Profile: Stephen Catlin and Paul Brand

Stephen Catlin: It must have been about two and a half years ago. Brando [Paul Brand] and I went out for a beer one night and agreed it would be fun to work together again. We’ve worked together now for 32 years. The catalyst that got me thinking about it really seriously was a conversation I had with Stuart Britton [senior managing director of Evercore’s financial institutions group] at a Christmas dinner in 2017. Stuart, who is someone we know well and respect, had said to me: “Stephen, 2018 is your year.”

He went on: “You’ve no idea what you could achieve; less than a handful of people in the industry could do what you could do. You’ve got the respect, you’ve got the longevity, you’ve got the track record, you’ve got the reputation, you’ve demonstrated you can keep a team together over a period of time.”

And then the Lloyd’s losses came out, which were pretty horrific, with every single product line losing money, with the exception of energy (and that was purely luck!).

So I rang up Brando and said: “Maybe we should start thinking about this seriously.” He said: “I think we should.” There were two decisions to make: one, if we were to start in 2019, would that be too early in terms of what’s going on in the marketplace; and the second thing was, was it really achievable?

So I rang up Stuart, and said: “We’ll look at it.”

We then spent some more time thinking carefully about where we saw the market going. Was 2019 too early, should we wait for a year? But by that stage we were getting pretty emotionally committed to the project.

By the end of March, we had decided that actually 2019 was going to be the year because what we were doing at the outset was building the toolbox.

Paul Brand: The market’s been creating more opportunity. It’s that classic case of, the worse it gets, the more opportunity there will be.

And then on top of that, there isn’t enough focus on clients and understanding different client needs. You think about more complex clients, and the commoditised clients, and how they’re going in different directions – one set of clients wants a more hands-on approach and a more bespoke service, and the other wants everything to be done seamlessly, automatically and absolutely transparently.

A lot of companies are dealing with both sets of clients using the same technology and the same underwriters, which is causing enormous cost challenges, and are almost over-diversified as everybody’s trying to do everything and be everything to everyone.

We started to think about how we would build an operation that would be more cost-efficient. There’s a huge issue for the insurance industry regarding how much of clients’ premium is spent on costs and if you solve that, that’s going to create a big competitive advantage.

Stephen Catlin: I should probably add to the backdrop and point out that around the end of 2018, both of us were being approached, sometimes collectively, sometimes individually, by distribution brokers and clients saying: “You should get back in the marketplace, it needs leadership.” So we walked into this knowing that we were likely to get quite significant support.

At the time we sold Catlin to XL, we’d been the largest Lloyd’s syndicate for about 12 years. We led over half our business in Lloyd’s, which was more than any other syndicate in the room. And we kept our leads over time. People knew that if we became the leader, we’d most likely stay there. We’d treat the client properly, we’d treat the broker properly, we’d pay our claims efficiently, we’d be proactive in helping a client if there was a change in circumstance.

Paul Brand: We did a lot of things which I’m very proud of at our previous organisation. But I think we can do it better and I like challenges.

Stephen Catlin: I think the answer to your question is, yes. But it wasn’t the main driver.

Paul Brand: With complex risks, clients want to know who the carriers are and they want to form personal relationships with the carriers and intermediaries. Whether that’s insurance or reinsurance, I think that’s a very special part of the business, and that’s got tremendous value. If you’re going to make bespoke products for people, it helps if you understand them and their business in depth.

There’s only a relatively small sliver of insurance premiums available out there. We think the addressable market for our insurance and reinsurance business is about $130bn out of a global P&C market of around $5tn. So this is more of a rifle shot as opposed to trying to do everything for everybody.

London is a really fantastic centre for complex risks; it’s got the brokers there, it’s got the carriers, has the right lawyers, has the right claims professionals and that feels pretty evergreen to me as well.

Stephen Catlin: The other benefit is the fact we have no legacy – there’s no legacy of liability, and no legacy of process.

This gives us the resource to really concentrate on technology in terms of the underwriting decision rather than the process.

We’re thinking a lot about data, how you collect data, how you synthesize data, how you use artificial intelligence to do that, how you create algorithms to get better risk modelling – to make better decisions for yourself, and indeed for the client.

If you understand the risk better, and you can talk to clients about their risks as you see them, you can help them with their risk management and risk mitigation. If you do that, you’re delivering a value-added product to the client beyond just risk transfer.

Paul Brand: When you think about commoditised business, it’s very unclear to me as to why you need so many loops in the chain and who’s really driving maximum value for clients. The companies that might be able to solve that problem need to be good with technology; neither the insurers nor the brokers are good with technology, as far as I can make out.

