Cover Story

Forged By Fire

Peter Eastwood and three trusted colleagues set out to build Berkshire Hathaway Specialty Insurance.
By: | December 1, 2013 • 9 min read

To understand the professional bonds and temperaments of the team that leads Berkshire Hathaway Specialty Insurance, go back to 2008.

Peter Eastwood, president of BHSI since its April 29 launch, then worked at Lexington Insurance, AIG’s excess and surplus division. David Bresnahan, David Fields and Sanjay Godhwani, the three other players in the leadership quartet that left AIG for BHSI in April, were also AIG employees at the time. All of them had worked together on major projects and trusted one another. Then came September of 2008 and the earth shook in financial services.

We all know the story. AIG’s liquidity problems brought it to its knees. For many of its employees, the question became, should I stay or should I go?

These four stayed.

David Bresnahan, now an executive vice president, casualty, healthcare professional liability, executive and professional lines with BHSI, recalled that AIG’s property/casualty operation was financially sound at the time but was losing talent.

“Because of the parent company challenges and the possibility that people would start leaving the organization, there was the threat of a vicious spiral where people would leave and then customers would leave and lose confidence in the property/casualty businesses’ ability to move forward. And if the customers had left, that is the beginning of that downward spiral,” Bresnahan said.

David Bresnahan, executive vice president, casualty, healthcare professional liability, executive and professional lines, Berkshire Hathaway Specialty Insurance

“Those years that we spent together — between December of 2008 through 2011 — were when I learned some of the most important life lessons with respect to leadership and teamwork.”
— David Bresnahan, executive vice president, casualty, healthcare, professional liability, executive & professional lines, Berkshire Hathaway Specialty Insurance

Kevin Kelley, who had stood at the helm of Lexington for years, left the company in December of 2008 to take his present job as CEO of Ironshore.

Eastwood was then promoted to president and CEO of Lexington. It was, to that point in his career, the chance of a lifetime.

“It was an enormous opportunity for me and I recognized it for what it was. As a result of that event I have received more opportunity than I ever would have been given,” Eastwood said.

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But he and his colleagues who stayed at Lexington and AIG had to battle to save the company and its reputation. Looking back, Eastwood now sees that as his proudest moment at AIG.

“I think the thing that stands out the most is how my former colleagues and I came together at the height of the financial crisis to move together as a team to move the organization forward. Essentially to run to the fight, to stay with the organization,” Eastwood said.

“I stayed, and I think my colleagues stayed, out of a sense of loyalty to one another and to the organization, as well as based on a commitment we felt we had made to customers and other business partners. Many of us had worked for AIG for many, many years,” he said.

One can’t gauge an individual in just one meeting. But when Risk & Insurance® interviewed Eastwood in New York in early November, he came off as someone with a great deal of self-control, who chooses his words very carefully. One executive who watched Eastwood at work in the stressful days of late 2008 recalled him as one who kept his cool.

“Despite everything going on around him,” said James Drinkwater, president of the brokerage division for the AmWINS Group Inc., “he was always very calm and very thoughtful in his approach.

“He obviously took over at a very difficult time in Lexington’s history. He retained many of the key staff and I think he just demonstrated great leadership at that time,” he said.

Eastwood also marks late 2008 and beyond as a time that strengthened his bonds with Bresnahan, Fields and Godhwani.

The Team

As he looks at the team he is assembling now, that proven success in sticking together to help salvage AIG is in his hip pocket.

“I have said repeatedly to people that they are individuals who are just great professionals and equally good, if not better, human beings,” Eastwood said.

In Eastwood, Bresnahan and Fields said, they have a leader who leads by example, someone who holds himself to high standards and expects the same from teammates.

“He is one of the hardest working individuals you will meet. No matter how high he has climbed in particular organizations, I find that he really sweats the details and really gets into the weeds of the business,” said Bresnahan.

Bresnahan said that he too feels the time the four spent at AIG when it was reeling not only strengthened their bonds with one another but helped them grow as individuals.

