where it's flat because the market cycle continues. There are going to be times where we'll not be able to write the business.
Unless we are able to measure the exposure and price our products correctly, we will not be stable. We'll be facing losses that we didn't expect. Stability for us over a period of time is absolutely key. It doesn't mean we have to write every account every single year. In the specialty lines account, we've been in the architects and engineers, lawyers, technology companies for 20 years. So stability is there, but we haven't always been the most aggressive in the market or the biggest supplier of capacity all those years.
People tend to think continuity means you have to be there every single year, even at the wrong prices. That's not actually true, because our clients choose to leave us sometimes if they can get a price reduction from somebody else who might not be there later. But we'll be back.
Q. How does Beazley handle claims? What differentiates Beazley?
A. One thing is, we don't have a centralized claim department. We see claims as a product of what we do. In effect, a client is paying us premium, not because they love us, but because one day they think they're going to have a claim. So we have our claims capabilities in the department. There are a few reasons behind that. One is because that's our product, we're taking premium off that client, we're paying claims. Those people should be sitting together. Also important to us is we want our claims people to understand what our underwriters are trying to do in underwriting that account, so they get a holistic view of the transaction. Our claims people can deliver to our underwriters information about what's happening to exposures that we can deliver back to the insureds.... We see claims as part of our underwriting, and part of our ability to shape our products, and also to price them.
We feel that there is a large amount of value that needs to be unlocked from the claims process. I'm not talking about cash value. It's quality to value in the way that the industry looks at claims. (In the industry,) a huge investment has gone into underwriting business, and there's not an equivalent investment going into claims.
Q. Why don't many other insurers try to put their claims people next to their underwriters?
A. It's partly tradition. I came up through the claims side. I started my career in claims, where in my view, everyone should start their career. The traditional view of the claims arena in the insurance industry is that it's cash out; production is cash in. The investment tends to be on the glory side, which is the cash in to the top line. This gives me such a thrill that so much can be done.
Q. What makes a good underwriter?
A. I've thought about it long and hard. The best underwriters are not only technically very talented, but they've got to possess other aspects. They've got to have a natural curiosity. When they're shown something, they need to ask themselves, "What does it mean? What does it do? Why is it important?" and try to understand the needs of the insured and how it fits into a situation. The other thing they need is self-honesty, to know when they're out of their depth. It's tough sometimes when you have powerful brokers trying to do their best for their client, and the underwriter must know if it's beyond them. The good underwriters know when it is. The third thing is, they're good businesspeople. A lot of insurance is connected to much broader business judgments.
Q. You've indicated that Beazley holds its underwriters accountable. How do you develop and train the underwriters that you take on, to hone their skills for the benefit of Beazley and its clients?
A. We don't like the phrase, "We will decide." We do really believe in trying to attract talented people who otherwise would be running their own business. Naturally, those are people who are relaxed at being accountable. A lot of it goes in behind the process. Here in America, it's been quite challenging to find people who are relaxed about being accountable. But that's the hurdle to get over. There's a lot of collegiate work of helping each other that goes on. We don't have offices. At one stage, we didn't even have titles on our cards. Part of my role is helping underwriters develop. And helping them develop means helping them think through their strategies and some of their business deals. In a lot of ways, it's like a business apprenticeship. Good managers are there to help; they're there as the coach.
Q. What led Beazley to seek an admitted-market presence in the United States?
A. It's a combination of the strategy of building a business platform that can operate through cycles. The cycles will exist; I have to take that as a given. I wish I could tell you they won't, but unfortunately they will. And the reason they will is insurers don't know the cost of the product until claims come in. Therefore, the pricing tends to be a perception which is found out to be a reality later.
To have that stability during the cycles, there will be times when part of our account will be written by other people who are very much cheaper than ourselves. The big competition tends to be in big-premium areas, partly because brokers are interested in that and partly because insurers find it's the easiest way to make budget. Therefore, the big-risk area tends to get quite overheated in the best of times. In the smaller-risk area, the brokers don't make so much money out of it, so it's not quite as competitive. For the carrier, it's difficult to manage because you've got a lot more units and it's got higher barriers to entry. We have our product lines, and we operate very much in the big-risk area and some of the smaller risks. What we wanted to build was better access to the smaller insureds for our product lines. Rather than trying to create a platform horizontally, it's getting deeper down into the disciplines we know and access that's slightly less volatile from a market cycle point of view.
Some of our products...started in the surplus lines market, like employment practices liability, but as the products mature, they start to go off into the admitted market. We don't want to lose part of our portfolio because it goes into the admitted market. It also enables us to move through the maturity cycle of products and follow them into the admitted market.... Because we're product-orientated, it made sense for us to be able to cross into both.
We're absolutely sure about what we're trying to do here. We're trying to reach into the same product area but going down the size of clients. Other people might have come across here writing different lines of business and getting more spread.
Q. What will Beazley Group look like in three to five years?
A. We'll still have a core in London. Lloyd's is a fantastic syndicated market. The talent on the underwriting side, the broking side, is there. The support talent, whether it be actuarial, legal, financial, is there. And the city of London is a financial powerhouse. It acts as the O'Hare Airport for business. We've got business coming from Australia, from New Zealand, from South Africa, Europe, America, South America. It's a crossroads. Therefore, syndicated, specialist risk is definitely going to be there in five years' time. There's absolutely no doubt about that. When you think about what's happening, you get the Bermuda startups that start in Bermuda and end up in London. It doesn't seem to me that London is going to be a shrinking violet. Outside that, our American operation is very important to us. We haven't started this with the thought of just trying it out. This is very real. It's going to be a material part of our business. But that will be for nonsyndicated risk, where we're writing it 100%. I suspect what might develop is a European platform that might look like the American platform, as Europe starts to develop. So in five years' time, you might see us as having three legs: syndicated London market for complex risk; America for nonsyndicated, same product lines reaching to smaller insureds; Europe nonsyn, smaller insureds, which will have distributed underwriting--we might be in Paris, Madrid. I hope in five years' time you'll see us have a more effective claims process where the outcomes will be really good value to the clients. I think you'll also find in five years' time that we'll have got rid of a lot of the issues to do with paper transactions.