In 2019, Stephen Catlin and Paul Brand co-founded the Convex Group with $1.7bn of initial committed capital to underwrite insurance and reinsurance for complex specialty risks. Energy Market Review editor Robin Somerville (RS) caught up with Paul Brand (PB) recently in Convex’s offices at Lime Street, London.
RS Paul, what’s changed in the London insurance market during the last five years?
PB Let’s take what hasn’t changed first - we can still segment our client base into two distinct entities, those that are focused primarily on receiving advice, and those who are focused primarily on the price of the transaction. The first group tend to have more complex risks, with more significant hazards and with more potential for significant losses. They want to form strong relationships with their intermediaries to obtain advice on how to manage their risk landscape as it becomes more complex. Conversely, there are plenty of other clients who, for very good reasons, need answers to two rather simpler questions: one, how do I get my insurance programme done and two, how can it be done as quickly and efficiently as possible? These companies tend to be less complex, with less exposure to risk; they are often buying insurance simply because the banks and the regulators have told them to. The interesting thing is that both these segments have been conducted in the London market using the same processes, all throughout my career. The complex risks have been dealt with quite well, whereas the commoditised risks have been relatively costly to deal with – in essence, a $10,000 risk still costs the same to place as a $1,000,000 risk. The opportunity for technology to really drive the changes behind how insurance is conducted is there, and that’s going to have a huge impact on the business. If you think about what clients want, their ideal would be to have the required insurance delivered instantly, and there it is – job done. Everything just happens in five minutes, rather like buying a book from Amazon. Now technology is enabling that, it’s really happening. A lot of people are talking about disintermediation: we have brokers trying to become underwriters, we have underwriters trying to become brokers, and I have some scepticism about how good either sector will be at that. Are these underwriters and brokers good at technology? Because they must be to do this properly and be successful. To be honest, I’ve not met many carriers or brokers in London who are. So we are on the cusp of a dramatic change. But in the meantime, the proposition that we’ve got for complex business is pretty strong. The transaction costs remain relatively low - the cost of broking a complex risk is relatively cheap compared to a similar transaction in banking or any other capital solution.
RS So how are you going to differentiate the Convex offering to these two market segments?
PB Convex is essentially set up to deal with complex risks. That doesn’t mean we won’t support people who have built solutions for commoditised risks; we’ll do that through our reinsurance business. This business can take global risks - where we find people who have built the right mousetrap, we will support it. But I don’t think that Convex is a technology company. We are an insurance company, and these days that implies knowing about technology, understanding data and understanding the opportunities that you can get from using data in different ways. If I get a bunch of underwriters turning up and telling me they want to create an online portal to attract $2,000 premium accounts from around the world, I would probably ask them: what’s the distribution? Because if you don’t have the distribution solved, why would the business come to you rather than to anyone else?
RS What about those large energy companies around the world who continue to tender their business regularly? Do you still treat these programmes as complex risks?
PB Forming long term relationships and tendering the business aren’t incompatible. I think it is entirely reasonable for clients to ask themselves: am I getting the right services from my intermediary, am I getting the right services from the market? So I don’t feel threatened by companies who wish to tender their business. What we are looking for is whether the companies can look beyond the price and see the value. If you are dealing with the company which is going to make very short-term decisions because it does not really understand what its risk transfer opportunities are and what its strategy should be, then this may be because they have not been properly advised by their broker. That’s very difficult for us to deal with, because we never know what’s going to happen next.
RS So you are looking for clients to be more transparent?
PB Transparency helps, but ultimately we want clients to behave in a rational way. We need to encourage them to consider not just the price but the value they are receiving. Some of the most prominent clients have had some of the worst claims records; it’s much better if that’s transparent and we can point out that we have people who can deal with claims in a fair way, looking to get a fair outcome, even if this offering is a bit more expensive than some of the less experienced alternatives. I think there is a lot more transparency in the industry these days and that’s a good thing - carriers are keeping business because they are coming up with the right product set and providing the right responses in terms of behaviours, speed and certainty when speaking to intermediaries.
RS We are getting a hard market now in virtually every line of business, but there is still a lot of reinsurance market capital about. Do you see that ever going away, or will the over-supply simply continue?
PB Over time, the market must sustain a reasonable return on capital, or the carriers will indeed go away. Is that fundamental insight currently broken? No, I don’t think so - you are always at risk of being out-competed by carriers who might have a cheaper cost of capital or lower expenses. The market needs to be the best place for clients to do business with. If we go back to the commoditised business, there is a challenge as to whether the London market will be doing all that it currently does in the future. For example, there is a lot less motor business in Lloyd’s than there used to be.
RS Would you ever envisage a convex syndicate at Lloyd’s?
PB It’s not something I would say never to – it will be really interesting to see how Lloyd’s recovers from its current issues. Are we hopeful that it does recover? Absolutely. Is the current management doing a good job? Yes, the blueprint has a lot of good ideas. In some ways Convex is a strategic bet on the fact that the London market will remain a really strong place for conducting complex insurance and reinsurance business.
RS Why are you so confident that London will retain its pre-eminent position in the global insurance markets?
PB We wouldn’t have opened our offices in London and Bermuda if we had thought otherwise. For complex insurance risks, it’s clear that London brokers and carriers are continuing to do a great job. Look at the amount of money flooding into wholesale brokers in London; that would not be happening unless investors saw a good future for the London market. When major brokers buy smaller wholesale units, they do that for the good reason that the London people generally represent value.
RS At one stage it was fashionable to talk about the globalisation of the insurance market. Do you now think we are seeing a re-centralisation?
