NAPSLO 2015

Surplus Lines See Pressure on Rates

Competitive pricing and M&As are pushing the E&S market to evolve.
By: | September 23, 2015 • 6 min read

Excess capacity, an abundance of capital and few CAT losses are driving pressure on rates in many lines of business, yet premiums are rising as well. That’s the situation for surplus lines, said Brady Kelley, executive director of the National Association of Professional Surplus Lines Offices.

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The annual NAPSLO conference earlier this month in San Diego drew about 4,200 brokers, carriers and other insurance professionals – a new record attendance, Kelley said.

The slowly recovering economy is increasing the need for surplus lines coverage, he said, noting a 6.7 percent growth in surplus lines direct premium written (DPW) in 2014 over the prior year, reaching $40.2 billion – the highest in history, according to A.M. Best.

While surplus lines carriers continue to “feel pressure on rate,” he noted that “there is a lot of optimism. The market is growing and that’s a good thing.”

Brady Kelley, executive director, National Association of Professional Surplus Lines Offices

Brady Kelley, executive director, National Association of Professional Surplus Lines Offices

As always, cutting-edge carriers are tackling the latest risks associated with drone technology, driverless cars and the sharing economy, such as Uber, as well as an ongoing demand for cyber protection, he said.

Some of the legislative items NAPSLO is paying attention to are adoption of a flood modernization bill that would continue to allow surplus lines carriers to provide coverage; formation of the National Association of Registered Agents & Brokers (NARAB II) board that would streamline nationwide registration of brokers; and exemption from the “burdensome” Foreign Account Tax Compliance Act (FATCA) regulations that require brokers to collect premiums from clients on behalf of foreign carriers

No End in Sight for M&As

Mergers and acquisitions in the insurance industry will continue due to excess capacity, a need for expertise and talent, and the benefits of scalability, said Alan Jay Kaufman, chairman, president and CEO of Burns & Wilcox.

The impact for risk managers will be fewer choices, he said.

“They will have more limited opportunities,” Kaufman said. “Risk managers will have to be better. They will have to have more expertise to deal with expertise. Experts want to deal with experts.”

Among the major M&A’s impacting both insurers and brokers, are Ace/Chubb, XL Catlin, AmWINS Group/Colemont Insurance Brokers, Tokio Marine/HCC Insurance Holdings, Global Indemnity/American Reliable and Fosun Group/Meadowbrook Insurance.

“These are very large acquisitions of consequence, and what is that going to do for our world?” — Alan Jay Kaufman, chairman, president and CEO, Burns & Wilcox

“There seems to be a heightened interest in who’s next,” he said. “These are very large acquisitions of consequence, and what is that going to do for our world?”

He envisions more limited distribution by insurers “in order to get more market share.”

“The relationship of being a broker or MGA is going to become more valuable in the future,” he said.

The lack of talent and the need for expertise is a key reason for the M&As, he said

“The insurance industry overall doesn’t have enough new talent coming in,” he said. “That’s why people are taking from each other.”

But, he noted, companies don’t have to be big to have expertise. “There will always be a place for expertise in boutique companies.”

Need for Technology

Commercial lines insurers are, generally speaking, behind the technology curve, at least as it comes to providing user-friendly web platforms for clients or the brokers that serve them.

Michael Sillat, president and CEO, WKFC Underwriting Managers

Michael Sillat, president and CEO, WKFC Underwriting Managers

“Where I believe insurers have made significant progress over the last decade or so, it’s been notably in the personal lines arena, such as travel, life, health or auto insurance,” said Michael Sillat, president and CEO of WKFC Underwriting Managers, a subsidiary of Ryan Specialty Group.

He noted, however, that there are a growing number of standard commercial business policies that can be procured on the web these days as well.

“Carriers that offer, or are developing products that a web platform can help distribute, quote, bind and issue, have been, and will continue to become more and more prevalent in future,” he said.

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“For now, I think all insurance companies are at least looking at it.

“No doubt, some probably wonder how on earth they can do it, but in my opinion, they have to, whether they develop the technology in house or outsource to an entity with such capabilities.”

“Carriers that offer, or are developing products that a web platform can help distribute, quote, bind and issue, have been, and will continue to become more and more prevalent in future.” — Michael Sillat, president and CEO, WKFC Underwriting Managers

A big part of the process requires developing sufficient intelligence, driven by data analytics and predictive modeling, to create and implement pricing algorithms, so that insurers can integrate risk-based decision-making tools into online platforms or at least within internal underwriting systems.

The excess and surplus lines should be able to provide such online access, he said.

Although given the diversity of the risks that enter this space, the challenge is greater and therefore, development in this arena, while not at all impossible, will probably require a longer gestation period than for standard lines.

A Competitive Environment

Bruce Kessler, division president, ACE Westchester, agreed that excess capacity in the market is making the insurance market more competitive in some lines.

Bruce Kessler, division president, ACE Westchester

Bruce Kessler, division president, ACE Westchester

E&S insurers “have to be really quick to adapt to a changing marketplace and use data to tell us what to do in addition to intuitive and experienced underwriting. … How we manage a portfolio and use data is never static.

“It’s generally hard to write new property business because at renewals, [the incumbent carrier] will take the business at a lower rate,” he said.

Casualty is also more challenging, he said, although not as fiercely competitive as property.

ACE Westchester continues to build out product in such lines as product recall, railroad, professional risk, private company D&O, life sciences, and allied medical services, he said

“While rates get more competitive, I think the results in those lines of business are still pretty good.”

Some structural changes as part of the ACE/Chubb integration — which is scheduled to close in Q1 2016 — will bring together ACE Westchester and Chubb Custom’s E&S businesses, which includes the wholesale sales and program business, he said.

“It will be a powerful platform, so we are excited about it,” Kessler said.

The integration overall, he said, is ongoing and complex, but “it’s a good match-up in appetite and product” and will allow the company to combine data and resources.

E&S in Transition

The E&S market is in transition, with significantly more competitiveness than in early 2015, said Vincent Tizzio, president and CEO of Navigators Management Co. Inc.

Nevertheless, while E&S will ebb and flow over the years, it has grown to about 7 percent of total property/casualty DPW in 2014, he said.

And in the 10-year period ending 2014, according to A.M. Best, surplus lines insurers grew from a 6.1 percent share of commercial lines DPW in 1994 to 13.9 percent in 2014.

“The death of the E&S marketplace has been predicted many, many times, said Jeff Saunders, president Nav Specialty, “and as many times as its demise has been predicted, it’s been reinvented or has evolved” by focusing on service, solutions, underwriting expertise and client need.

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One way it needs to evolve again requires technological advances. Insurers need to use data, segment customers, enhance cost containment and offer a self-service approach to insurance, particularly for small to midsize businesses, Tizzio said, noting there have been some “nascent” advances in the commercial space.

“No one seems to have the special sauce to create technology solutions that aren’t rendered obsolete before they can be rendered,” he said.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

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.

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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.

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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?

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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.

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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 an 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.

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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. &

The R&I Editorial Team can be reached at [email protected]