R12-13p24-26_01Eastwood12-2.indd

David Fields, executive vice president, underwriting, actuarial, finance and reinsurance at Berkshire Hathaway Specialty Insurance

“I agree with Peter,” Bresnahan said, “Those years that we spent together — between December of 2008 through 2011 — were when I learned some of the most important life lessons with respect to leadership and teamwork.

“And I share Peter’s view that it was one of the more rewarding times. It really revolved around teamwork, collaboration and being highly communicative to employees, customers and brokers. Those were some of the keys that got us through that very difficult time,” he said.

That experience and the way it strengthened existing bonds, instead of weakening them, is perhaps why this team at BHSI has as much faith as it does.

“It comes from having worked together in a variety of different situations and feeling that we had each other’s backs. We really feel comfortable with each other,” said Fields, now executive vice president, underwriting, actuarial, finance and reinsurance at BHSI.

Chance of a Lifetime

Being able to launch BHSI, backed as it is by the Berkshire Hathaway name and balance sheet, presents unique advantages.

“From my perspective, I smile every morning. I feel like I need to be able to pinch myself about is this all real,” said Fields.

“We are fortunate to be able to have the capital support and name recognition of the Berkshire organization; the freedom within the organization to focus on the things that are important and to be able to accomplish them quickly; and then the ability to work with people that we know and feel comfortable with.

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“We are creating an environment here that is completely different, in my opinion, than other places in the industry … it is a once-in-a-lifetime opportunity,” he said.

Bresnahan said the response from customers so far has been glowing.

“When you meet with customers,
a lot of validation comes out of those meetings. There is genuine joy that people have seeing what we are doing and recognizing that we have a really special opportunity,” Bresnahan said.

“They have approached the marketplace in a very responsible fashion,” said AmWINS’ Drinkwater, “and I think that they have got a terrific team that is going to be incredibly successful in building a new company.”

On the one hand, BHSI has capital strength and a strong brand so it is not viewed as a new entrant, but on the other, it has the unique opportunity to build a team and systems from the ground up that are highly efficient and service-oriented.

R12-13p24-26_01Eastwood12-2.indd“The opportunity in and of itself is exciting. But the ability to build a company with people you respect, trust and have a very strong working relationship with is unique.”
— Sanjay Godhwani, executive vice president, property and programs, Berkshire Hathaway Specialty Insurance

“The opportunity in and of itself is exciting,” said Sanjay Godhwani, executive vice president, property and programs for BHSI. “But the ability to build a company with people you respect, trust and have a very strong working relationship with is unique.”

Since its launch, Eastwood said, BHSI has grown quickly and has been received enthusiastically by brokers and insureds. The possibilities are obviously enormous, but for Eastwood — who left a position as CEO and president of AIG property/casualty in the Americas for this unique opening — so too is the gravity with which it must be treated.

“It comes with a lot of opportunity and a lot of responsibility. The former of which I am thankful for, the latter of which I take very seriously. While the opportunity is significant for me, it is important for me to recognize the team and their contributions and the significance of this opportunity to them as well,” Eastwood said.

The Business So Far

BHSI was launched in April with Eastwood, Bresnahan, Fields and Godhwani. As of early November, the company had 73 employees and five business units, those being a property group, a casualty group, an executive professional lines group, a health care professional liability group and a program business group.

Coming out of the gate, Eastwood described BHSI as “disproportionately focused on the E&S market right now” for a number of reasons, “but evolving quickly.”

The reasons for the initial focus on E&S is that there is a good growth trajectory in E&S. It offers freedom of rate and form, and that makes it attractive for a firm looking to stand up businesses quickly, Eastwood said.

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Getting to work in admitted markets takes a little longer to set up, but Eastwood said BHSI is in the process of doing that. The directors’ and officers’ market, in particular, and the larger professional lines space is more of an admitted market.

“We have just completed a primary D&O policy form and we are now underway getting that policy form filed and the rates filed with it,” Eastwood said.

