Episode 19: Innovating in Insurance
Guest: Stephen Catlin, Founder and CEO of Convex
Interviewer: Sam Tidswell-Norrish, International CMO Dun & Bradstreet
Sam TN 00:00
Hi there. Welcome back. You're joined today by myself, Sam and by Stephen Catlin, the founder and Chief Executive of Convex. Welcome, Stephen.
Stephen Catlin 00:08
Thank you very much.
Sam TN 00:09
So, we established this podcast series, the Power of Data to predominantly talk about data and how it's changing the industries. But I already get the sense we're gonna have a ton of other stuff to talk about. And I think I want to start with your journey.
Stephen Catlin 00:22
Sam TN 00:22
You're a veteran of the insurance industry, in fact I shouldn't say veteran.
Stephen Catlin 00:25
No, you shouldn't, quite right.
Sam TN 00:27
That's a bad word. You're an industry legend. Let's start with that. And you founded your original underwriting firm in the 1980s. You were acquired by XL group and then subsequently that firm XL Catlin was acquired by AXA, recently you founded a new innovative insurer and reinsurer Convex and you were named Ernest and Young's UK Entrepreneur of the Year in 2011. That's just a summary. Could you tell us a little bit about the journey to date?
Stephen Catlin 00:54
Firstly, I'd say it's been the most fantastic journey. I learn every day still do which excites me. When we started back in, actually, the end of ’84, I’d just turned 30, literally by a couple of months. And we started with 25,000 pounds paid up capital and two people. But looking back on it, I was crazy. I had no experience to speak of and learnt on the job. And I did not have an ambition beyond getting rid of my mortgage and paying for my kids’ education. That was my financial aspiration at the time. But as things evolved, I suppose, in a sense, one of the fulcrums was 9/11. By that stage, we had just under 100 people in the firm, we raised $500 million in private equity in 2002, which nobody else did in the London market, which gave us a real step up in terms of opposition in the marketplace. Then in 2004, we did an IPO. And then in 2006, we bought Wellington which is a competing managing agency, and we pretty much doubled the business overnight. And it made us the largest Lloyd's syndicate and we would have that position all the way through until the sale to Excel.
By the time we sold to Excel, we had a top line of $6 billion of revenue. We had two and a half thousand employees, we had 56 offices in 22 countries. So, we had a real global footprint. The trouble with that global footprint was that we were doing it in a market which was quite difficult. We were struggling to get it to pay in terms of expenses, because the only way you could do that was to grow the business. And growing the business and the falling market, you lose money. So, we're kind of in the catch 22. And one of the main reasons why we actually did the deal with Excel, was that we made both businesses scalable almost overnight, certainly in America, certainly in London, certainly in Bermuda, to a lesser extent, Europe and Asia, and extensively it was a fantastic opportunity.
Now, I hadn't really intended on doing other business to be frank with you. But when I stepped down mostly retired, although I'm not sure I did that, too well, my number two Paul Brand, who I've worked with now for nearly 35 years, nine years younger than me, he was keen to do something new. And the truth of the matter is he couldn’t do it on his own. He wouldn’t have been able to raise the kind of money that we raise. He just wouldn’t have got there, and he knows that, he’d be the first to admit it.
We had agreed some three years ago over a beer, wouldn't it be fun to work together again. There's no more, no less than that, just almost a throwaway line, almost equally a de facto statement. So, I landed up going across to New York, March of last year to catch up on my network, and everybody was very kind and saw me and it got my juices going to have to admit. The Christmas before then, I’d been persuaded by one of the bankers that we really could raise significant money.
And then the question was, what about timing? Because in March of last year, there were headwinds everywhere. That's to say, pricing pressure in every part of the business, and quite significant pricing pressure. Our belief was that it couldn't go on and the money was running out, capital going to be destroyed. And that's what turns markets. So we took a view, that it's probably the right time to really start thinking seriously.
Sam TN 03:59
You've described Convex as a Greenfield business, which I love because startup just doesn't do it justice because I don’t think you can raise just shy of $2 billion and call it a startup. And I say this actually because you and I have sat in meetings in fact, with technology entrepreneurs, people like Jason from QOMPLX and your understanding and appreciation of the power of technology for any business is incredible. Convex is already a client of Dun and Bradstreet, you use the DUNS number to link all of your data together, which again, shows that you guys are very forward thinking and on the front foot. What other technology and innovation opportunities do you see that are going to set you guys apart?
Stephen Catlin 04:40
I'm just going to take one step back to work towards that answer, if I may.
Sam TN 04:43
Stephen Catlin 04:44
One of the things that we decided to do, which is far from where nobody else has done here to for in our industry, is to do horizontal outsourcing. What that means is we're going to use one outsourcer for all the back office. People who outsource tend to do it in buckets at the moment. And the trouble is the buckets don't talk to each other. So you mean to get four versions of the truth. You get quadruple data entry, and you have an inbuilt inefficiency of process, before you even start. So if you can employ one company to the whole lot and do it at the get go, not having to worry about legacy. So WNS who we chose, we've got about 45,000 employees, 11,000 of which are in the insurance industry, in terms of process, technology, they're right up there. And it's good for them, it's good for us, because they don't often get the opportunity to find a client, which is a startup with just under $2 billion worth of capital. There aren't many of us around.
Sam TN 05:33
And they're gonna get to grow with you. That's the really exciting part. Where are they based?
