Seven years and counting

Seven years and counting

Peter Eastwood and Mark Lingafelter look back at the remarkable rise of Berkshire Hathaway Specialty Insurance, while moving forward into a more diverse future

By John Deex

In April 2013, US-based Berkshire Hathaway Specialty Insurance (BHSI) was born, with ambitions to grow into a truly global commercial property and casualty player.

Seven years down the track, President and Chief Executive Peter Eastwood is more than happy with its progress. The business has a physical presence in 14 countries, more than 1000 employees (or team members as BHSI likes to call them), and annual gross written premium of $US3 billion.

And it’s still expanding, with topline growth of 27% last year and recent pushes into France and Spain masterminded by former Australasia president Chris Colahan, who now manages BHSI’s UK and Europe arm.

The Australian business, which celebrates its fifth anniversary this year, also goes from strength to strength, with last year’s launch of an Adelaide office and a recent drive into the surety market.

Mr Eastwood – who spent 22 years with AIG before spearheading the BHSI launch – says BHSI’s expansion plans are “on track”.

“When we started the business we said with the appropriate level of pace we wanted to build a commercial property, casualty and specialty lines insurance business that would satisfy most if not all of the needs of our broker partners and our prospective customers,” he tells Insurance News during a visit to the Sydney office in early March.

“We have done that. We’re in more countries and doing business in more parts of the world than I would have anticipated when we launched, and we are going to continue to build the business.”

Mr Eastwood says the growth strategy has two elements.

The first is to be physically in markets where there is “indigenous risk” that can be underwritten profitably.

The second – to build a multi-national business to satisfy the needs of multi-national customers.

“We have a 14-country footprint, but we also have the ability through freedom of services in Europe to get to considerably more countries – approximately 41.

“And through the network partnership arrangement that we have, we can actually satisfy the needs of the multi-national customer in upwards of 200 countries.”

Mr Eastwood says that during the launch phase BHSI’s attention was very much on the “larger account space”.

But while this focus remains, it’s also broadening.

“We’ve always felt that over time we had an interest in moving into the mid-market space, the SME space,” he tells Insurance News. “We have efforts underway in different parts of the world to do just that.”

In the US BHSI has been developing a digital platform, Berxi, that sells commercial insurance direct to the customer.

“That has us entering the very small customer market segment, for example individual practitioners in the medical professional space. We have other efforts in different parts of the world to enter the mid-market space.”

Mr Eastwood says current market conditions create “huge opportunity” for BHSI to grow existing business and products.

Huge opportunity: Mr Eastwood says current conditions open doors for BHSI

He says most product lines in most parts of the world are seeing “dislocation”, with capacity coming out of the marketplace.

“That is giving us an opportunity to step in and satisfy the needs of the buyer and the broker when they are at their greatest,” he says.

“This presents very substantial growth opportunities for us, as we are still a relatively new market entrant.”

BHSI’s Australasia President Mark Lingafelter tells Insurance News that four key principles outlined by Berkshire Hathaway Chairman and Chief Executive Warren Buffett form the basis of the company’s underwriting discipline.

These are:

• Understand all exposures that might cause a policy to incur losses

• Conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does

• Set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered

• Be willing to walk away if the appropriate premium can’t be obtained.

“We try and run the business based on those four principles, but we face the same challenges that the whole market has faced,” Mr Lingafelter says.

“In the last 120 days the devastating bushfires, the hailstorms, the flooding, have certainly impacted our business as well.

“It’s not easy but we’re very committed and we don’t pursue growth for its own sake. We follow a set of underwriting disciplines that we are committed to.

“The market dislocation that is currently underway allows us to have confidence that eventually our approach will result in a profitable book of business.”

Mr Lingafelter says BHSI uses “dials instead of on-and-off switches” and urges its teams to be “active portfolio managers”.

“We are getting data every quarter and as the data starts to emerge there is a real opportunity to step into that.

“We talk about not kicking the can down the road, but owning the portfolio and the results, and taking the right underwriting steps to deliver a reasonable level of underwriting profitability.

“Our business target is a combined ratio of 95%. In a world of very low interest rates that is an extremely reasonable target for the capital that we are putting at risk.

“As our portfolios mature, that is a weekly, monthly, quarterly discipline that we are bringing to our business.”

