Pat Ryan, CEO and founder of Ryan Specialty Group, reflects on the last four decades of the broking market’s evolution and provides insight on how the industry could do much more in insuring against the next pandemic.
In 1982, Ryan Insurance Group and Combined Insurance were merged. That new entity acquired brokerage Rollins Burdick Hunter Co., and after several more acquisitions the company became Aon in 1987. How do you recall the state of the broking business at that time?
By the end of 1984 the market had locked up and was in a crisis for casualty lines. A lot of new capital was coming in. The traditional carriers had been at the tail end of a very, very soft market and the business that they had written was fundamentally unprofitable. So at that time, many brokers were reeling from past excesses.
[Alexander & Alexander] had problems at the top from commitments they made by being involved in underwriting, in London. There were those runoff problems, and it was No. 2 in size. Frank B. Hall was around No. 4, and they were in difficult times. But they had great quality brokers. But beyond Marsh and Johnson & Higgins, the people serving the larger part of the market, those brokers had some very difficult challenges. And there was a real conviction that there was going to be a disintermediation in the broking business and that there’d be direct to insured and shortening the supply chain. We didn’t believe that – and we believed that it was a unique opportunity to expand inorganically. We had basically been growing organically with, for us, sizeable acquisitions in the late ’70s and early ’80s.
There was strength at the very top of the market, and then a lot of challenges beneath that. At that time, the industry was looking only at fundamentally organic growth. Brown & Brown and Gallagher were buying up smaller brokers in the small commercial market or lower mid-market. It was a time of a lot of skepticism about the future of insurance broking, and stocks were not valued particularly high – quite low, in fact. Shareholders were uncertain about the future.
There wasn’t a lot of creativity going on or innovation; it was more a matter of survival. There was a feeling of ambivalence on the future of broking, and that carried on into the ’90s. We didn’t have that ambivalence; we had enthusiasm and conviction. We made a whole series of acquisitions starting in the late ’80s, but we started the expansion not just in the U.S., but in Europe and in the Far East, North America. And that allowed a very small company relative to the larger brokers to get significant traction gaining market share. And by the late ’90s Aon was a formidable competitor to Marsh. Second, but a strong second.
We’ve discussed the September 11th attacks, the lessons that were learned after so many insured losses and how formidable public/private partnerships like TRIA became essential. Do you see the same thing happening going forward, with regard to pandemics?
As you know, TRIA has been rolled over several times from ‘02, and it’s been a successful public/private partnership. People are now looking at whether [insuring] pandemics should follow that model, or if it should just be government-backed. There are people who believe that you could never even partially insure against a pandemic; I’m not one of them. People have wide-ranging opinions, but I think that when the next potential pandemic or actual pandemic occurs, we will have learned so much from COVID-19 that society won’t shut down. People will be much more selective in how they distance and how to protect yourself and be much more alert to the do’s and don’ts.
I think there’s a need for a blend of the insurance industry to take a part of that risk and then have the government fundamentally act as a reinsurer, similar to TRIA. And I think that the industry needs to develop risk management tools, learn from all the societal change, learn the lessons we’re all being taught from March on to when we get the vaccine. But I think it is going to be appropriate that some of those risks can and should be underwritten, and then recognizing what needs to be handled by the government. That book’s yet to be written, obviously, and I understand where people are coming from when they say a pandemic is uninsurable.
One could say that a lot of the lessons learned around SARS informed a lot of the decisions around policy language that has protected insurers during the current pandemic.
That’s a good point. And I’ve made the point in other discussions that those who had their [policy] wording appropriate, meaning they took the ambiguity out of the exclusion, and had well worded grants of coverage, have done quite well in the courts. Those who didn’t learn that lesson are still vulnerable. I’ve always been a huge believer in the importance of wording. But I like to look at it as, “How can we cover that risk as opposed to just defaulting to have it excluded?” It’s an intellectual challenge to say, “How can this industry, with its tremendous history of innovation, be a major participant in the solution?” While some of it isn’t doable, I’d like to see the industry take more terrorism risk and more flood risk and more infectious disease risk – but have the right forms and the right pricing. But that’s just one man’s opinion.
In your own experience and how you perceive all the different machinations of this business, what do you think has changed the most about the Property & Casualty insurance business since 1981 and what elements have remained the same?
I think risk management has changed the most; now, it’s much more sophisticated. I think we’ve become much better at designing policy forms that are clear, where the wording is specific and is designed to meet that individual risk’s likely claims – a lot more tailor-made responses. We learned a lot of that coming out of Katrina, where there was just so much [policy-language] ambiguity that in many cases the courts ruled against insurers. I would like to see more of what we will do, but we’re much better at helping people manage their risk.
