An Allied World View…

In an exclusive interview with Advisen, Lou Iglesias shares his views on excess capital, industry consolidation, Allied World’s growth strategy and product innovation.

Since its inception in 2001 with 4 employees, Allied World has grown to a $3.5 billion market cap corporation with a network of global offices offering specialty property and casualty solutions to its mid-market clients.

Lou Iglesias has almost 30 years of insurance industry experience and took over as President of Allied World’s North America operations in January 2014. He now oversees 13 offices across the North American region.

Advisen: Is the P&C insurance market over-capitalised?

Lou Iglesias: Capital in the P&C industry is at record levels today but I caution against describing the industry as over-capitalized.

The models will tell you that there is excess capital, but you never really know in our business – we haven’t had a series of events that have moved the needle for quite some time. Prudent capital management is essential.

In an over-capitalized environment, it’s prudent for our industry to think about how to utilize the capital for risk transfer, as well as other capital management functions you see insurance companies undertaking.

Demand for insurance is currently subdued, partly because of low economic growth in North America. But if the insurance industry really listens to our clients’ needs and responds to emerging exposures with the right products, we can create that demand. However, we have to take great care to understand the implications of those new exposures.

Advisen: Why does it appear that market cycles are less volatile than they have been in the past?

Lou Iglesias: Since the financial crisis, financial investors have ‘discovered’ the insurance industry as a source of returns. We fared pretty well in the crisis and investors – that have been getting low returns in other asset classes – are coming in.

This opportunistic capital is focusing mainly on the short-tail lines and therefore price competition is fiercest in the property sector. I don’t believe that will last once returns in other classes become more attractive. However, there is a class of longer-term investor – notably from Asia – that is here to stay.

Secondly, we’ve made great strides forward as an industry in how we manage data and how we read the signals they are giving us. Every day, our executives receive valuable information – on losses and ratings, exposures, for example. As they interpret that data and adjust their books of business, they avoid the need for huge corrections on books of business that in the past would deteriorate over time.

The industry is more self-correcting today, as we have sufficient information available to us to read those signals early on and respond accordingly. The key, of course, is having management teams that will properly evaluate and act on the information that is available.

Advisen: The industry is undergoing a very active period of M&A at the moment. Do you see industry consolidation as a good thing?

Lou Iglesias: Insurance companies are looking to grow and increase operational efficiencies and, ultimately, profit.

Some – like Allied World – are at a stage in their development cycle where they can continue to grow. Allied World has launched new divisions and expanded geographically – both organically and by acquisition – and we’re still investing in our business by efficiently using capital.

Established businesses don’t always have the same market opportunities, so the best option right now might be for a transformative merger or acquisition, if there’s a strategic fit or expense savings to be had.

For some – especially the reinsurance industry – there may be a strategic advantage to be gained from sheer size.

I believe at this stage in the cycle it is healthy, as long as our customers continue to have choices and the buyers and sellers feel that they are getting value.

Advisen: What is Allied World’s growth strategy?

Lou Iglesias:  We will continue to be opportunistic in any acquisitions, while forging ahead with a measured organic growth strategy.

Last year, Allied World acquired the Hong Kong and Singapore operations of RSA. It’s tough to grow organically in Asia and RSA’s long-standing presence in the region allowed us to buy an established business with good people. That deal gave us a great footprint in the area and makes us a truly global company.

Allied World has successfully expanded in North America by introducing products and expanding and growing our local presence. Our strategy here is to take our core products to the customers where they are located, rather than have them find us in a central office location.

We have seen an increase in business from smaller and regional brokers through this strategy and it still has room to run. Additionally, our key wholesale relationships aggregate business for us where our reach is limited.

We also recently consolidated our Bermuda operations into the North America division, which has streamlined our offering to our North American clients. We now have $75 million of capacity available and have built products on the back of that. We also benefit from having the combined experience and ideas of a wider group of underwriters when we are setting strategic goals for the region.

This combination of strategic acquisition, organic growth and streamlined operational structure works for us.

Advisen: How does Allied World differentiate itself in this market?

Lou Iglesias: We want to hire the best people, have the best products, increase our geographic footprint and seek organizational efficiency.

But above all, good old-fashioned service is a rare commodity in the insurance sector and we pride ourselves on being responsive to our clients.

We have a flat organizational structure, which means that our underwriters have authority to make decisions and get quotes to customers in a timely manner.

For example, we opened a crisis hotline for our excess casualty clients. In the event of a loss, our clients can call the number 24/7 and get immediate advice on PR, claims and loss control and other consulting services.

Answering the phone for customers, turning quotes around quickly and listening to their needs seem like simple tasks to execute, but the insurance industry does not execute these well, on the whole.

In terms of product, we won’t compete with the big players on the boiler-plate products. We are a specialty firm and we want to be the best providers of the specialty products we offer. In this sector, we are very comfortable competing on any level.

Advisen: Where do you see pockets of opportunity in today’s P&C sector?

Lou Iglesias: Overall, the P&C rating environment is flat, but there are certain lines of business where rating is more robust.

Allied World’s product mix is more than 50 percent casualty and we will continue to focus there. The longer tail on the business acts as a barrier to entry to that shorter-term capital in the market today and the rating environment is more robust that elsewhere.

We have a strong claims management ethos and this is a strong competitive advantage in the longer-tail casualty products, such as D&O, architects & engineers, healthcare, environmental and construction.

We have also carved out niches in Defense Base Act cover and M&A insurance, which both have higher barriers to entry.

Advisen: How should the industry be responding to emerging risks, such as cyber or political risk?

Lou Iglesias: Innovation in the industry does not have to be disruptive or entirely new. We just need to constantly evolve our thinking and our products to keep pace with growing global exposures.

Take political risk, for example. Global trade is here to stay and, increasingly, companies have global footprints. Combined with increased uncertainty and complexity in credit markets, counterparty exposures, supply lines and political instability, political risk is a hot topic for our clients right now.

But one of the main coverage issues facing the industry today is cyber risk. The industry has been slow to react to the real concerns of our clients.

When we speak to senior executives, their concerns are for their stock price, reputation or market share following a cyber event. As an industry, we should be working with our clients on loss avoidance and not necessarily always with risk transfer. It is dangerous to try and weave cyber risk into existing policies, as it is not clear how the products will respond to these exposures.

There is demand for a standalone cyber risk product, but it is a limited solution today.

Although there is a clear need for risk transfer, Allied World believes that value can be provided to clients today by offering services that help raise awareness of the risks and help customers understand and strengthen their information security.

In response to this need, Allied World launched FrameWRX, which offers a series of pre-incident risk management services designed to help clients avoid, manage and mitigate privacy and network security-related risks.

Again, I believe that success for the insurance industry will come from listening to our clients’ needs, developing measured solutions to those needs and meticulously executing the service of those products. That’s what we aim for at Allied World.