He says in some sectors, such as public directors’ and officers’ cover, customers may disagree with pricing, but it’s important to put forward terms that are “reasonable and sensible”.

“The ability of a strong underwriter to set terms and conditions that are sustainable provides the customer and the broker with a more consistent transfer of their risk,” Mr Lingafelter says.

“I think that there is too much capital in our industry, and that does lead to people mis-pricing, entering the market, offering what may be attractive solutions in the short term.

“But when people have to exit, that withdrawal of capacity, that dramatic change doesn’t serve the customer well. So there is a role for a strong underwriter to bring a consistent, stable approach to the market.”

Mr Eastwood believes claims is also a crucial area where BHSI can be there for its clients.

Claims is the product, he says, and the words are backed up by action.

BHSI was well represented at last year’s Mansfield Awards for Claims Excellence, run by Insurance News with LMI Group. It was joint winner of the corporate property and casualty segment and a finalist for the overall Gold Mansfield trophy.

“When we launched the business we said we were going to find a way to be more customer-centric around claims handling than what we think the buyer typically experiences in our industry,” Mr Eastwood says.

“What we have said to our claims handlers is, ‘We want you to endeavour to find coverage under the policy when a claim is submitted to us’, as opposed to endeavouring to find as many ways through the exclusions or definitions of the policy to inform the customer as to why the claim may not be covered.”

Core culture: BHSI believes its values are its foundation

He says a hard market, rather than sparking a tougher stance, is the “greatest opportunity” in claims.

“The way I think about the business from both an underwriting and claims-handling standpoint is that our job is to be there when the needs of our broker partners and the buyers of insurance are at their greatest point.

“[In a hard market] insurance carriers are presented with losses, and prices are inadequate to satisfy the losses that are showing up in the organisation.

“But if you are a healthy, well-performing, well-capitalised business it is actually an incredible opportunity – particularly for us. “As an early-stage business, we can go into the marketplace when the need is actually greater than it’s ever been, to bring our capabilities and our financial strength to satisfy the needs of the buyer.

“It’s an underwriting opportunity but it’s a claims-handling opportunity as well.”

Mr Lingafelter says that being part of the wider Berkshire Hathaway organisation – which has one of the strongest balance sheets in the industry – helps.

“I would suggest that there are companies that can be tempted to vary their claims-handling approach,” he says.

“For our firm the values around doing the right thing and the importance of integrity, which really go back to Warren Buffett, are important, and the business is managed accordingly. So for us there is no temptation.

“We have been impacted by the recent bushfires, we have been impacted by the hail. So we are responding to those events right now, but we are doing so in good faith. “We want to run our business with a very long-term view, a forever view, and reputation is everything.”

That reputation is enhanced by the way BHSI deals with partners, Mr Lingafelter says.

Respect is a core value – respect for the customer, and respect for brokers and partners.

“In the current marketplace there is a shortage of capacity in certain lines of business,” he says.

“It’s probably a relatively unique occurrence in the life of an underwriter, maybe one year in 10, when our brokers actually have difficulty completing a placement in certain product lines.

“The very moment in the insurance business where we could probably get away with being a little bit full of ourselves is exactly when we want to double down on our values. Respect, integrity, excellence, collaboration, passion.”

Mr Eastwood says the cultural characteristics that his leadership team have built over seven years are the foundation of the business.

“As I look back over the seven years, the conscious decision that we made to focus on those things, being clear about who we are as an organisation, what we expect of people that work in this organisation, what our business partners can expect of us – the return on that investment gets greater and greater as time goes on.

“It gives our team a framework from which to operate the business – a level of consistency across the world.”

And in a crowded marketplace, this can be a crucial differentiator.

“We show up every day and demonstrate to people why they should want to do business with us. There are a lot of reasons, but it starts with our people.

“The thing that I’m most proud of is the job that the team has done in assembling an incredibly talented group of individuals.”

And despite recent challenging conditions, BHSI is here to stay. With its financial strength and capabilities, its long-term vision is unshaken.

“Even in those moments when the dislocation is so severe that others have retracted, you will find us in the marketplace to satisfy the needs of the buyer and the customer,” Mr Eastwood says.

“That’s our business model.”