Insurance is a very simple business.
“You take in some money, you spend some money and you lose some money, and God willing, you have some left at the end of the day,” according to Anthony (Tony) Markel, vice chairman of the board at Markel Corp., and a keynote speaker at the inaugural Super Regional Property/Casualty Insurer Conference 2017, sponsored by Demotech Inc. and Insurance Journal, in Lake Geneva, Wis., July 16-18.
Markel told the story of the Markel Corp., a company that he helped grow from a small long-haul trucking wholesale specialty agency with a net worth of about $6 million, into a global holding company for insurance, reinsurance and investment operations with total revenue of more than $14 billion today.
His main advice for super regional carriers: specialize but diversify, much like Markel has done over the years. He also urged them to take full advantage of all new technology and analytics but not to forget the people and relationships.
When Markel and his cousins took over the wholesale insurance agency in the mid-1970s from his father and grandfather, the business was entirely dependent on long-haul trucking, which even today remains a difficult class of business.
“Although we had a nice platform we decided we needed to make changes,” he said. That change meant taking the firm into a risk-bearing role. In 1980, Markel started the firm’s first entry into the insurance company side by founding the Essex Insurance Co. Then in 1986 the company went public opening the door to future expansion and global opportunities in the London market. In 2016, Markel was listed on the Fortune 500.
The road to $14 billion in revenue wasn’t always easy, Markel said, but the firm grew by staying true to certain principles. Markel told Super Regional P/C Insurer Conference attendees that the firm’s success can be told through an old marketing concept known as the 5 Ps – product, price, place, promotion and, the most important, people.
Markel’s success has everything to do with its people, according to Markel.
“Clearly people are the most important thing in any business. Everything boils down to people,” he said.
“Hire smart people, much smarter than you are,” he said.
Also, critical to companies in a growth mode is hiring the right people that align well with the company’s culture.
“You can’t hire good people unless you know what drives your company,” Markel said. “Companies in a growth mode have to determine what makes them tick; it’s critical. People drive the entire process of any organization and it’s critical to stick to your culture.”
Competitive salaries and good employee benefits are important but one of the most overlooked compensation benefits, according to Markel, is incentives. “You want eye-catching incentives that focus on what performance you really want. …Give employees a piece of the action and most importantly base a majority of their incentive comp on their individual performance.”
From a public company standpoint, the shareholder mentally goes along well with incentive compensation, he added. Results are quantifiable. “I hate incentive programs that are judgement (based) and subjective. That doesn’t focus on what to deliver. Tell them upfront, here’s what I expect and here’s what you are going to get.”
People want to feel like they are part of the team, they want to feel important and be engaged, Markel said.
Insurance products are not “rocket science” but success comes with specialization. For Markel, that success has come with one specialized product after another, he said.
“We started off with a few fundamental products — one deal and product at a time — but they were all reasonably specialized. The last thing you want to do is get into a generalist mode. Specialize but do diversify. If you are wed exclusively to one product and that product comes under attack you are in trouble. Specialize but diversify.”
Products have a life span in insurance just like in every other business. “What’s hot today will be less necessary tomorrow so continually add to your product mix,” Markel advised the audience.
Pay attention to what producers say, too. “Anyone who doesn’t pay attention and listen to their producers when developing new products is dooming themselves to mediocrity,” Markel said.
Don’t overlook how to enhance products either. “Things change rapidly today. Competition comes in at the drop of a hat,” he said. What is an outstanding product today might be outdated in six months. Always be aware of what’s going on in the marketplace and respond accordingly to producers. Listen, he said. “You better know what’s going on in the marketplace and make conscious decisions on what you can do and what you can’t do.”
While Markel Corp. began its roots as a wholesale insurance organization and continues to focus primarily on the wholesale market, Markel said in today’s world diversifying is a must.
“We started and continue to be very wholesale driven but we also have retail channels and direct business,” he said. Sticking to one channel of distribution is no longer an efficient and effective way to deliver every product.
“Retailers themselves will admit they are not the proper way to distribute some products and wholesalers are not the end all either,” Markel said. “You can’t be naively committed to one distribution system because clearly all products cannot be distributed by one distribution system.”
The proper way: take a look at each product and be open about how it should be distributed, he said.
When Markel broke the news that it would diversify its distribution channels – that news had to be delivered to its traditional wholesale channel “very gently,” he said.
“But realistically, wholesalers understand their role. They might not see it the way we do and where they add value and where we add value but frankly these products didn’t fit into their mold.” He said it’s important to have a realistic conversation. “Sit down and talk. We found with very few exceptions that if you are upfront to your normal channel … they will respect you for that and in most cases, they will acquiesce.”
A property/casualty insurer cannot be successful without producing an underwriting profit, Markel said. “It’s job number one and everyone in the organization from the president to switchboard operator has to know that underwriting profit is number one. You can’t invest funds with any degree of confidence if you are always facing the specter of underwriting losses.”
Insurers have to be committed to making an underwriting profit and it takes everyone in the organization to do it, Markel said. He advised tying underwriting profits to incentive programs when possible.
Just as important to profitability for insurers is conservative reserving, he said. “If you don’t reserve adequately you are doomed to bring on potential failure. For an underwriter – to bring on good risk when you have under-reserved puts you in trouble.”
For Markel, “if you see us taking any underwriting profit from long tail business I can assure you it will be from years three, four or five. … We will not take underwriting profit from reasonably current years because of the potential of losses.”
Insurers must invest in the proper technology tools as well, Markel said. “Make sure your underwriters have the tools necessary to do the job instead of being naïve,” he said.
Markel’s success didn’t come from holding back on expenses.
“We have never been a low expense writer. We have always spent more time pricing on loss ratio than expense ratio. We look to reduce expense as every organization should but it’s a heck of a lot easier to reduce an expense ratio than to reduce a loss ratio. We concentrate much more on loss ratio than expense.”
According to Markel, communication and promotion are key and service “goes without saying.”
It’s a competitive market and there’s always someone “ready to eat your lunch,” Markel said. But at the end of the day it still boils down to people and relationships and understanding what people want. “You cannot over communicate – you can’t. You can’t provide your people, your clients and your distribution channel partners with too much information on what you are doing and what you want to accomplish,” he said.
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