PB I think my old shop at Catlin was part of that trend, but what we discovered as we expanded globally was that complex business came to London anyway; there was an assumption in the past that business wanted to stay local which I think was less true than we thought it was.
RS Why do you think that London’s expertise, it’s knowledge base, it’s accumulation of insurance acumen has never been exported successfully to other hubs in quite the same way?
PB The key to it must be that we have been providing the right outcome for our clients, or it wouldn’t have happened. However, I am quite interested in how networks work and how organisations administer themselves. Why is Cambridge University a brilliant institution? It’s because there are all kinds of people in Cambridge that are rubbing along together, talking to each other, sharing ideas and concepts. And in a strange way, there is a sort of university feel to the London insurance market. Why has Convex chosen to position itself in the Scalpel next to Lloyd’s in Lime Street? Why is Willis Towers Watson next door? It’s because we can talk to each other easily.
RS So despite all the advances in technology, physical locality is still important?
PB If you are doing complicated things, then it’s helpful if you can speak to somebody. It will be interesting to see how commoditised risk will become, but if you have got a difficult problem to solve, then you are normally better off going to speak to somebody. So when Convex conducted our capital raise, we went to speak to specific people. Now If you are doing something different, for example securitising a mortgage portfolio, you don’t necessarily have to speak to people to do that, you simply create an index and people form opinions. But when I think about the complex business that London is good at, that still requires a great deal of face to face interaction.
RS Let’s now turn to the risk landscape for the energy industry, and the risks to which it is increasingly exposed to. Let’s take natural catastrophe (nat cat) risk as an example - with the climate change agenda becoming increasingly apparent on the horizon, there is the potential for nat cat losses to increase. But there’s also a limited amount of nat cat capacity in the insurance markets. Do the insurance markets need to re-address what clients need and come up with a fresh, innovative nat cat solution?
PB I think the insurance market has indeed innovated around nat cat - the ILS market has increased from nothing to 25% of the global nat cat market over the last 10 years. That’s hardly a minor blip. There has always been a bit of a supply/demand gap – on the one hand you can purchase anything if you are prepared to pay enough money for it, but on the other hand, quite rationally, companies have their own budgets and will limit themselves as to how much risk they can transfer. For individual carriers, we obviously have to be very careful about the amount of nat cat exposure we have on our own balance sheet – we clearly have to pay these claims if they happen.
RS Most companies have to be seen to be buying as much nat cat as possible because of shareholder pressure. So if there’s a demand because these companies have to be seen to be buying it, given the amount of reinsurance capital in the market, should there be a larger capacity available for nat cat risks?
PB Well, at the moment I think there is as much capacity as is required. US property nat cat prices, even in a hardening market, didn’t increase very much at this year’s 1/1 renewal season. We will have to see what happens with the Florida renewals at 1/6, but in January there wasn’t more demand than supply, although it was close. So demand didn’t generally exceed supply – in the small number of instances where it did, it was not a question of price; carriers were just full.
RS Turning to the question of clients providing underwriting information - in this era of big data, is it easier for insurers to get the right sort of information to make good underwriting judgements than it was say 10-15 years ago?
PB Yes indeed. It’s going to be fascinating where the internet of things will lead us to, and no one is really using that data yet in ways that truly help us to be more informed about risk. But the second area is where we can know more about companies than we used to be able to know. We can now do that independently, and that is a useful thing in terms of shifting the timeframe of the negotiating process.
RS We have heard a lot about how certain insurers have withdrawn from the coal industry recently – do you have any views about the type of business Convex likes to write from an ESG perspective?
PB Society as a whole, and governments generally, need to show a bit more leadership around environmental issues. If its legal to burn coal in a certain jurisdiction, and people are using that energy to heat their houses and run their air conditioning, you get to the question: well, who will insure them? I don’t see coal mining as a major business opportunity for Convex but there is a challenge and people have to start thinking it through: obviously it has to be legal, secondly it has to be moral, thirdly, you have to think about your stakeholders and ask what is their view of that segment. Finally, do you think you will make money out of it?
RS It’s interesting that you want to take into account the views of the company’s stakeholders because everyone is going to be affected by this.
PB We have had similar challenges before. For example, one of the risks that I have always avoided has been tobacco companies; part of my moral compass was not to have too much to do with that industry. Other people in the company had similar concerns, then we got to the final factor - could we make money? And we concluded that we probably couldn’t. Now if you think about the oil and gas industry and some of the pressures it is coming under from some of their investors, again you have to ask: who are the polluters? Are they the people producing the energy or are they the people consuming the energy? Or should you simply ask the question: if climate change is accelerating and we believe that carbon is contributing to that, how do we as a society think about how we can cut carbon or re-capture it or find a solution that addresses the problem that we’ve got? So I get concerned with people who seem to possess magical thinking on this issue. Which companies are probably spending and investing the most and finding renewable sources of energy at the moment? It’s actually the major oil companies. Does constraining share ownership of these companies help that? Probably not.
RS Finally Paul, how would Convex differentiate itself in term of what you want to offer the oil and gas industry as a long-term strategic risk partner?
PB Firstly, being collaborative – we think that the quality of our people, the ease of access, the faster service, all lead to smarter decisions. We are interested in finding the right outcome – that doesn’t mean we write everything that comes our way, but it does mean that we will engage intelligently with anything that brokers are kind enough to bring us. We’ve set the business up so that the behaviours are right. Secondly, because we are not caught up in legacy, because our business plan is much more focussed, operationally we can be a bit slicker and cheaper. And as we build our data, analytics and insight we will continue to make smarter decisions.
Paul Brand is Co-Founder of the Convex Group.
Robin Somerville is the Editor of the Energy Market Review.
