The chief executive of Markel finds that thinking in terms of set risk appetites has sustained the firm’s buying strategy post-financial crisis
Jeremy Brazil really is a farmer’s boy at heart. He completed an agricultural degree before his first foray into the insurance industry as a graduate trainee with Willis Faber (now Willis).
Brazil was an obvious candidate to help develop crop insurance with the broker, though he laments the lack of take-up from the market. “The people who need it can’t afford it and the people who can afford it don’t need it.”
Undeterred, Brazil went on to work as a London market underwriter from 1989, before being made Markel’s director of reinsurance in August 2001.
Here, Brazil tells us why back-to-back meetings are a necessary evil in reinsurance buying.
Q: How would you describe the pricing situation in the reinsurance market – would you say we are in a soft market?
A: At the moment, it is flat to soft across all lines. But if a class has been impacted by losses, prices have moved up to reflect that. In classes where prices are either flat or down, then reinsurance has tended to track that.
Q: How do you approach deciding what to buy and structuring your reinsurance programmes?
A: I am a great believer in the basic principles of reinsurance. It should be there to protect against the large risk loss or combinations of losses like catastrophes. I tend to look at it on that basis. We don’t arbitrage. We expect our underwriters to write profitable business so they carry meaningful retentions on their own business and we don’t want to pay too much away to reinsurers when it is profitable business.
Q: What in particular is important to your company as part of this process?
A: In terms of structuring, we have a set risk appetite for catastrophe losses and non-catastrophe losses. If it is catastrophe losses, we’ll use the models such as RMS to get a sense and feel about what our exposure is. We also use our own internal models to do that and price our own reinsurance before it goes out to the market. We will have an idea about what to expect and what we are looking at. Once we get quotes, we have another look and see if what we have been quoted represents fair value.
Q: How has the current pricing affected your buying strategy?
A: It hasn’t changed to any great extent. We tend to look for value, rather than price. But, having said that, we won’t pay silly prices for something that is not appropriate. If the price is not good value then we are happy to run all or part of it net. We have a core panel of reinsurers with whom we have a very longstanding, stable relationship, which is reflected in the pricing.
Q: How has your buying strategy changed post-financial crisis?
A: No, not really. We don’t have a large panel of reinsurers but they are the larger, more financially strong companies. It hasn’t really changed it at all. One thing we do look at more closely now is risk appetite per reinsurer. One of the unintended consequences of going for high-quality reinsurers is that you end up doing a lot more with a lot fewer people. So we set a risk appetite per reinsurer and keep within it.
Q: What impact will Solvency II have on the purchase of reinsurance?
A: We’re keen to use our own internal modelling in order to test the reinsurance programme and that is all part of imbedding the model into our day-to-day business. It’s all about a greater understanding of risk appetite and its capital implications. I think more and more insurers will be modelling their programmes in an attempt to try to optimise their reinsurance purchase and its capital implications. We already used our internal model when we looked at retentions across various classes to see what the impact is. Modelling can’t and shouldn’t make those decisions for you but they are another useful tool when analysing your portfolio to make informed decisions.
Q: How much premium do you cede to reinsurers?
A: Typically it’s plus or minus 10%. That has been pretty much standard for the past few years.
Q: To what extent do you make use of alternative reinsurance structures such as catastrophe bonds?
A: We don’t. We keep abreast of all the options out there – traditional, non-traditional, finite and alternative. But really, Markel only use traditional methods because we want certainty and to make sure the reinsurance matches where it can and not run a basis risk.
Q: What do you most look for in reinsurers?
A: In no particular order: consistency in approach, commitment to class of business, long-term relationships, multi-class relationships, a high standard of service including front and back end. By this I mean that when we are placing business and there are amendments to be made, I would like to think we get a good hearing and things will be turned around very quickly. And, in the event of a claim, that they respond very quickly.
Q: How is the success (or otherwise) of your reinsurance purchasing measured?
A: That’s a tough one. It’s really looking at the basic principles of why you buy reinsurance; looking at how value matches our plans. We tend to have a core reinsurance programme for each class. Typically, there is an issue if we have ‘X’ loss last year and the program didn’t respond, then we’ll change the programme to be safe. But the law of nature is that the same loss won’t occur again so something else may now not be covered.
Q: Describe your average day.
A: I spend a fair bit of my time in meetings internally and externally.
They are unavoidable but must have a reason and purpose. A long time ago, I did attend a meeting to discuss whether we had too many meetings. Since then we have fewer. I spend a lot of time discussing underwriting issues and strategy with our London and overseas-based underwriters. This is somewhat challenging when you have more than one time zone to contend with.
Q: Who do you most admire in the insurance industry and why?
A: My first underwriting manager, John Hodges, set me on my way. He gave me some good first thoughts and provided me with guidance I have used in the rest of my career. He would say: “At the end of the day, insurance is half common sense and half luck so don’t over-complicate it.”
Q: What do you enjoy doing in your spare time?
A: I am a farmer’s boy at heart. I still have a small farm, which is my escapism. It gets me out and about in the fresh air. GR