For most property/casualty actuaries, routine parts of the job involve finding comfort with insurance pricing levels and claims trends, grounded in a thorough understanding of the parameters of coverage language offered by their company’s policies.

But life is different at Berkshire Hathaway’s direct insurance operations, where the idea of “challenging the normal” now guides daily activities for President Peter Shelley, a casualty actuary by training, and a growing team of innovators charged with viewing insurance from a different vantage point—that of its customers.

Shelley spoke to Carrier Management a few weeks after the company announced the launch of THREE, a three-page comprehensive insurance policy for small businesses. He explained that customer reaction to some previously offered direct-to-customer policies and a bit of prodding from Ajit Jain, vice chair of Berkshire’s overall insurance operations, were factors behind the development of a short, plain English offering that attempts to cover small businesses for workers compensation, multiple liability coverages including cyber, property and auto all at once.

Shelley described the continuous experimentation that started with the creation of an online sales platform a few years ago, agreeing that the idea of building a GEICO for commercial insurance is now possible.

It Started With biBERK

Although the dateline of the Feb. 11, 2019 THREE media announcement is from the Omaha, Neb., headquarters of Berkshire Hathaway, it was in the Stamford, Conn., office of the conglomerate’s insurance and reinsurance operations where “ideas have been bubbling” about the potential need for a new product for small business, according to Shelley, who is also vice president of Berkshire Hathaway Reinsurance and president of biBERK Insurance Services.

“It really started about three years ago when we launched biBERK, a direct-to-consumer, small commercial, small business offering. At that point, we were just testing the waters. Would a small business owner buy a policy direct from an insurance company without an agent? Is that even a viable business model?”

“While we would always like to be bigger and faster,” the experience proved there was definitely an opportunity to sell small commercial directly, Shelley reported. But an analysis of potential sales that biBERK wasn’t able to close indicated there was room for more innovation at Berkshire Hathaway Direct Insurance, the legal entity that issues biBERK and THREE policies.

“One of our learnings is that there is a need for a simple policy that covers [small businesses] for what they are…They don’t think of themselves as a work comp risk or a GL risk or a property risk. They think of themselves as a restaurant or a barber shop or plumber, and the insurance product as designed doesn’t treat them that way.”

“There seemed to be this desire for this comprehensive solution, and that was to some degree limiting our ability to sell to certain customers on the biBERK platform.”

But that wasn’t the only motivation for developing THREE. “I think there’s universal acceptance in the insurance world that the actual policies we sell are far from optimal. Most people, even in the insurance industry, haven’t read their homeowners policy. If you sit down and read a BOP policy, it’s very, very difficult to navigate. It’s generally been written by lawyers for lawyers and reviewed by lawyers.”

“It’s just become this monstrosity of verbiage that is difficult for a person in the industry to understand, let alone someone who’s not in the insurance industry.”

In addition to recognizing “that there is just a tremendous opportunity to improve the customer experience from that standpoint,” Shelley also noted “the rise of the consumer in this day and age” and examples of Amazon and Netflix addressing their needs. “All these other industries are being…disrupted. It would be fair to assume that we, as the insurance industry, aren’t going to be immune to that—the consumer feeling more empowered, wanting more, a better experience from whomever is providing it for whatever.”

Combining all that, “we came up with this idea: Can we basically take the old way of selling insurance policies to the small commercial businesses, start from scratch, and write a simple, comprehensible and comprehensive policy in three pages that we believe delivers value at the same time to the consumer.”

He confirmed that actual customer opinion is one of the drivers of product innovation—that it isn’t just a matter of Berkshire anticipating what customers might want or speculating that a new policy format could drive up sales. “We absolutely got feedback that buying one policy is the preferred approach as opposed to buying four or five.”

“If we got a consumer who we were talking to on the biBERK side about their work comp, they might say, ‘I have my GL policy. It doesn’t renew for a couple of months. I’d really like to just get this all done at a one-stop shop.’ There was some tangible feedback there.”

Why Not Two? Or Four?

So, why has Berkshire Direct Insurance Company settled on a three-page form instead of two or four or some other small number?

“Because my boss told me it was going to be three pages,” said Shelley, referring to Jain. “Two was probably going to be a little too tough, and he probably thought four was too long.”

