In March 2021 Willis Towers Watson’s Chief Broking Officer for Natural Resources, Richard Burge (RB), spoke to both Sam Harrison, Group Chief Underwriting Officer (SH), and Peter Burton, Executive Director, International Markets (PB) from global insurer QBE. They discussed a variety of topics, ranging from the future of the global insurance markets to the impact of climate change and the energy transition. An edited version of their conversation appears below.
RB Gentlemen, can I start by asking how you think the pandemic has changed the Energy insurance market? What are your general thoughts, one year on?
SH For us, it’s been all about the way we work. We have broken a few industry myths, such as an insurance policy can only be renewed if there is a formal renewal meeting around a table with multiple participants. Despite all the predictions to the contrary, we have shown that electronic placing can be used effectively to deliver contract certainty. We have been forced into using a tool which may not be perfect right now, but we are still using it and it will evolve. Most other industries already use an agile way of working, and up until now the insurance industry has been reluctant to use this as a method of continuous improvement. Now I think electronic trading is providing that agility, which is fantastic.
RB Have you been surprised by how well it has worked?
SH From a QBE standpoint, we issued all our staff with laptops and video call software which actually had been planned in January of last year. So it was great that we found we were in a strong position to transact business just before the pandemic really hit. There were teething problems over sharing screens and all the issues surrounding the implementation of new technology, but when we were told to go home, our staff all left the office with the right equipment. From an insurer standpoint in a rising market, we have found that we have adapted to the new working environment more assuredly than the brokers. We can all hazard a guess as to why this might be; however, I put it down to there being less disruption to the insurer’s way of working.
RB So you would expect brokers to want to transfer back to a more physical business environment when the pandemic is over?
SH It’s much easier for brokers in a face-to face environment. But equally, brokers are adapting all the time – if it were a race, I would think underwriters have a head start; over time, brokers will of course catch up. At different points, different players are favoured. But in this particular market environment, it’s favouring the underwriter. Where the current business environment also disadvantages the client is in terms of access to individuals, because it is not as efficient at gathering consensus. It favours quick decision making by the leader, but where the leader’s views are not as palatable as the client would like, I don’t think it favours consensus.
RB So how do you think the business environment will evolve from here?
SH The next iteration is electronic transfer of information in a structured data format, as opposed to the transmission of data by excel or pdf spreadsheet. Client data is going to be needed to be captured in an electronically structured manner which is consistent for the entire market, that each insurer can then manipulate separately to meet individual company needs. The way the market used to work was along the lines of: let’s wait for the leader to do the work, and then we will seek other people to critique the leader’s view. Whereas in future, each insurer will conduct their own analysis at the same time.
RB Do you feel you have been able to maintain your key client and broker relationships during the pandemic? What, if anything, have you missed?
PB We haven’t really maintained the relationships with either our clients or our brokers in the way that we would really want to. It’s true that we have maintained our broker contacts via video calls etc, but for complex risks, and for a broker to properly represent their customer in the best possible light to explain the sophistication of the companies’ attributes and activities, there is no doubt that some of this can be lost through remote communication. There is so much to be gained from doing this in a face to face manner. For instance, I’ve just been on a call with a client; it was a good call, we had a good conversation, but if we were face to face, we would have had a much more interactive dialogue and would have covered a myriad of additional issues. I think you can understand each other better in such an environment, especially during the “non-business” time with the client, which you don’t get on video calls; this informal time is very important in building these relationships up. As an underwriter, you get to understand what drives the customer and their culture. So if you want a long-term relationship –and we always look for these kind of relationships - that’s the understanding you need to build between the two parties.
SH Our industry is based around trust and speed of decision making, mainly because clients have coverage needs that often are immediate and require solutions in very short timescales. So the value of people knowing and trading constantly with you is really important. Peter and I have 25 years’ experience of building relationships; we think that we have traded on these relationships heavily over the last 12 months, and I’m sure that the broking fraternity has done the same. But if we look at our 26- and 27-year olds, who haven’t yet had the chance to build up such relationships, what are they going to trade on in five years’ time if this continues to be the new way of working? Yes, we as an industry have done well during the pandemic, because we have leveraged our own personal relationships, mobile numbers and phone groups to get things agreed and done. When you don’t have that ability to access people, you are relying on one method and if you don’t know the person you are calling, it becomes infinitely more difficult.
PB It’s a worse position for the clients to be in. They will get better delivery from us with more interaction.
SH And more latitude. If something happens outside the norm, a collaborative way of getting over a unique problem is generally done best by people who have done similar things together over time, involving similar problems and similar solutions. When you are dealing with people who have never done anything outside the norm together, then the system is very likely to grind.
