Although the insurance market is awash with capacity and competition, two new specialty companies—a re/insurer and a broker—formed earlier this year, aiming to create something new and different for their clients.
First, well-known industry veterans Stephen Catlin and Paul Brand, colleagues for 32 years, announced on April 30 they had launched specialty re/insurer Convex Group Ltd. in Bermuda. Then, just a few days later, another industry veteran, Steve McGill, said he had formed a London-based specialty broker, McGill & Partners.
The timing was coincidental, but the executives’ messages are similar. The key for both companies is the fresh start they are taking, with legacy-free operations and the use of modern technology to help them keep their cost bases down. At the same time, their strong industry reputations helped them obtain substantial support from private equity investors.
“It’s not often that startups actually have benefits over incumbent re/insurers, but because we’re a startup, we can think differently about how to go to the market,” said Paul Brand in a joint interview with Stephen Catlin. “We’re being very thoughtful about our operational structure to provide us with a competitive advantage.”
One of the challenges the property/casualty industry faces at the moment is that clients are very heterogeneous, he said. “They want different things.”
Brand explained that some clients want more commoditized coverage, “while others are seeking more complex solutions and care deeply about who their carriers are and who their intermediaries are. They’re looking for lots of advice. They’re essentially looking for very bespoke products.”
Brand recalled that the bedrock of success at Catlin Group was with its complex, specialty business, which generated most of the profits. (Catlin Group had its roots as a Lloyd’s underwriting agency in 1984. The company was purchased by XL Group in 2015, which in turn was purchased by AXA last year).
As a result of its historical success with specialty business, Convex made the strategic decision to create a very focused insurer and reinsurer, concentrating on complex client needs rather than handling commodity-type risks.
Brand said that he and Catlin wanted to find ways to create a simplified business, so they made the decision to outsource many of the common activities that every insurer handles.
“I think we’re the first insurance company to do horizontal outsourcing,” noted Catlin. “That is to say, we’re outsourcing everything to one company [called WNS] but not to myriad companies.”
Convex outsources any activity that doesn’t need intellectual input, such as claims processing, but keeps in-house anything that does require intellectual input, such as claims adjustment, Catlin explained.
Brand said Convex’s decision to outsource “a very significant part of our operation” provides it with increased flexibility. “As our requirements grow, it will be very easy to get a few more heads from our provider. But equally, if our business grows more slowly than we anticipate, we can easily reduce our service requirements.”
Incumbent re/insurers, on the other hand, must employ the people to do all these back-office functions themselves and make guesses about the resources they’re going to need in a year or two years’ time. Because they have to employ these people today, their cost base is higher, Brand said.
Convex has positioned itself as a “digitally enabled insurer.” In July, the company announced that it would be using Cytora, the AI-powered platform for commercial insurance underwriting. Using Cytora’s platform, Convex aims to enhance its underwriting process by using big data to achieve a more complete and accurate view of risk while helping underwriters improve risk selection.
In addition to building “a fantastic team of underwriters and claims people who offer a very differentiated service proposition team to clients and brokers,” Convex is focused on investing in its decision-making framework, so it is able to make better underwriting decisions, said Brand. “I think we’ve got a recipe for a very successful business.”
Although Convex has received initial committed capital of $1.8 billion, Catlin said the company’s first year is not as much about writing business as it is about building its operational toolbox. Convex’s investors have committed to providing capital for 10 years, demonstrating their level of faith in the company’s growth potential, Catlin said.
Further, Catlin added, as many of the talent the company wants to hire are on six months’ notice from their current employers, some are not yet working at Convex but will be at their desks in November in time for January 2020 renewals.
When the company is operating at full steam, 40 percent of its business will be reinsurance, while 60 percent will be insurance. It currently is applying for excess and surplus lines licenses in the U.S.
Convex Re Ltd. in Bermuda and Convex Group UK, wholly owned subsidiaries of Convex Group, have received an A.M. Best Financial Strength Rating of “A-“(Excellent).
Catlin said he has been gratified at the talent the company has been able to attract, with a lot of former Catlin Group employees asking to come back. “This is very comforting for both Paul and I. People loved working at Catlin, and it’s nice to know that it was valued.”
McGill & Partners
In a separate interview, Steve McGill discussed his rationale for launching a specialty boutique brokerage, McGill & Partners.
For nearly two years, he said he looked at the business landscape and realized that in the larger corporate space, clients have fewer options because of the success of excellent firms like Marsh and Aon as well as the spate of recent broker mergers. McGill has more than 40 years of insurance broking experience, most recently at Aon from 2005-2017, where he was group president, responsible for all insurance and reinsurance broking operations worldwide.
However, McGill emphasized that McGill & Partners was a gleam in his eye long before Marsh acquired JLT in April.
During his analysis of the industry, McGill saw there was an opportunity to build a high-quality, independent, boutique specialty firm from scratch without replicating or creating a smaller version of the big brokers. Such a boutique brokerage would be unencumbered by the legacy challenges that exist in the industry and would present an alternative option for clients, colleagues and for carriers, he affirmed.
The higher cost base of many existing brokers is related to their legacy operations, which McGill & Partners—a startup with a technological focus—doesn’t have. “There’s a lot of cost in the accounting process of premiums and claims with unreconciled entries going back many years. But we get to start with a clean sheet of paper,” he affirmed.
McGill said his new firm is making optimum use of technology and data analytics, “which will enable our brokers to be more productive in the way they handle and place the business than those companies that don’t use cutting-edge technology.”
The market needs to take a “fresh and modern approach to meeting the needs of clients and carriers,” he said. McGill refers to the needs of carriers, in addition to clients, because he is sensitive to the fact that some large brokers offer clients risk consulting and risk engineering capabilities, which are also offered by insurers.
“At McGill & Partners, we do not want to duplicate capabilities that already exist in the industry, which have been built by carriers to support their underwriting.”
McGill & Partners instead is focusing on creating “world-class placement capabilities” and designing and structuring placements with the most efficient coverage terms and conditions and competitive pricing, he continued.
“By reinforcing transparency, we’re going to help clients work with carriers to navigate through the entire value chain, which currently has got a lot of complexity in it,” McGill emphasized.
It was this passionate pitch that enabled McGill to raise an initial equity commitment of up to $250 million from Warburg Pincus, a New York global private equity firm that focuses on growth investments. McGill & Partners’ management also is providing substantial investment, said the May 2 announcement about the company’s launch.
For the past several months, McGill & Partners has been building its team and its technology, gearing up for the coming renewals. “We’re very focused on building the business organically, but we also have the ability to do strategic acquisitions when appropriate,” he said.
“I believe we have a tremendous opportunity to build a British-based business at scale, with a significant presence in the U.S. and then ultimately expanding elsewhere,” said McGill.
Will he be building a company that ultimately is sold to a larger competitor? “We genuinely believe the way we can maximize value for clients, colleagues and carriers is by maintaining an independent position. And we’ve got the benefit of a significant financial backer that also fully understands the importance of independence.”
Market conditions are perfect for McGill & Partners to launch, he emphasized. “Rates are increasing. Clients want choice. Carriers want alternative distribution. And talent is looking for alternative homes as well.” McGill said he is proud of the team the company has been able to attract.
This article is republished from the September/October 2019 issue of Carrier Management, the publication for P/C insurance carrier C-suite executives.
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