First of Two Articles
After 44 years in the insurance business, Stephen Catlin is retiring at the end of 2017. While he’ll be retiring from his role as executive deputy chairman of XL Group, he emphasizes that he won’t be retiring from the industry – just entering a new phase of work.
He hasn’t quite figured out what he’ll do, but one thing is clear from interviews and recent speeches: He will not be spending idle days on the golf course. He might start a new company, but it won’t be Catlin 2 – or another Catlin Group.
“There are lots of changes going on in the industry, and it’s going to need people who are prepared to truly embrace change and benefit from it. That could mean anything or nothing for me. We’ll see what happens,” he said in an interview with Insurance Journal.
Catlin has spent a good deal of time recently reflecting on his long career, partly because of his impending retirement. In addition, he and James Burcke have collected some of the reflections in a book they have written.
The book, “Risk & Reward – An Inside View of the Property/Casualty Insurance Business,” was published in July. (A former insurance journalist, Burcke worked most recently as head of corporate affairs for Catlin Group Ltd.) The book details industry developments and challenges as well as Catlin’s business ethos and leadership lessons. In so doing, it provides perspectives on the industry – past, present and future.
Catlin joined BL Evens & Others on Syndicate 264 at Lloyd’s at the age of 19 in 1973 as an office junior. By 1982, he became a deputy underwriter. Just two years later, he founded Catlin Underwriting Agencies Ltd., which later became part of Catlin Group Ltd., which was acquired by XL Ltd. in 2015. And that’s only a brief synopsis of his career.
Last year, Catlin became chairman of the Insurance Development Forum (IDF), a public-private partnership designed to help bridge the “protection gap” for developing nations. He will continue that role after he retires from XL Group.
“Having started as a small Lloyd’s syndicate without a fax machine or a photocopier, Catlin [Underwriting] became a multibillion-dollar company employing 2,500 people in 25 countries. That is what I call a successful startup!” These words of praise came from Nikolaus von Bomhard, former chairman of the board of management, Munich Re, who provided a forward to Catlin’s book.
“And over time, Stephen has become a highly esteemed insurance heavyweight to whom the industry rightly listens,” said von Bomhard.
With a book fresh off the press and a career to reflect on, it seemed like a good time for Insurance Journal to pick Catlin’s brains about the industry he loves.
Social Value of Insurance
Looking back at the lessons of his early career, Catlin said he regrets that no one sat him down and told him the value of insurance. While he eventually did work it out for himself, he said he nearly left the Lloyd’s market two or three times in the early years. “I couldn’t figure out whether Lloyd’s was a value creator or just a big gambling casino. The truth of the matter was that, at that time, it was probably a bit of both.”
He explained that some Lloyd’s underwriters in those days regularly traded “gambling policies” that were actually wagers disguised as legitimate insurance – until these policies were banned in the 1980s. To his credit, Catlin refused to get involved and instead focused his efforts on true risk transfer products, which provide real social value by supporting global commerce.
While such gambling policies are a distant memory for Lloyd’s, according to Catlin, there is one thing that hasn’t changed: The insurance industry still doesn’t know how to communicate how it provides value for people and businesses.
People’s eyes often glaze over when insurance is mentioned – as many in the business can confirm. But Catlin emphasizes that he couldn’t have chosen a more exciting career in a valuable business that provides products underpinning the global economy.
“The world as we know it today wouldn’t work very well without insurance. If there was no insurance, you wouldn’t be able to drive a car. You couldn’t fly in an airplane. You couldn’t travel on a ship, nor could a ship carry cargo. You couldn’t attend a sporting event. In most countries, it would be impossible to obtain a mortgage on a house,” said Catlin in a passage from his book.
While the industry historically has been really poor at communicating what it does, it is getting better, he said, pointing to the fact that the insurance industry is now “an employer of choice among students graduating from first-class universities around the world.”
During the interview, Catlin said he is “staggered at the high caliber of the people who apply to come into the industry, which is very different than when I started.” At the time, Lloyd’s had few university graduates, and many people entered the market because their fathers and grandfathers had worked there.
When he joined Lloyd’s, the underwriter was king. “In those days, the active underwriter could do almost whatever he wanted – and he often did. Some people benefited from that autonomy, and others lost out big time.”
Fortunately, that’s no longer the case, which is a good thing because there are more requirements for accountability and transparency in the current market, he said. “A Lloyd’s business is accountable to its shareholders and regulated by the Franchise Board; there was much less accountability in the old days.”