BHSI is, at this point, also a predominantly U.S.-focused business. The United States is by far the largest market in the world and it is where the Berkshire Hathaway infrastructure is “largely focused and built,” Eastwood said.

But BHSI does have an interest, he said, in moving the business outside of the United States and is exploring opportunities. That said, the company is writing U.S.-domiciled risk with foreign exposures.

In terms of distribution, Eastwood said his team is “interested in seeing as much of the marketplace as we can and as a result we are interested in seeing as much business from as many brokers as we can see it, because it is, again, the only way to see the totality of the market.”

Eastwood said the network will be both retail and wholesale-focused.

“I value the wholesale broker channel as a very effective distribution channel for us, reaching brokers that we couldn’t get to on our own or getting to geographic territories that we wouldn’t get to on our own,” he said.

As this venture unfolds, the excitement on the part of the BHSI executives is palpable and the possibilities before them look to be historic in their uniqueness.

Eastwood described this chance to build a business within Berkshire Hathaway as an opportunity to work within a company that has “industry leading characteristics.”

One, he said, Berkshire Hathaway is a company that knows and values the insurance industry. Its personal lines business Geico and its reinsurance arm Gen Re being just two examples.

Two, it has great financial strength.

“In a business where companies are transferring risk and we are assuming risk — it’s a competitive advantage,” Eastwood said.

The third is the brand of Berkshire Hathaway, standing as it does in Eastwood’s words, for “integrity and doing things the right way.”

And the fourth is group empowerment.

Eastwood said he has the right team to act with that freedom and deliver.

It’s fair to say that the rest of the industry is watching closely.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Black Swan: Cloud Attack

Breaking Clouds

A combination of physical and cyber attacks on multiple data centers for cloud service providers causes economic havoc. Even the most well-prepared companies are thrown into paralyzing coverage confusion.
By: | July 27, 2017 • 10 min read

Scenario

By month 16 of the new presidential administration, the Sunshine Brigade is more than ready to act.

Stoked by their anger over rampant economic inequality, the mostly college-educated group of what might best be called upper-middle-class anarchists — many of them from California, Oregon and Washington State — put in motion the gears of a plan more than two years in the making.

Their logic, to them at least, is unimpeachable. Continued consolidation of economic power into the hands of fewer and fewer corporations is creating a world where the rich increasingly exploit and shut out the poor.

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The rise of the techno giants is accelerating this trend, according to the Sunshine Brigade’s de facto leader Emily Brookes, an All-American rugby player and a graduate of Reed College in Oregon.

With a new presidential administration seemingly bent on increasing the economic advantages of the rich with no end in sight, nothing to do then but break things up; and in so doing break the hold of this technology oligarchy.

As Emily Brookes so forcefully put in her instant messages to the other members of the brigade: Break the Cloud.

With more than 500 members, many of them with ample financial and technical resources, the Sunshine Brigade is very capable of delivering on its plan for a two-pronged attack.

It is also radicalized enough to justify the loss of some human life, even its own countrymen, to “save” — in its collective logic — the tens of millions of global citizens that are living as virtual slaves in this callous, exploitative global economy.

With websites and digitally connected services large and small down for days, irritation turns to fear.

The first wave in the attack is an attempt to infect and shut down the data centers for the top three cloud service providers. It takes months to set up this offensive.

Rather than rely on a phishing scam from outside the firewalls of the service providers, The Sunshine Brigade uses its social and business connections to place three members on each of the cloud provider’s payrolls. An infected link from someone you know, someone in the cubicle right next to you, seems like an unstoppable play.

It only partially works. Only one of the cloud service providers is harmed when an unsuspecting employee clicks on a link from their traitorous co-worker. The released malware manages to cripple a major cloud service provider for 12 hours.

With millions of users affected, the act creates substantial disruption and garners global headlines. Insured losses are around $1.5 billion. But this is just the beginning.

The morning after, the Sunshine Brigade unleashes a far more devastating and far more ruthless Round Two.