Once the vision was set, implementation and validation involved a team of people. “I’m an actuary by background, and we have our product managers on the biBERK side who have been involved. We obviously can’t get away from the lawyers completely, so they had a fair say in how it would be written. And we’ve involved our marketing folks, and the folks who did the customer research are involved.”

He cited the positive response from regulators as an early validation that Berkshire Direct is on the right track with THREE. “We love the idea of comprehensive. We love the idea of simple and easy-to-read,” he said, reporting their feedback and willingness to adjust their own approaches away from those that have always gotten them comfortable in the past. “They’ve been very willing to work with us,” Shelley said. “The biggest concern we’ve heard is, ‘Wait. You want to do this in three pages?'” But even those concerns are ebbing, he said, noting that Berkshire has agreed to add amendatory endorsements in states where certain items are required by statute.

“It’s been a very positive collaboration with the state departments on getting this up and running.”

An Actuary Gets Comfortable

“The next validation point will be when we go live and we start advertising—if the phone starts to ring and people show up,” Shelley said, noting that Berkshire will use a combination of online and traditional advertising.

Shelley, who has been working in the industry for almost two decades, is familiar with the problems that arose during a prior soft market when multiyear, multiline policies written for large accounts got some carriers into trouble. How does the actuary get comfortable with risk aggregations and pricing for an expansive insurance product for small businesses?

“I do sleep better at night knowing that this is a small business target audience. Especially in the Berkshire world, the limits that we’re going to be offering are relatively small compared to Berkshire’s balance sheet.”

“I think this is to Ajit’s credit—he’s pushing us out of our comfort zone….He makes us think outside of the box”

In addition, being a little uncomfortable is part of the process, he suggested. “To Ajit’s credit, he’s pushing us out of our comfort zone. He’s pushing the legal team out of their comfort zone on the wording. He’s pushing us on giving the customers a better product at a better price. We’ve got a great example to follow with GEICO. They’ve been a role model for a lot of this process. So, we’ve gone through the policy. We’ve built the pricing algorithm. I’ve got a team that works for me that feels comfortable with what we’re putting out there. And, to be honest, time will tell.

The Next GEICO

Is becoming the GEICO for commercial insurance a goal?

“That’s a good goal to have,” Shelley responded. “They’ve set the gold standard. They’ve revolutionized the personal insurance market, and that’s what we want to do to the small commercial business.”

Just as GEICO promises to save customers 15 percent or more on car insurance in 15 minutes, THREE and biBERK are attempting to save small business customers money. “We’ve looked at industry pricing for all the coverages that we have within THREE, and we’ve targeted a price—if you bought all the coverages that are in THREE—to be about 20 percent below what the market rate is,” Shelley said.

While biBERK is also priced 20 percent below market, a THREE policy could cost more than a collection of policies purchased from biBERK simply because THREE offers more coverage. “It’s a little bit apples and oranges,” he said. An apples-to-apples comparison to the market is also tough, he said. “Depending on how you count, the THREE policy could cover 13 different policies. Most small businesses don’t buy 13 policies today.”

The buying experiences on the biBERK or threeinsure.com sites will be similar, he said. “They’re going to come to the website, or they’re going to call our small business advisers, and we’re going to basically ask them a handful of questions about their business—the operations that they perform, the size of the business, revenue, payroll, number of employees. And based on the class, there will be certain underwriting questions that we’ll ask.” Because a THREE customer is getting more coverage, there will be more questions to answer, but by prefilling answers with external data, Berkshire, like many competitors, is making the process consumer friendly.

While the THREE buying process is still being worked out, Berkshire Direct expects it to take five to 10 minutes. “There are certain classes that will either get referred or we’re only going to be in a handful of states for the first days. So, not everyone will be able to get a quote online. But for those businesses that qualify, there will be a portion of the people who come online, and they’ll be able to see a quote online and they’ll be able to bind right there with a credit card.”

“One price, one bill, one stop shop,” he said, confirming, however, that customers will have the ability to vary limits and see different prices if they choose.

As is the case for biBERK, human advisers are available to complement the online process. Customers can call an 800 number that’s on the website if they have any questions or just want to go through the application over the phone. That will be the same phone number they would call to eventually report a claim, Shelley said.