There is a bit of a turf war going on with the commoditised business. As opposed to thinking about how they best serve the clients, both intermediaries and carriers are thinking about how they can eat each other’s lunch.

So you’re getting intermediaries that are trying to underwrite, and you’re getting carriers which are going to try and distribute.

Client dissatisfaction with the industry will drive change. There’s been too much concentration on who gets what share of the spoils, and that’s where an awful lot of the effort has gone. How do we create facilities, as opposed to how do we build things that are a lot better for clients?

Paul Brand: We’ll absolutely follow. It’s up to clients as to who they choose to lead their business, it’s not something you can dictate.

Paul Brand: We certainly intend to build the capability to be able to lead business and be able to lead it well.

Paul Brand: Yes, more or less.

Stephen Catlin: As you know, we were involved in the Aon Client Treaty. That wasn’t underwritten by the broker, it was underwritten by selected leads, and we had control over those leads. It was an attempt to see whether you could do portfolio underwriting, with the appropriate underwriting leaders, so that you could save cost. Unfortunately, we didn’t get the opportunity to see whether that really worked or not.

The question of portfolio underwriting is really interesting but I think both of us are fundamentally opposed to portfolio underwriting when the broker is doing the underwriting.

Stephen Catlin: We’ve got 10-year money, so we’ve got time and we’ve got perfectly adequate capital for the time being. There are lots of levers we can pull, and third-party capital is another lever. Over a 10-year period, undoubtedly we will make use of different kinds of capital. But that’s an issue for tomorrow, not for today.

Stephen Catlin: Well, I can remember a management meeting where I was asking the difficult questions and I said: “We need to have a plan B, and we need it in writing.” I wanted it for myself in terms of my fiduciary duties and if I was the regulator it would be one of the first questions I’d ask, because we’re doing something that hasn’t been done before. The team came back with a very detailed piece of work about what happens, our relationship with the technology provider and our relationship with our data.

We’ve all asked ourselves the “what if?” question. Are you being sensible putting all your eggs in one basket? And in one sense you say “no”, and in another sense the advantage of it is that you can get your outsourcers to talk between the various departments behind the scenes.

So often people do this on a piecemeal basis and therefore they’re discrete, and there’s no synergy. That cross-flow brings huge advantages, reduces multiple data entry and makes certain that you’ve got the same version of the truth the whole time.

So yes, it has its risks but it has significant benefits and if we didn’t do it, we’d have a different set of risks. We could not afford the technology that we’re getting from WNS [business process outsourcing firm WNS Global Services] ourselves at this stage, so by outsourcing we’re getting top-end technology in a cost-effective manner.

Paul Brand: It’s going to have a huge impact across multiple dimensions. It’s changing how clients are operating, whether that’s with the Internet of Things or whether it’s by using telematics data to know more about risk. It’s changing the way products are distributed in the commoditised risk space and it’s changing processing cost.

The ability to set everything up in the cloud is an awful lot easier, cheaper and faster than buying in servers. The most important change for us is the ability to predict, which will be transformed by InsurTech in the next five to 10 years.

Insurance is about predicting things and what we want is to be really good at making decisions. Typically, this is achieved through data and analytics, and using this information to build a portfolio that is resilient.

Paul Brand: Yes, exactly.

Stephen Catlin: And we’ve got Mark van Zanden, our head of portfolio optimisation, who can concentrate on these issues and build a team around him to do it. This will be one of our alphas – we’ve got the flexibility and the resource to concentrate on this.

Stephen Catlin: Well, both of us are very supportive of Jon Hancock [Lloyd’s performance management director] and John Neal [Lloyd’s CEO]. They’ve got a very difficult job because they’ve inherited some nasties. Jon Hancock has been unfairly castigated for his decisions, but he had little choice given where the market was. Jon’s already shown he can be positive and constructive and now we need to move forward.

I’ve known John Neal for a long, long time and he’s very capable; he knows what bad looks like too, which is a great advantage in this situation. It seems to us that in the time allotted they’ve made some real progress, and their thought process appears to be logical and rational. The proof of the pudding will be in the eating.

I was actually delighted to read recently that Lloyd’s is coming down heavily on silent coverage for cyber, which has been an elephant in the room for years now. It’s an area where the industry needs leadership, and the arguments are so compelling. I’ve been talking to the Prudential Regulation Authority about this for years, saying: “Look, if you want to worry about downside risk to capital, worry about silent coverage. Because nobody can aggregate it.”