Using self-driving trucks, the Sunshine Brigade smashes into five data centers; three on the West Coast, and two in the Midwest. Fourteen employees of those cloud servers are killed and another 23 injured; some of them critically.

This time the Brigade gets what it wanted. The physical damage to the data centers is substantial enough that it significantly affects three of the top four cloud service providers for five days.

With websites and digitally connected services large and small down for days, irritation turns to fear.

Small and mid-sized banks, which host their applications on clouds, are shut down. Small business owners and consumer banking customers immediately feel the brunt. Retailers that depend on clouds to host their inventory and transaction information are also hit hard.

But really, the blow falls everywhere.

In the U.S., transportation, financial, health, government and other crucial services grind to a halt in many cases.

Not everyone is disrupted. Some of the larger corporations are sophisticated enough in their risk management, those that used back-up clouds and had steadfast business resiliency plans suffer minimal disruption.

Many small to mid-size companies, though, cannot operate. Their employees can’t get to work and when they can, they sit idly in front of blank computer screens connected to useless servers.

For the man on the street, this is hell.

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Long lines blossom at the likes of gas stations, banks and grocery stores. A population already on edge from a steady diet of social media provocation becomes even more inflamed.

By nightfall of Day Five, the three major cloud service providers are recovered, and digital “normalcy” begins to creep back. But for many small and medium-sized businesses, the recovery comes way too late.

Economic losses promise to register in the tens of billions. It’s not being too imaginative to think that losses could hit the $100 billion mark.

Two multinational insurers based in the U.S., three Lloyd’s syndicates and a Bermuda insurer signal to regulators that their aggregate cyber-related losses are so great that they will most likely become insolvent.

Emily Brookes and her cohorts were willing to kill more than a dozen people to promote their worldview. In their youthful naiveté, they could not know just how much suffering they would cause.

Observations

For some commercial insurance carriers, the aggregated losses from a prolonged disruption of cloud computing services could be catastrophic, or close to it.

“It’s on a par with any earthquake or hurricane or tornado,” said Scott Stransky, an associate vice president and principal scientist with the modeling firm AIR Worldwide.

AIR modeled the insured losses for the Fortune 1,000 were Amazon’s cloud service to go down for one day. They came up with a figure of $3 billion.

Now consider that most businesses in this country are small businesses, with not nearly the risk management sophistication of the Fortune 1000. Then consider a cloud interruption of five days or more.

Mark Greisiger, president, NetDiligence

“Almost any company you talk about today would rely to some extent on the cloud, either to host their website, to do invoicing, inventory, you name it — the cloud is being used across the board,” Stransky said.

“It’s a significant issue for insurers and one we think about a lot,” said Nick Economidis, an underwriter with specialty carrier Beazley.

“Should a cloud service provider go down, everybody who is working with that cloud service provider is impacted by that,” he said.

“Now, pretty much every software maker is on the cloud,” said Mark Greisiger, president of NetDiligence.

“In the old days, someone would come in and install software on your servers and come in annually for maintenance. That’s all gone bye-bye. Everybody who makes software is forcing you onto their private cloud,” Greisiger said.

The aggregation risk for carriers is complicated by the degree of transparency they have into which insured’s applications are hosted on which cloud provider.

Now here’s the even trickier part. Clouds outsource to other clouds.

“It’s almost becoming a spider’s web of interdependencies on who has access to what in terms of upstream and downstream providers,” Greisiger said.

Determining which of their insureds is hosted on which cloud, and in turn, where that cloud is outsourcing to other clouds can be very difficult for carriers to determine.

Even if a company is careful to diversify the risks they’re taking, they might not realize that a high percentage of insureds are even with the same cloud provider. They could be hit with devastating losses across their entire portfolio of business, said an executive with BDO consulting.

AIR’s Stransky said his company launched a product in April, ARC, which stands for Analytics of Risk from Cyber, which is designed to help carriers gain that much needed transparency.

Among insureds, surviving an event of this magnitude will depend not only on the sophistication of their risk management department, but on the company’s overall ability to negotiate contracts with vendors and suppliers that will indemnify the company in the case of a cloud outage of this duration.

