W. Robert Berkley, Jr., the CEO of W.R. Berkley Corp., is not one to mince words about perceived missteps in the property/casualty insurance industry. A recent assessment of the P/C reinsurance market presented during the S&P Global Ratings 2018 Insurance Conference is just one example.
“The part of the market that really takes the prize for pain or a train wreck, if you will, would be the reinsurance market in general—in particular, the property-cat reinsurance market. [And] the behavior or the competitive environment in the reinsurance market does to an extent empower what I would define as ‘less-than-responsible’ behavior in the insurance marketplace,” he said.
“If all we are is capacity and all they are is access, then the customer will treat us as a commodity, as they should.”
W. Robert Berkley, Jr.
At another S&P conference back in 2016, Berkley expanded on his observations. “Clearly, if you look at the cost of distribution, it is unusually high compared to other industries,” he said. “The number of pennies on every dollar that is effectively frictional cost between where the product is manufactured…and where it actually is consumed by the insured—there is a lot of cost associated with that and ultimately, from our perspective, that is going to change over time.
“We don’t know exactly how that will change, but the consumer will demand that, and we think that’s opportunity for the industry as well,” Berkley said.
Q: Something that you spoke about at an S&P meeting back two years ago was tension between underwriters and brokers. I haven’t heard too much about that recently. Have the tensions subsided?
Berkley: No, I don’t think the tension has really abated in any way. I think it continues to be a serious issue….We remain hopeful. But ultimately, both carriers and distribution have the same challenge and opportunity all wrapped into one, and that [involves] how you bring value to the customer.
We need to work together to bring value to the customer, otherwise the customer, as they have in other industries, will just marginalize both of us. If all we are is capacity and all they are is access, then the customer will treat us as a commodity, as they should. So carriers and distribution need to work together to turn ways to bring value beyond capacity.
Q: Looking ahead to the next decade, do you have a view on how insurance products and services will be distributed?
Berkley: Clearly, it varies depending on the product. I think small commercial is likely, to a certain extent, to go the way of standard consumer or personal lines. Will the whole market go that way? No. But will an increasing percentage of the market go that way? Probably. I think the larger the risk gets, the more complicated it gets, and the more there will be a need for advice and expertise.
Q: I’ve heard some people talk about the fact that underwriters are endangered by automation. One observation they make is that agents and brokers with predictive models and analytical tools can underwriters.
Berkley: Well, there’s nothing new about that. It’s called an MGU. Right?
But, I think ultimately, and it’s the problem with some of these facilities that have been associated with brokers—Is there not an inherent conflict of interest when a broker has a pen? They’re incentivized to write the business. Are they really incentivized to protect the capital? I think the answer is, “Some brokers, yes. Other brokers, no.”
Q: On a different topic, a huge priority for W.R. Berkley in recent years has been tax reform—specifically the leveling of the playing field between U.S. and foreign insurers. Now that the Base Erosion and Anti-Abuse Tax is law, what impacts have you seen on the P/C insurance and reinsurance markets?
Clearly, they are either going to have to accept lower returns, they’re going to have to charge more, or they’re going to have to change their selection or terms and conditions—something, because the simple math is that if you go from paying a lower tax rate to a higher tax rate and everything else stays the same, you’ll make less money. So, ultimately, without the benefits of being able to move business as efficiently offshore as they once could, that’s going to have an impact on their economic model. So if they want to maintain their margins, they’ll have to find something to do.
Q: What are some of the biggest challenges for a P/C insurance CEOs in 2018? What are the things that you’re spending the most time concerned about? I’ve heard you talk, for example, about inflation…
Berkley: I think inflation has to be on the list. Obviously, it has the potential impact [on] the industry and companies’ economic models in many ways. Clearly it impacts book value. Then, there are questions as to what it means for reserves. Investment income as well. And ultimately, what does that mean for pricing?
When we look out, certainly from our perspective it would seem as though inflation is on the rise. We’re seeing interest rates move up. And that’s really a reflection of the health of the economy. The good news is, our insureds are, by and large, healthy. New businesses are being started. The challenge is with inflation, how we think about pricing going forward, and ensuring that we get enough rate to appropriately contemplate increased loss cost trends in the future.
As we all know, the insurance industry is somewhat of a unique one where you really don’t necessarily know your costs of goods sold until, oftentimes, many years after the transaction has actually occurred. And because of that duration, it makes it that much more important to really contemplate where you think inflation and the overall trend is going.
Q: Here, you’re speaking now about economic inflation. I heard some CEOs talk a little bit, being concerned about “social inflation,” or a rise of litigation activity. Are you seeing that as well?
Berkley: It’s not clear as day, but there’s a growing number of data points that would support that….I think it’s just become a more litigious environment and a more plaintiff-friendly environment. [And] it’s not a complete surprise to be perfectly honest. There’s a lag but after having had eight years of Washington being somewhat controlled by the Democratic party, or certainly them having a disproportionate amount of influence, and they are the ones appointing judges. The pendulum then swings in one direction and, eventually, in all likelihood…you’ll probably see the court system go back the other way. It’s really just a delayed effect as a result of people being appointed to the bench and how they manage the legal system.