RB Do you think that the insurance industry will permanently change as a result of the pandemic? If so, how?
SH I don’t think for us it’s changing so much – I would suggest that the impact will be felt more by clients, because they may decide that they will no longer need to travel to see their underwriters. Regardless of what we want or what we think is right and beneficial, I think that in the future clients will regard travelling to buy insurance as a luxury and not a necessity.
RB Turning now to climate change and the energy transition, how committed is QBE to supporting the fossil fuel industry as economies begin to move towards a net-zero future?
PB Climate change and sustainability is a highly complex subject, and we are all trying to understand what it means to us, either as individuals, or as businesses. In respect of QBE, we are committed to the goals of the Paris Agreement. Taking the investment side first, we are committed to achieving zero emissions by 2050 in our investment portfolio, and we are aligning our investment strategy in accordance with the Paris Agreement. In terms of our energy industry client base, we have a very long-standing client portfolio which we are very proud of and which we will support throughout their transition to a lower emissions environment and towards meeting the Paris Agreement goals, along with their governments. We must all work together towards that common objective.
RB So for Coal and maybe, for example, Oil Sands business, how significant would some kind of accreditation process be in ensuring that support? Should they have to go through such a process to provide you with the rationale to continue to support them as we move into this new era?
PB If we could have a consistent accreditation process, that would certainly help us as an underwriting community as it would allow us to rank or to assess clients on a more objective basis; it would enable us to establish how far along the road are they in achieving their transition goals. We need to come up with a consistent framework for our underwriting toolkit. It’s a very challenging subject, if only because of the need to assess clients on a level playing field. For example, take carbon credits and how they are assessed, as well as new emissions technologies – these issues are highly complicated and there are so many inconsistencies and contradictions. So if we can access better tools to identify how our clients are achieving their climate goals, it can only be better for us as an industry. I would also like to see the accreditation process broadened across the whole ESG spectrum, rather than just focusing on climate change. A client may be top of the league in certain areas of ESG but may have a way to go in other areas.
SH The beauty of accreditation is that you select the client for the efforts that the client is making, regardless of industry sector. That is the more socially responsible way of handling this issue.
RB So what’s your view on those insurers who have already announced their withdrawal from certain fossil fuel sectors?
SH I’m not convinced that clients should be selected against purely because of what they produce as opposed to their social responsibility and how much they invest in it and care about it. If you look at some of the insurers who have come out of the blocks championing zero emissions and pulling out of certain sectors, they didn’t start with an oil and gas portfolio that they needed to defend; some of them are the ones that have had the least premium income from those operations to start with. What will be interesting is when we start examining the second order of magnitude, and those insurers currently underwriting Agriculture and Construction business; after all, cement is a huge emitter of carbon. Once the focus shifts from Oil & Gas, what are these insurers going to do when it comes to Construction? Or even Auto?
At some point, the benefit of insurers forcing clients to manage the transition will have a gross domestic product impact on societies around the world. Do we understand that balance at the moment? We are focussing on one industry sector, thinking that we will sort this one out and then move onto the next one, but there are some very big knotty subjects just on the horizon. I think companies will find it more and more difficult to make a soundbite on their portfolio management when we get through this initial barrier.
However, I must say we fully support our industry making public statements on climate change and the existence of discussion can only lead to the insurance industry actively and objectively doing its part in driving the energy transition forward.
RB How has the quality of underwriting data submitted by clients improved over the last five years or so? How much more work needs to be done in this area?
SH The client’s data quality will only ever be as good as what the underwriter’s pricing and monitoring models will take. Our models are not quite 21st century in most cases; the type of data that we can receive from clients is similarly constrained. In terms of the data requirements, Downstream Energy is infinitely more granular than Upstream, but if you look at the results over the cycle, you wouldn’t say that there has been a profitability advantage by having better data. The one area that I do think clients should do more on is underlying claims activity, particularly in Casualty business, where our clients tend to take larger retentions than other industries. That’s fine, but I do believe we would improve as an industry if we had better data and insight into these underlying claims and how the client believes they might develop in specific judicial regions as they can take significant time to come to fruition. The more data and information we have around claims developments, the better we can assess risk and pricing and provide clients with a better product.
RB You don’t think this issue has been resolved by writing Liability business on a Claims Made basis?
SH For us, the bigger issue is the XL-004 policy forms from Bermuda. They are not Occurrence forms, but you would be forgiven for thinking they might be when you look at the claims that are coming through. It comes back to the big issues such as climate change; there are number of clients that have advised policies of climate change loss notifications, but there aren’t many discussions at renewal about the correct way to price these losses.