It will also depend on organization’s understanding that there is no off-the-shelf solution that will prevent an event like this or make a company whole after it.

Shiraz Saeed, national practice leader, cyber, Starr Companies

Experts say contracts with cloud service providers, customers and suppliers must be structured so that a company is defended should it lose cloud access for as much as five days or more.

Best practices also include modeling just what your losses would look like in this area, and vetting your full portfolio of insurance policies to understand how each would respond.

One broker said buyers can’t be blamed if the complexities of the coverage issues at stake here are initially hard to grasp.

“It’s becoming a spider’s web of interdependencies on who has access to what.” —Mark Greisiger, president, NetDiligence

“I think it’s the broker’s job to inform the client of this exposure,” said Doug Friel, a vice president with JKJ Commercial Insurance, based in Newtown, Pa.

“You may have business interruption coverage for direct physical damage to your building. But have you ever thought about your business income if your IT structure goes down?” Friel said.

He said many buyers might not realize there is a difference.

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Large businesses should have the resources to demand from their cloud service providers that they be indemnified for the entirety of a cloud failure event. There will be a fee for that, but it will be well worth paying, Friel said.

“You have to push,” Friel said. “They are going to say, ‘Here is our standard contract, sign it.’ ”

Don’t settle for that, he said, although many do in ignorance, he added.

“Where possible, we would look for clients to negotiate their contracts. These business relationships should be mutually beneficial, even if one of these events occur,” said Shiraz Saeed, national practice leader, cyber, for the Starr Companies.

It’s a partnership, he said.

“It shouldn’t be a zero sum game on either side. I think there should be an understanding of what the potential loss might be and then designing a contract around that,” he said.

While cloud service providers are known for having high grade security systems, most average organizations don’t have the means for that. But no matter what a company’s resources, the first step is modeling where your digital assets are, and what you and your customers stand to lose if you lose access to them.

“Most insureds don’t seem to understand the amount of individual loss that you could be subject to,” said Jim Evans, leader of insurance advisory services at BDO Consulting. “Usually this stuff is measured in hours,” he said. “But what if a cloud provider is out for three or four days?” he said.

“Trying to quantify what you did lose in an event is hard enough. Trying to do a modeling exercise about what you could lose? It’s something that just doesn’t get done enough,” he said.

Once you have an understanding of what you own and what you stand to lose, the next step is prioritizing the protection of the assets you have. That means drilling into your contract with your cloud service providers to get the maximum indemnification.

It also means spreading your risk so that if at all possible, not all of your assets or your customers’ assets are housed by one cloud service provider. Cloud platforms can be public, private, or a hybrid of the two.

Understanding where your assets are in that architecture is crucial. Spending the money to insure that they are protected behind a diverse menu of firewalls is highly advisable.

Navigating the different iterations of business interruption coverage in property, cyber and kidnap and ransom policies is also important.

Make sure your broker can provide clarity on the different types of coverages and tailor them to your needs, experts said.

The concept of design thinking is really what’s in play here. Organizations have to work with vendors in every aspect of their operations to design a risk management system that can sustain this kind of hit.

“Build a better mousetrap to protect yourself,” said JKJ’s Friel.

“Depending on your service, you need to have the best and the brightest designing this stuff. Spread the risk.”

“Don’t be afraid to ask for more,” he said.

Postscript

In engineering an attack on the cloud, Emily Brookes and her cohorts accomplished the opposite of what they set out to do.

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Only the largest corporations with the most sophisticated risk management programs were able to survive the attempt to break the cloud with manageable losses.

Small businesses, the true backbone of the U.S. economy, suffered terribly. Entrepreneurs who put their life’s work into their business lost it in many cases.

Those on the lowest part of the economic scale, the working poor, lost their jobs and their ability to cover their rent and grocery bills. They joined the ranks of those subsidized by the government by the millions.  The attempt to break the cloud resulted in an even more polarized society. &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]