When you’re more client-centric you may have to take some business that you don’t think is priced appropriately, but it is more about the relationship.
We’re used to just coming off business and not worrying about what impact it will have and now we have to think about the bigger picture.
Few: These things tend to go in fashionable cycles as to whether it’s better to be mono-line or diversified. We started Aspen from a Lloyd’s syndicate called Wellington where we were always diversified, but since then there have been periods where there’s been attractive investor interest in mono-line solutions because they’re simpler to understand, they’re highly modelled and everyone thinks that’s a very manageable business proposition.
There have been times during my career when that’s been more attractive to investors than a diversified model, which is seen as being too complicated or too broad or having too many ways it can go wrong. Clearly at the moment the fashion is to be diversified because relying on any one product is seen as being too dangerous, and diversification is a better way of utilising your capital and spreading your risk.
We’ve always believed that, regardless of the cycle, but I suppose fashion will change again at some point. The key is to ensure that your business model is flexible enough to be able to adapt quickly to changing market conditions and dynamics.
Berry: I agree with James, the key attributes that drive successful businesses are access and expertise and as an underwriter I’ve always thought ‘never dabble’ because that doesn’t end well. I would approach a diversification model very much along the lines of: ‘it has to make sense, I have to be doing it right, I have to be in the right geographies with the right level of access and expertise’.
We’ve been a diversified entity even as a reinsurer right from day one. We chose a way of doing things where we initially worked with third parties who were specialists in their sector and we stuck to our core competency, which was property cat in the early days.
16 Bermuda Finance | 2014
“I worry that we’re a little too complacent, given we’re operating right on the cusp of pricing adequacy on most lines of business.” Jed Rhoads
Eventually we morphed out and took on a Lloyd’s platform and became multi-line in our own right. It was a very thoughtful strategy which I think is why it was a success.
Rhoads: The key here is profitable diversification; diversification for its own sake doesn’t do you any good if you’re dumbing down the returns of an otherwise profitable operation. Diversifying into an area you don’t really understand is dangerous.
If you don’t have the people, then get people who are experts in either the geography or product line that you’re diversifying into, otherwise you’re just compounding soft market issues and, when the tide goes out, you’ll be found either wearing swimming trunks or not.
The diversification you’re referring to is interesting and that’s deploying third party capital as additional diversification. All the companies round this table and around this Island are starting to deploy meaningful amounts of third party capital, augmenting their underwriting income with fee income, but that creates its own issues.
The good news is that fee income provides stability in results, and shareholders like stability. Working in a volatile business, fee income is a good thing. The bad news is that fee income is typically not as profitable as underwriting income, and fee income for its own sake tends to result in a fairly vicious spiralling down in prices.
The underwriter who is paid to deploy capital doesn’t have the same motivations as the underwriter who is paid to produce bottom-line profits. With top-line fee income or bottom-line underwriting income
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