PB The data issue is an interesting one. If we are honest with ourselves, the data that we are currently receiving from clients is not that different from five years ago. I think clients would like to provide a lot more data, and they have the ability to do so, but as an industry we don’t know what to do with it. Our analyses, models and pricing mechanisms are just not sophisticated enough to be able to reflect the data which they could provide.
RB Data is a factor, but I am surprised at times where underwriting decisions are being made just on the basis of past data. Sometimes people forget that bad things just happen sometimes. After all, that’s the reason that energy companies buy insurance - they don’t know when or how losses will materialise.
SH But when it happens, it’s hugely impactful. I have yet to see a broker bring data in to show me that I should charge more for a risk, and I’ve never had a broker yet who has ever introduced me to the world’s “second best drilling contractor”! These data questions are all asymmetric; they are designed to enable the broker to suppress price, not for it to be assessed correctly.
RB Do you think that the market is sufficiently innovative? Does it need to be to remain relevant to the energy industry?
SH Clients are always going to want us to deliver ease of transaction. Over time, we will have to migrate to balance sheet protection rather than product protection. I find it amazing that we still refer to the energy industry in terms of Offshore and Onshore; the Energy market even buys reinsurance on this basis, when almost every Energy client thinks of themselves in terms of being Upstream, Midstream or Downstream. When you have an industry which is so misaligned with the operations of their customers, there will come a time when there will be a schism. Soon, our clients won’t care if they are classified by us as Upstream, Downstream, Midstream or even Renewable – they will just want protection across the board. So the industry needs to get a grip on the fact that that our clients’ businesses are changing again; we probably need to take a couple of steps forward and simply become risk protectors of our clients’ business, full stop– not just the insurers of offshore platforms. We need to be more aligned with the way our clients do business.
PB The key to this is to find mechanisms for pricing these risks which are open and transparent; to understand from the client’s perspective what the pricing value is. In the very few times where we do come up with a product that might be innovative, often it’s very hard to get a client to buy it. I’m not sure we know the reason why: is it the wrong product? Do we not engage with them enough to understand what they really want? Furthermore, clients tend to buy within their peer group as well – they buy what other people buy. We very rarely see a client who is prepared to do something different, but in the same way, they rarely see an insurance company which is prepared to price and market an innovative product.
RB Finally gentlemen, QBE is a global company. To what extent is it possible to regionalise your global underwriting operations for the energy lines of business, or is a more centralised structure more effective?
SH It depends on your company’s broader operating model. We are a global insurance company, but underwriting appetite and strategy is governed by the region. For QBE International, our underwriting appetite is designed by us for us, obviously in collaboration with our global colleagues. But it’s not impossible for my division to decide, for example, that we want to expand in Oil & Gas, and for QBE North America to decide that it’s not a class of business that they want to explore. The reasons for that will be wide-ranging, such as acceptable volatility, track record and access to capability of underwriters, claims and distribution staff. Can you make a portfolio of a critical size to make it structurally important to the company, with longevity? And is it where the client wants it to be placed?
RB It might be argued that with modern technology there is less need for a regional underwriting distribution network today.
SH It’s a client business. Within reason, we have to provide our clients with access to our product where they wish to access it. And if clients in Houston want local insurers to be making local decisions, because their perception is that they have a better understanding of the nuances of the local business, then we have a rightful obligation to provide our clients with that source of expertise locally where economically possible.
PB There are two very simple issues: one, where does the client want their business to be placed? Two, can we as a carrier economically provide the requisite level of expertise in underwriting and claims to service that client in that region? If we can, then we’ll do it.
SH There is no such thing as one operating model; what works for one company doesn’t work for others. Five years ago we anonymously canvassed a large number of oil & gas companies who were good enough to respond, and the one thing that came through loud and clear was that they would far rather talk to two underwriters in two different product lines, both of whom were empowered to make decisions in their relevant products, than talk to just one person who would then go and talk to the decision-making underwriter on their behalf. They do want the organisation to be aware of the importance of their business to the insurer, but in terms of interaction, the thing they really want is the ability to talk to the decision makers.
So our whole structure has been designed around putting underwriters in a place where clients can talk to them and they can make the decisions as a result of these conversations. We have chosen not to go to a distributed product model, where we have generalists in many parts of the world talking to local clients and the passing the requests to either a regional or a global hub; instead, we have gone for a multi-hub underwriting model, to try and provide as many clients as possible with as many decision makers as possible.
RB Gentlemen, thank you both so much for your time.
Sam Harrison is Group Chief Underwriting Officer, QBE.
Peter Burton is Executive Director - International Markets, QBE.
Richard Burge is Head of Upstream Broking and Chief Broking Officer Natural Resources, Willis Towers Watson London. richard.burge@willistowerswatson.com
