FROM THE ARCHIVES: A VINTAGE CARRIER MANAGEMENT ARTICLE FROM 2018.

Chiding industry peers for making an art out of “but for” measurements of financial results, the chief executive of W.R. Berkley Corp. also said it’s time for the industry to face reality about inefficient operations and needed changes.

When catastrophes occur, “we have this ability to back the cat losses out. But ironically, the industry doesn’t seem to back the premium out,” said W. Robert Berkley, Jr. during a second-quarter earnings conference call last week, explaining the “but for catastrophes” logic.

“There is a reality. Hail happens every year. Tornadoes happen every year. Earthquakes, hurricanes happen certainly more often than we would like but we cannot ignore the reality when we decide what an appropriate risk-adjusted return is. We cannot back it out of the results just because it’s convenient and it tells us an answer that we would rather have,” he continued.

Noting that his company’s combined ratio came in at 94.9 for the quarter, including cat losses and premiums, “I would love to be able to sit here and convince myself that actually it’s more of a 94 or 93.9, if you back out the cat. And if you back out weather altogether, it’s a better number than that. But that isn’t reality,” Berkley said, admitting that he had aired his opinion about this particular pet peeve during prior earnings conferences.

“But-for” math doesn’t change reality, Berkley says.

Bottom line: “We’re concerned because the industry is not known for its ability to change or to adapt,” Berkley said during last week’s earnings conference. “I mentioned these three topics again for no other reason than we view them as short-to-intermediate term issues that do need to be addressed. These are issues that if they are not addressed, the world will find a way to come up with better solutions,” he warned.

Berkley’s Bottom Line

As for the company’s bottom line, net income rose 65.2 percent to $180 million in the second quarter, with higher underwriting profits, higher net investment income and investment gains all contributing to the jump and a return-on-equity of 13.3 percent.

“We’re concerned because the industry is not known for its ability to change or to adapt.”

For the first half, net income rose 49.1 percent to $346.5 million. Year-to-date premiums grew 2.4 percent to roughly $3.3 billion, and the combined ratio for the first-half was 94.8.

Overall, second-quarter net premiums written rose 3.8 percent to $1.6 billion, with the insurance segment growing 5.2 percent and reinsurance premiums dropping 12 percent. Contributing to the jump in insurance premiums was a 12 percent increase in premiums for short-tail lines, Chief Financial Officer Richard Baio reported. Berkley later explained that the bulk of that jump related to accident and health business rather than property.

Commercial Auto Improves; Opioids Not Asbestos

Also showing a premium volume increase was the commercial auto line, up 7 percent for the quarter. And with rates moving up in the commercial auto, the company may turn on the gas to write more business, Berkley noted. “Once we feel as though it’s in the green zone, you’ll see us open up the spigot quite a bit,” he said, noting that loss costs are finally falling into place on a line that caught the industry “flatfooted for a while.”

But Berkley will grow with eyes wide open, he suggested in his answer to a question about the impact of litigation funding on commercial auto (described in a recent Carrier Management article.) That’s a reality “that probably needs to get factored in” when carriers project future loss costs and needed premiums, he said, agreeing that the big-money financers are “somewhat of a concern.”

Of greater concern to Berkley is the general impact of inflation on loss costs for specialty commercial lines generally—financial inflation and social inflation.

“There is growing evidence…that there is an increasing frequency of severity and severity continues to be on the rise. There is growing evidence that we’re living in a more litigious environment and it is undoubtedly the case that it will have an impact on loss costs,” Berkley said in his opening remarks.

Of particular concern is the fact the industry has not had to deal with the reality of inflation for a extended period of time—and many of today’s professionals have not had to operate in an inflationary environment at all during the course of their careers. “Many actuaries, many underwriters, many people in other disciplines have never had to think about this” as they determine appropriate prices, terms and attachment points, he said.

Asked specifically about litigation targeting opioid makers and whether another asbestos crisis might be looming, Berkley agreed that from a social perspective, the opioid epidemic “should be very concerning to all of us as a society” and noted the propensity for society to deal with such problems by finding parties to sue. While carriers could be on the hook, however, it falls short of the asbestos litigation scenario, he said. “The big difference is policy limits and aggregate limits that backed during the asbestos period didn’t exist the way they exist today.”

More Realties

Keeping with the theme of change and “the industry accepting reality and doing something about it,” Berkley also discussed inefficiencies in the industry. “The numbers of pennies on every dollar premium that are spent on other things than claims are overwhelming. This is not a sustainable reality.

“The combination of acquisition costs and internal costs are not something that society, in our opinion, will be willing to accept long term,” Berkley said, suggesting that a solution won’t be found if carriers keep blaming distribution and distributors keep pointing fingers at carriers. “This is a riddle that will be solved by the two parties working together….But in spite of all the chatter about this throughout the industry, it’s both shocking and disappointing how little has actually changed,” he said.

At W.R. Berkley, the expense ratio for insurance came in at 32.9 for the quarter, Berkley noted later during the call. Characterizing the result at “not bad” given the high amount of specialty premium the company writes on a wholesale basis, he said that the expense ratio is still something that the company will “keep chipping away at.”

Asked for specifics, Berkley said some efficiency is going to be gained as a result of technology. “When you look at the inefficiencies that exist between the consumer and actually a policy getting issued, when you look at the inefficiencies between a claim occurring and the person actually receiving the funds they’re entitled to, the number of hands, the multiple entry of information—just the path that payments go through [is] just terribly inefficient,” he continued.

You’d be “hard-pressed to find [a similar] level of inefficiency” to what exists within insurance underwriting and distribution in any other parts of the financial services segment or in any other industries, he said, broadening his remarks.

“And quite frankly, while it’s a little bit of a third rail, you’re going to be a hard-pressed to find a part of financial services, where the customer is paying this number of pennies on the dollar for access to the product,” he said.

Noting that true value and service and expertise is sometimes provided in exchange for those pennies, he suggested, however, that “there are a lot of situations where it is just access” that’s being paid for. “That’s not just a distribution issue. That’s a carrier issue [too, and] we need to find ways to work together to be able to do all these things more efficiently,” he said.

Read more of Berkley’s thoughts on carrier and broker inefficiency and inflation in the related Carrier Management article, “Reinsurance a Train Wreck; Brokers and Carriers Need to Bring Value Together, Berkley Says“)