“We’re trying to be as consumer friendly as possible, and that’s definitely one thing we’ve seen—that a lot of people still like to talk to a person as opposed to doing [business] quickly online.”

Does Shelley envision copycats trying to mimic the THREE approach for small business customers going forward—either traditional carriers or InsurTechs with VC funding behind them?

“You never want to think of yourself as the only person that could do something. But I think we are uniquely positioned to put this kind of offering out there. From a customer standpoint, I think having that comfort that this is from Berkshire Hathaway and that the credibility that the Berkshire name brings to the product is definitely helpful for us. And I think it’s good for the consumer to know that, ‘Hey, this is something a little bit different than what I’m used to but it’s from a credible source.'”

“I think it would be a challenge, for lack of a better word, for an InsurTech operation to do something exactly like this. But I would never want to sit here and think we’re the only ones that can do it and no one else ever could.”

“Maybe the more traditional players might try to do something similar. But we’ve been challenged to be ahead of the curve.”

Shelley also won’t be coaxed to expressly rule out options on the distribution question. Asked if the three-page policy could ever be rolled out to independent agents to sell to small businesses, Shelley said, “As we sit here today, our launch will be on a direct basis, and that’s been the directive from our management. You never want to say never about anything.”

Currently, biBERK does work with online agency CoverHound, and Berkshire keeps abreast of what’s going on with other InsurTechs. Are there any, in particular, that Shelley admires or wants his company to partner with?

“There are absolutely pieces of different parts of the insurance process that we’ve paid attention to, and we’ve seen companies in the InsurTech space prompting us to say, ‘That’s a neat idea’ or ‘They do that really well.’ But I don’t know if I’d point to anyone in particular and say that, ‘Wow, they’ve ticked all the boxes.’ Whether it’s a more consumer-facing distribution model, whether it’s the data on the underwriting process, whether it’s [improving] the claims process, there is some very cool stuff going on…We definitely have conversations and meetings, and we’re definitely trying to stay plugged into that world and take advantage of the innovation.”

As for claims, “they’re all handled within the Berkshire family by humans,” Shelley said when asked about automated claims handling processes offered by InsurTechs. “Where there is innovation on the claims side, we’re learning with everyone else. But to answer the question, ‘Is there any bot that will automatically take the claims?’ The answer is no.”

We Hear the Critics

Within days of Berkshire Hathaway’s announcement about the launch of THREE, which had quotes from Chairman Warren Buffett about the benefits of protection delivered in a policy that “can be read in a few moments,” critical online bloggers took to LinkedIn and other sites.

“Is this actually a legal contract?” wrote Bill Wilson, author of “When Words Collide,” in a LinkedIn article titled “Warren Buffett’s New 3-Page Small Business Insurance Policy.” “It appears that there is no coverage for the hired/non-owned auto exposure (including rental cars and temporary substitutes), only listed vehicles presumably equivalent to ISO Symbol 7 coverage,” he added. “I see no exclusions or limitations for damage due to flooding, earthquake, war, terrorism, widespread off-premises power failure, vacancy, freezing of plumbing or sprinklers in an unheated building, and the list goes on,” he wrote in another item on a very long list.

Chris Boggs, executive director of the Independent Insurance Agents and Brokers of America Virtual University, offered a similar catalog of critiques, exploring particular nuances of traditional coverage and finding gaps and limitations in THREE on the one hand, and overly broad and simple language on the other. “Granted,…Buffett’s form does offer three rarely packaged coverages (cyber coverage, errors and omissions, and directors and officers), but even these coverage grants lack specificity. Lack of specificity generally results in court dates to decide how the coverage responds,” Boggs wrote.

What does Shelley think about commentary he’s read with a similar bent?

“I don’t want to sound trite about it, but I think a lot of people are looking at it from the Old World perspective and not thinking about it. Take the criticism that there is no terror exclusion. Why is that a criticism? We’re offering more coverage to a consumer.”

Addressing comments that vary from “there’s no exclusion” to “there’s no explicit coverage grant,” Shelley said, “We’re trying to offer a broader coverage than what I think most policies have given consumers today” and are responding in a way that customers expect. “If I’ve got a car and there’s a terrorist attack that blows up my car, I would expect to have that covered.”

