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Homebuilders should be able to focus on building quality homes, without worrying where their insurance is coming from year to year. But for many homebuilders, that’s not been the case in the past. Berkshire Hathaway Specialty Insurance’s Katie Beck, Assistant Vice President of Construction Underwriting and Head of Homebuilders, and Ron Chenault, Assistant Vice President of Construction Risk Control, discuss how BHSI provides a new approach that gives homebuilders welcome certainty in their insurance programs.
R&I: The homebuilders insurance market is traditionally very challenging – much more so than commercial building. Why is that?
Katie Beck: First, there’s the nature of the business and the buyer. Homebuilders face a different level of customer expectations and need to provide a different level of customer care. A homeowner can be more sensitive to quality issues than a commercial buyer. This is the largest purchase they will ever make, so they are very invested in the property.
In addition, a homebuilder may build hundreds or thousands of homes a year, if they are a national builder. Having this number of individual customers/owners requires homebuilders to have a different set of skills when dealing with their customers as compared to a commercial builder.
Ron Chenault: When a homebuilder has a claim, the claim could be endemic throughout an entire development. Because of similarities in home builds, a problem with a single type of home may ultimately be widespread over the communities, states or regions where such homes have been built.
R&I: What are some of the unique challenges in underwriting these risks?
KB: Along with the potential severity of claims, homebuilder claims tend not to materialize immediately upon completion of the home, which creates a challenge around having adequate data to analyze. While homebuilders typically provide 10 years of past loss history for underwriting, homebuilder claims typically do not arise until about 8-10 years after a home is sold.
The rapid pace of change in the homebuilder industry is a challenge. The methods and materials used by homebuilders continue to advance. New technology and materials change both the way homes are built and the components used to build them. Legislation and regulations are in constant flux. The industry is also wrestling with a shortage of qualified workers.
Risks such as these pose a challenge to underwriters and their ability to properly underwrite a difficult market. As a result, homebuilders have seen inconsistent and limited capacity over the years.
R&I: What is BHSI’s approach?
KB: We see an opportunity to create a new paradigm in insurance for homebuilders, one that rests, most of all, on creating a close and trusted partnership with our customers. The better we know our customers and their business, the better we can be at bringing certainty to them. We’re committed to doing that – and our customers see it. We combine a clear and innovative policy form with a proactive, truly collaborative approach to risk control and claims.
R&I: Tell us about your policy form.
KB: We have taken great care to provide simple and clear policy wording that includes all relevant terms without reference to extracontractual documents. All terms and conditions of the coverage are found within the form. We’ve eliminated grey areas that have persisted and been problematic for homebuilders. This gives our insureds certainty in terms of the insurance provided, not only at the time when they purchase the policy, but continuing into the future when the potential claim happens.
R&I: What is BHSI doing from a risk control standpoint?
RC: The homebuilding industry has been evolving, becoming increasingly sophisticated in its risk management approach, particularly over the last 10 to 15 years. I work closely with our customers and with the overall homebuilder industry to understand what’s being done from a risk management and customer care perspective. I then share that with our underwriters so they can fully understand the technical risks that come with the potential customer.
I also see my role as a catalyst providing information on best industry practices relative to quality and safety. We hope that with this type of information our customers will benefit by developing their own best practices and raising their own risk management game.
R&I: What are some of the trends making homebuilders “better” risks?
RC: One important trend we’re seeing is homebuilders integrating aspects of commercial building into residential building to elevate risk management. An example: foundations. We’re seeing builders being proactive in conducting more extensive geotechnical investigations as they design their foundation slabs. This is important since a builder might be building on a plot many years after it was purchased. They need to understand the soil horizons and draw solid conclusions in order to develop a foundation that will perform as intended a decade or so down the road.
R&I: Any other key trends in risk control?
RC: Homebuilders welcome a risk control partnership. They realize risk control is not just about inspecting rather it’s about utilizing all resources to construct better homes. In turn, this enhances their own and the overall industry’s ability to manage risk.
They appreciate that we can connect them with other industry stakeholders. By introducing builders to the manufacturers of key components – items like exterior membranes or water intrusion protection products – the homebuilders have a chance to learn more about such products and pass that information along to their own workforces.
We’re also seeing new emphasis on training and education. Homebuilders are seeking the next generation of construction professionals and actively training people to be future leaders of their companies. Online tutorials enhance jobsite safety. Animated illustrations can help to clearly demonstrate building and safety practices where there are language barriers.
KB: Because these risks evolve so much from the time a policy is written to the time a claim will come in, it is important for us to continue learning with our customers and to stay abreast of the industry and understand what’s being done from a risk management standpoint. That’s why as underwriters we work so closely with our risk control team and our customers.
R&I: What is BHSI’s approach to claims and how is it different from what a homebuilder may have experienced in the past?
KB: Builders that have gone through construction-related claims recognize the challenges posed by such claims. No one wants to face a claim, but when they come, we view them as an opportunity to demonstrate our commitment to our customer and to underscore our partnership.
While many insurers choose to use TPAs for homebuilder losses, we utilize our own claims team. At the end of the day, claims handling is the product our customers purchase. That’s why we involve our claims team early on during our underwriting meetings with customers and brokers. We work hard to be forthright, transparent, and proactive in handling claims so that homebuilders gain a better understanding of their losses from day one.
The homebuilder industry’s unique risks can make it a challenging business to underwrite successfully. To reduce such challenges, we’re working together with our customers to elevate risk management and risk control. This approach helps us to better underwrite these exposures and handle claims in a way that will provide the certainty and long-term insurance partnership homebuilders need – and deserve.
To learn more about BHSI’s coverages and areas of expertise, visit https://bhspecialty.com/.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.
In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.
He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.
Now he was ready to make his mark on the business world.
Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.
Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.
This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.
In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.
R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?
Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.
When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.
I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.
We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.
R&I: So Starr’s success has meant success for the Chinese insurance industry as well.
Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.
“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.
Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.
We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.
On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.
R&I: What’s your outlook on current trade relations between the U.S. and China?
Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.
President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.
R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.
Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.
They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.
R&I: What stands in the way of that happening?
Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.
For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.
The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”
So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.
R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.
Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.
R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?
Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.
It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.
R&I: Your op-ed was very enlightening on that topic.
Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.
R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?
Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.
R&I: And that’s because you are a private company?
Hank Greenberg: Yes. We attract a different type of person in a private company.
R&I: Do you think that enables you to react more quickly?
Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.
“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.
R&I: You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.
Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.
R&I: And that fateful decision the AIG board made really affected the course of the country.
Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.
From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.
R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.
In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.
Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.
Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.
R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?
Hank Greenberg: We did something last week.
On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.
Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.
R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.
Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.
R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?
Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.
How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.
More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.
One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.
So, change is inevitable. You need people who can deal with change.
R&I: Is there anything else, Mr. Greenberg, you want to comment on?
Hank Greenberg: I think I’ve covered it. &