Q: You often describe market conditions on the quarterly earnings calls. It seems like the market isn’t quite catching up to the projected inflation [and] that the reinsurance market, particularly, has be somewhat of a headache for you.
Berkley: We’ve found the reinsurance market very frustrating. But it’s a small part of our business at this stage. So, it’s more a frustration because it’s foolish than it’s having some horrific impact on the group. Not at all.
But the fact is that we are an industry that still spends time looking in the rearview mirror as opposed to out of the front windshield. And we tend to make choices, decisions, judgments based on historical data, as opposed to, yes, using historical data but also incorporating current information, such as economic data. It’s pretty clear that, again, there is more inflation in the system today than there was a few years ago.
Q: You mentioned that reinsurance is a small piece of the Berkley operation—
Berkley: Less than 10 percent at this stage.
Q: Does it make sense to remain in the business? Would you contemplate at all selling the reinsurance business going forward?
Berkley: No. We’re very happy with the business. We think that there is clearly a place for it. Unfortunately, we think there’s been some irrational behavior for an extended period of time. But we are hopeful, and there seems to be some growing evidence that that marketplace may be ripe for change.
Q: During a recent S&P webinar, analysts described some trends they saw in the reinsurance marketplace. They talked about AIG buying Validus and AXA buying XL, which does have a reinsurance piece, and the comment from the S&P analyst was that there’s a wider appetite for global insurers to buy reinsurance platforms, marking a departure from the past when you saw Chubb getting rid of Harbor Point, The St. Paul exiting the reinsurance business, etc. Do you see any similar trends unfolding?
Berkley: I think it’s more the other way around to tell you the truth….There are a lot of people who got into the reinsurance business, and then all of a sudden realized that it’s not working out so well, so they decided, “Well, we’ll just expand into this specialty insurance business.” That hasn’t worked out so well for them either.
Q: Turning more specifically to focus on W.R. Berkley, can you share with me maybe what you view as some of the most significant changes at the company over the past three years since you’ve been CEO, in terms of changes in product, or territory, or use of analytics, anything you want to talk about?
Berkley: Clearly we are making great strides with data and analytics, and how we incorporate those into decision-making at a macro level, as well as an individual transactional level. And artificial intelligence.
It’s not just applicable for data scientists and actuaries, but we feel that we are finding ways to apply it to almost all activities in the organization.
Q: Can you give examples of how you’re applying both data analytics and artificial intelligence?
Berkley: We’ll use it not just from an underwriting perspective, but we will use it on the claims front, we will use it in distribution management, things of that nature.
Q: Is it difficult to get the workforce on board with using some of the newer tools, both data analytics and artificial intelligence?
Berkley: It certainly requires training, and it requires explanation. And not just explanation [about] how to use the tool, but ensuring that people understand the benefits and why. Most people, once they get beyond the idea of it being a threat and they understand the value, are willing to embrace it.
Q: What benefits have you seen? Can you quantify?
Berkley: Some we can and some we can’t, like a lot of things in life. Some things are more easily measured than others. And sometimes you know there’s value, but it is difficult to quantify.
Q: Some insurance executives are worried about disruptors, InsurTech companies that are taking aim at making the tasks of buying insurance and underwriting insurance less complicated through technology. What aspects of InsurTech are you concerned about or excited about—that create opportunity for W. R. Berkley?
Berkley: I think it’s exceptionally exciting. I think it gives an organization like ours with 54 different operating units the opportunity to experiment in many different ways. I think that it’s exciting because [for] the whole industry—from carrier to distribution to risks that the customers are trying to manage—there’s just a tremendous amount of change. And change creates opportunity for us to bring value to customers.
A changing environment is one that lends itself particularly well to a decentralized organization like ours, because we’re able to respond and be more nimble.
Q: In doing my research on the company, I found that W.R. Berkley invested in a technology company called Pypestream. Can you share information about some other InsurTech investments and what intrigued you about them? Pypestream, in particular, seems like a chatbot. Does that have a specific application to W. R. Berkley in terms of distribution of specialty insurance?
Berkley: What we have done is we’ve brought some people into the organization who are helping us look at opportunities within the InsurTech or fintech space. We’re able to look at it through two different lenses. One, obviously, as an investor, and two, as potentially a consumer of the product.
[With] Pypestream, there is applicability for our business and some of our operating units are in the process of using the technology. We think the applicability goes far beyond us, obviously far beyond the insurance industry.
As far as other investments that we’ve made, not to be too coy or cute, but we just generally don’t publicize that kind of stuff. But we have made a few others.
(Editor’s Note: In April 2017, W.R. Berkley Corp. announced that the hire of Goldman, Sachs & Co. Analyst Michael Nannizzi as part of the corporate investment team to evaluate potential investments in emerging insurance technology companies—a newly created position. Nannizzi joined with nearly 15 years of experience as an equity analyst focused on the financial and insurance sectors.
Separately, in November 2017, Pypestream, a B2C messaging platform, announced that it secured capital through a significant investment from W.R. Berkley to and appointed Nannizzi to its board of directors.)
Additional Reporting by Elizabeth Blosfield.