“We’re not trying to hide the fact that we are trying to offer broader coverage. If people want to criticize us for being too broad, that’s their prerogative, but this is what we’ve been charged with by management to achieve. And to be honest, it’s very tough to keep a policy simple and short and manage to tick every single box that’s already been ticked in an insurance policy.”

“But at the same time, management has also told us we need to be responsible about the pricing. So, when we are adding these coverages, we are accounting for it in the pricing. We’re not trying to be ignorant about anything.”

Shelley agreed with the assessment. “We’re making all these efforts on the consumer front, on the process—the purchasing process, everything on the front end. It would be nonsensical for a business to try to be that consumer friendly on the front end and then just to turn around and have all that goodwill dissipate on the back end. What would be the point?”

With innovation, “people are going to be skeptical, and they’re probably not wrong to be skeptical. They’re asking questions. And believe me, we’ve read every blog and LinkedIn post. We want to know what people are feeding back to us.”

“There have been some fair points [where] we’ve looked at each other and said, ‘Oh yeah. We probably might want to think about that a little bit more.’ So, by no means do we think we’ve got the perfect solution here. It’s going to evolve over time, but we’re trying something different and we think it will be to the customer’s benefit.”

biBerk Continues as THREE Rolls Out

Shelley confirmed that biBERK will continue to exist, offering separate policies for comp, GL, property, commercial auto. In fact, he said that professional liability would be available on a standalone basis as well, with that coverage expected to be added in late March.

“That’s going to be basically, for lack of a better word, our traditional brand in a sense that we will sell individual policies to businesses in the same way we’ve been doing it…We’re reasonably pleased with the progress we’ve made, and that will continue to move forward.”

In addition to being different in terms of policy wording and length, “THREE is effectively going to be our comprehensive product [for] a business that does want that one-stop shop—I’m covered for everything, [and] I can sleep easy knowing I’ve got a Berkshire policy there.”

“The easier way to think about it is it’s a bundled product versus an unbundled product.”

He said that Berkshire isn’t likely to be targeting specific segments of the small business market for biBERK products versus THREE. But the company has some theories about which customers might choose THREE. “I think that the THREE product might appeal to somewhat larger businesses who already purchase maybe say four or five policies versus maybe a smaller microbusiness that maybe purchases one policy. The THREE product might not be what they need today as a business.”

“Say you’re a restaurant. You’ve got a BOP for your property and liability. You’ve got an auto for the cars. You’ve got a comp policy for your employees. You’re taking credit card payments, so maybe you saw something on the news so you bought a cyber policy last year.” Weighing the choices, THREE would be compelling, he suggested. “I don’t have to worry about buying all those different policies and I get more coverage? Yeah, this makes sense,” the insured might reason, he said, contrasting the situation for “a contractor who hires their first employee. [Then] I probably need a comp policy, or maybe I need a comp policy to be on a certain job site.”

“That’s purely a theory. We are going to be very happy to sell either product—whichever one the customer wants,” he said.

The Innovation Team

Carrier Management also asked Shelley to weigh in on the questions we have asked other leaders about finding talent to build innovative products.

“It’s a challenge. It’s a very tight labor market. We’re constantly looking for good people,” he said, adding that having a new product to tinker with has helped. “The spark of innovation is there, and we want people to embrace it and run with it…This is our idea today, but what can it be [in the future] and how should we be moving it forward?”

The staff size is around 50 people today, Shelley said, referring to the number working on biBERK full time. “For THREE, we’ve been tapping into some of those biBERK folks. We’ve definitely been using some external folks for help” too, he said.

As Berkshire Direct Insurance seeks to add staff, the company is focused on “people with the customer mindset and the user experience mindset.” Said Shelley: “As a traditional insurance company, we are probably a little light there. The insurance industry, I think it’s fair to say, has never been accused of being customer friendly.”

He continued: “I think one of Ajit’s better qualities—and this is how he’s gotten so far to where he is today—is that he makes us think outside of the box. We’ve tried new things over the years in the insurance space, and I think this is just another step in that direction. This is the first one that’s really consumer facing.”