We’re far better at claims adjudication. The sophistication that outside vendors have brought to the industry on claims management has made us a more user-friendly industry. We’re not as technologically advanced as we should be, but we’re making major strides in that. There’s a lot of really good innovation going on to improve the experience that insureds have with their coverage issues.
I also think that there’s a significant commitment now to data management and analytics. I look at what Aon accomplished in that area: that was a major factor in the growing of their market position, bringing really sophisticated data and analytics to clients and to help insurance companies manage their balance sheets more effectively.
I think we’ve become a lot more efficient at taking costs out, but there’s a long way to go to make insurance more attractive to the end user. We’ve done a very good job with things like creating insurance-linked securities with alternative capital, and the not-too-often-discussed use of captives.
We’ve also done a lot more with managing deductibles, trying to put people in a position where they’re not trading dollars, just paying the premium and insurers paying the claim. Overall, I think the industry is much more sophisticated than it’s ever been, but I expect the sophistication to grow exponentially because of the really significant commitment to investing in technology.
How would you characterize the environment for brokers as we enter 2021?
It’s a very positive environment for brokers. The responsibilities are great, but I think they’re responding really well. Specifically, there’s a lot of significant changes, a lot of form change, and the broker’s responsibility is to prepare the client. The worst thing for the client is to be surprised by the changes. They don’t have it in their budget, and when they don’t have it in their budget, people make short-term decisions that are budget-driven that are not good risk-management decisions. You see it in reinsurance, where sometimes they don’t properly allocate the capital to geographic regions or certain kinds of risks, and they get caught with inappropriate allocation. I think the broker is playing a much more valuable advisory role.
A broker is advising the client to be prepared for the changes. You’re helping them understand the changes and helping them make informed decisions as to the amount of risk that they should take and then appropriately selecting the carrier and ensuring the forms are properly written so that when there are claims, they’re ready and not saying, “What did I get myself into?”
The broker’s role has been never more important than it is now, and I think that’s going to continue, because the world is getting so much riskier. That’s not just influenced by the pandemic, but the whole litigation environment in the U.S., and that is expanding around the world. There are a lot of changes that are impacted by climate change, by other social issues. And I think we just have to recognize that the more populous the globe becomes, the riskier life becomes.
The advocacy role – and I’ve been saying this for all of my career – is critical, timeless, but it’s just taking on greater significance, greater importance.
Where do you see Ryan Specialty Group’s place in the specialty market, and where would you like to see it a decade from now?
I see us as aligning our specific expertise. I would like to see the company doing what it’s doing, but more broadly and obviously larger, certainly. But the principles that we have in our verticals now are principles that would apply to other verticals that are adjacencies to our current solutions for our clients. Our mission statement is to provide specialty to insurance products, to brokers, agents, and insurance carriers. Products are obvious. Services are not so obvious, but there are a range of services like actuarial service, like claim service.
TPAs created a whole new sophisticated approach to the outsourcing of claims, and they bring great value. I think there’s going to be more of that outsourcing. We want to be playing a role in that, a major role because of our expertise and frankly, our culture that has proven that we can attract really high-quality people and retain them. We have very little attrition of our talent because of the culture, the platform, and significant employee ownership so that we will be invaluable to our broker clients, to our agent clients and to our carrier trading partners.
You have to have quality and quantity of talent, because it takes more than just a few good people. It’s a lot of good people so that you can respond to all the client needs and that takes quality, but it takes depth so that you can respond quickly to the insured’s needs and the retail broker’s needs. Our role in the riskier world is enhanced, and access to the global market has great value.
How do you see the industry evolving over the next four decades?
There’s going to be a lot of change just because of technology. When you look at the future of private passenger auto, for example, driverless automobiles are certainly going to be a major part of transportation. But with every dramatic change generally comes dramatic opportunity—and that’s what I’ve always loved about this business. It’s more pronounced in the U.S. because of freedom of form, freedom of rate, but it’s not confined to that. We basically make our living by providing products and services that are compulsory to our clients.
I think discretionary buys and even some compulsory buys like auto insurance will change over time, but the core risks that we fundamentally insure are just going to get riskier. There’s no reason to believe that all of a sudden we’ll be less litigious. We’re also not going to all of a sudden change our social obligations to [global] population growth. Those countries that have the hardest limitations on population growth have suffered as a result of that, and they have a high number of older-average-aged people and a lot fewer people working. Forty years from now, I think that we’re going to be living in a riskier world.
This feature was originally published in Reactions.