Further, he noted, very few women worked in the market in the 1970s because women were not allowed in the underwriting room until the end of 1973! “Looking back, that seems outrageous,” he said in the book. Although great strides have been made since that time, Catlin said much more must be done to increase the role of women in the insurance industry because they are “still grossly underrepresented,” especially in management positions.
“During the latter years of Catlin, we had a 50/50 ratio between male and female employees worldwide, but the percentage of women fell away quickly as the pay grade increased,” he said.
“A truly heterogeneous workplace is far superior to one where everyone talks the same, looks the same and thinks the same,” he went on to say. “Over the years, I observed that meetings attended by both men and women tended to be more productive than male-only meetings. The quality of the debate increased, people tended to treat each other with more respect, and a greater range of opinions were exchanged.
“When I joined Lloyd’s, it had an atmosphere very much like a stuffy private club: few women, virtually no minorities, and many people from a posh, upper-class background,” he wrote in his book.
“Thankfully, Lloyd’s – and the entire insurance industry, for that matter – has moved on. The insurance industry is now based on meritocracy and an individual’s capability; the industry now attracts people from all walks of life. This can only be for the best,” he added.
An industry is better, remains more relevant, when it attracts the best people – male, female, from all ethnic origins, he indicated.
Indeed, the industry’s relevancy in a changing world is a prevalent theme for Catlin. During the interview he predicted that the industry is due for some reasonably radical change, “which I think is needed.”
During the past 40 years, the industry has made tremendous progress in many different areas such as modeling, claims handling, capital management, its professionalism and the level of talent it attracts. “The one area that hasn’t moved on much…is what I call ‘process’: how insurers and brokers obtain data, handle data and process data,” he said in the book.
“Frankly, we are still pushing paper around to a ludicrous extent. In London, brokers show up at the Lloyd’s underwriting room or insurers’ offices carrying huge files of paper. We are still entering the same data at nearly every point from initial quote to policy issuance. The whole ‘process’ is unbelievably inefficient.”
As a result of all these inefficiencies, the cost of the transaction is too high, and “if we as an industry don’t sort out this issue in a reasonably short time frame – let’s say five years – someone else will.”
He pointed to the success of Amazon as a cautionary tale for the insurance industry. “Amazon has absolutely transformed the retail book market by doing things a different way, which was more efficient.” That efficiency and cost savings has led to the closing of book stores across the globe.
“I think everyone would agree that no other city in the world has the depth and breadth of the expertise that exists in the London market,” he said. “That is a prize for us to lose, not to keep.”
As a result, he warned, London has to look at its cost base “to make sure we can remain competitive in what is an increasingly competitive marketplace.”
Turning to the relevance that comes with “making certain we meet the changing needs of our clients,” Catlin warned that customers’ risk landscape has changed and continues to change dramatically.
The biggest concern of the management of Fortune 500 companies used to be with its physical assets, such as property and equipment, which for many years represented about 80 percent of their value, he explained. However, a similar group of companies today would probably say that 80 percent of their value is associated with soft assets such as intellectual property rights or data, rather than their physical assets, Catlin continued.
“If the insurance industry is to remain relevant to society over the next 20 or 25 years, it must embrace the new risks to which society will be exposed,” he said in the book. “We must be at the forefront of understanding those risks and finding solutions to mitigate them. The big obstacle, however, is that insurers’ thinking tends to focus on what has happened in the past rather than what might happen in the future.”
In the past, management’s biggest worry was that the factory would burn down, but today some of their “biggest worries relate to competitiveness, data retention and cybersecurity.” He questioned whether insurers really spend enough time thinking about these things.
Systemic Cyber Risks
Another major concern for Catlin is with the industry’s potentially systemic exposure to cyber risks and cyber attacks that affect diverse industries across the globe.
“Because the pace of change is so fast, it’s hard for us as underwriters to keep up with that change and to understand the risks that we are undertaking,” he said.
A systemic cyber attack would hit the entire global economy, given the interconnectivity of data systems, and could present losses that are “bigger than the total market capitalization of the industry.” The result, he said, is that the industry wouldn’t be able to honor its promise to pay – its fundamental reason for existing.
“The real challenge for the insurance industry is how insurers can offer meaningful cyber insurance coverage to clients – both in terms of scope and policy limits – without bankrupting themselves,” he said in the book.
One solution would be for governments to provide the ultimate financial backstop when society is hit with a “truly catastrophic cyber-related loss, such as complete disruption of the Internet for a prolonged period.”
Another crucial solution would be to draft clear policy wordings, so that cyber is excluded if it’s meant to be excluded, he continued.
In tomorrow’s article, Catlin discusses some leadership lessons he’s gathered during his career.
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