Nobody knows what could happen, and anybody who thinks that silent coverage is no coverage is living in cloud cuckoo land. Go back to my time in Equitas, go back to asbestosis, go back to pollution, look at what the American courts did in terms of rewriting the intent of the policy for something that hadn’t been contemplated. It will happen again for cyber.

Stephen Catlin: The answer is not to say we won’t do any silent coverage – as the new kid on the block we would have a problem doing any business – but rather, that behind the scenes we have to keep on asking questions, time and time again – have you thought about this? Have you thought about that? You know, you and I were talking about this, probably eight years ago.

Paul Brand: I think the cyber market’s an interesting one to watch. We don’t have a cyber underwriter on board yet, and it’s one of those areas where the risks are growing very rapidly…

Stephen Catlin: And the understanding of the risks is growing rapidly as well.

Paul Brand: There have not been enough claims yet either – it’s very difficult to price insurance where there haven’t been many claims.

Stephen Catlin: I started in Lloyd’s, as you know, it’s given me every opportunity of my life. Brando actually started in the company market so our emotional attachments are not quite the same. We haven’t said yes, and we haven’t said no to Lloyd’s.

When we first spoke to Lloyd’s, we said: “We don’t see how, in the light of what you are doing at the moment – which, by the way, we support completely – and the restrictions that have been brought upon the market, that you could approve a business plan which works for you and works for us. That’s not a hostile comment – it’s just reality. You don’t want to do something with us that undermines what you’re doing elsewhere; that won’t be good for the market.”

We’re very supportive of the individuals and Lloyd’s is still the epicentre of the wholesale market in London. If we can find a way of having a Lloyd’s syndicate which makes sense to our shareholders, particularly in terms of expense, then we would consider it.

Paul Brand: Lloyd’s also needs to clarify the purpose. It’s going through a great process of trying to think that through and is edging its way towards an answer, but it’s not really answered it yet.

Paul Brand: It comes back to the question of how strong is the London market. The consolidation is an affirmation that London’s got some very talented people and businesses. That fact that Marsh wanted to buy a broker, which was a global broker, is an interesting affirmation of our view that London is a great place to have an insurance/reinsurance business. And it also creates ripples, and those ripples are going to lead to changes in quite a lot of places.

Stephen Catlin: What’s your view?

Paul Brand: Open, flexible, a lot of fun, but at the same time we’ve got to be good at what we do and it’s got to be an environment where we challenge one another in order to provide the best products for our clients.

Stephen Catlin: We’re not a start-up, we’re a greenfield, so there’s an embedded culture we bring with us which you know a lot about anyway.

When you’ve got almost an established base for culture, it’s a lot easier than starting from scratch. It’s not to say that our culture was perfect but it’s a foundation; we’ve learnt from it, and like everything else we do, we want to do it better than we did it before.

Stephen Catlin: Culture is a company-specific issue. I’m not convinced that the insurance industry is better or worse than any other part of financial services, but it needs changing. Comments about the failings of the industry are valuable to the extent that it’s a recognition of the issue, but the change won’t come from regulation per se.

John Neal is doing what he has to do, but he is not in a position to change the culture of individual companies – the only people who can do that are the leaders of those businesses. So it’s the group executive, it’s the CEO, the CFO, COO; how they behave, how they treat each other, how they behave to the outside world, how they behave with people that work with them in the company. These are the things that drive culture.

Culture in financial service industries has slipped. It was very, very bad when you and I first joined the market – it was horrific in those days. It then gradually improved. Some of the consequences of M&A and bringing cultures together has meant that there’s less strength of culture at a company level than there used to be and it is very important that it’s rebuilt.

From our point of view, our experience is our legacy, and we’re well known as people to take culture really seriously and have that as part of our alpha. And we aren’t going to change that.

Stephen Catlin: One hundred.

Paul Brand: As always, it doesn’t pay to be too generalist about it. It’s varying a lot through specific classes of business, largely driven by recent trading history. There’s an expectation without seeing into everybody’s reserves that reserves could become an issue. The market is teetering on the brink of quite a big correction, but which way it goes is anybody’s guess at the moment.

Stephen Catlin: Our gut feel is that there’s a casualty story to come out which is pretty horrific – and a lot worse than a lot of people realise.

The thing that concerns most of us is if people get too euphoric about what’s happened in the last six months – we’re not actually at adequate pricing yet. We’re on a journey together.

This article was first published in the Autumn 2019 issue of Insider Quarterly