Stephen Catlin 05:37
India. You know, we went through a very complex process, and then to make certain that if something did go wrong, we know how we get the cut throughs to keep the business going so we can still make our regulation reporting. So a lot of detail went into that. How do we protect ourselves in the extreme? I need to satisfy myself as Chairman and CEO that we’re there. And when we speak to the regulators and we had three to deal with which has been the PRA, the FCA and the BMA, I guarantee to you, they'll ask this question. And so I said to the team, you've got four weeks to have a plan B in writing on my desk. And we’ll talk about it in the next meeting, which they did, and they did it very thoroughly.
Sure enough, we were asked by the regulators one by one, and they were amazed that we could answer that question in such detail, and that I know that helped speed up that process. But we demonstrated that we were really thinking carefully about how we do what we do. Because what we're doing is actually subcontracting process which doesn't require human intervention. Whether that be claims process, whether that be HR, whether it be the general ledger, whether it be the underwriting, recordkeeping, it doesn't matter whether it be just the basic data for reserving, you know, these things don't need human intervention. That's been done for us subcontracted at a much cheaper price than we could do ourselves.
Sam TN 06:51
And what does that do to your ROI?
Stephen Catlin 06:52
It's worth nearly 5% which is extraordinary isn’t it?
Sam TN 06:56
Stephen Catlin 06:57
It's there or there abouts. But it also means that we can then use our thought process and our experience to really start thinking properly about big data. To start thinking about how AI can help us. How AI can help us normalize data and how we can feed that into algorithms to have a better appreciation and pricing of risk, which I think is the way the industry has to go.
One of the problems though, is during the period I was out, at least once a week, an Insure tech startup will come and see me. I never asked to see any one of them, they were all cold calling. And 90% of them did not understand really how the industry worked. 80% of them didn't know how to run a business, never done it before. And another 8, the same 80% actually had a mono line solution for a mono line problem. I said to one guy, he was selling hard on me. I said, “you know what, I hate to tell you this, but you haven't demonstrated me business acumen. You haven't demonstrated how this fits in to the industry. You haven't demonstrated to me how you grow your business. All you've actually offered me is what might be a five-year lead time. That isn't a business”. And he walked out of my office. And it was true. And I think the problem is that a lot of the people involved – the same both ways round by the way, there's not too many people in the management of the insurance industry that actually understand holistically how the market works, from soup to nuts. Yeah, I had to learn it. Because when you start with two people, if you don't learn it, you lose your cash flow, if you lose your cash flow, you go out of business. Very simple.
Sam TN 08:27
So let's talk about the industry then. You and I have just watched Steve Daffron talk about the data analytics and risk space. And he talked about data being the picks and shovels to the gold rush. It's all about supporting the infrastructure, it’s the glue. And there's a ton of new entrants in that space. Dun and Bradstreet data on the UK insurance industry indicates that there's a rise in insurance businesses. It indicates that a lot of those businesses are actually very, very small businesses, which tends to suggest the many of them are insure tech businesses. What's happening in the insurance space and how's it changed from when you started in late 1970s?
Stephen Catlin 09:06
I think you kind of have to bifurcate the insurance business, I'm talking about non-life, between that which is commodity personal lines, as opposed to that, which is what we concentrate on, which is what we would call high-value, complex risk. And the industry historically treated both of those types of businesses the same, in terms of process everything, and it's absolutely insane. So a lot of these new startups, honestly they're dealing with the process of small business, personal lines, small commercial. There's not many people who are really concentrating on what you can do at the other end of the scale, which is where we've always played. In fact, the CEO of one of the larger companies in the industry, European company, when we were in Monte Carlo, I spent an hour with him, which was a long time in Monte Carlo. And he said to me, “Stephen, well, well done good for you. The thing I'm going to really watch, and the thing that really interests me, is your outsourcing model”. And what that tells me is, he knows he's got a problem, but he's honest because he’s admitting it. Many people won't even talk about this, but you know, we have a cost basis and we just have to deal with this cost base. I mean, particularly as prices start to rise, and you Mr. Clark, find out that only 60 cents and dollar gets to the underwriter, you're not going to be over the moon. So we've got to get efficient. And that's an industry issue. So not just for the carrier, but the distributor as well.
Sam TN 10:24
Thank you. So, let's talk a little bit about the application of technology directly to the industry that you're in. Now there's there's a bit of a war ongoing between the brokers and the manufacturers, the underwriters on distribution and technology I think is is definitely changing the way that those relationships are being forged and who owns the relationships. What other technology trends are you seeing in the industry?
Stephen Catlin 10:48
Well I think people have got to understand what their Alpha is. I'm not against distribution at all. The broker has the skill set, and the client base that I don't have. I build our client relationship through the broker, and it's triumphant and it works well. And if you do it properly, you can build up trust and it becomes a long-term relationship. When we sold to Excel, we lead over half the business we wrote in Lloyds, which is far more both in slip count, and volume than anybody else did. And we kept those leads. And the reason we kept those leads is because we were trusted. And we were fair. And we gave a good service. We didn't always say what people wanted to hear. But we were consistent. And we'd explain why we were doing what we were doing. So, people understanding what they're offering is really important.
And then brokers have got to understand is that one of their Alphas is not process at all. In fact, they’re very bad it, you know. I didn't actually care, who does the process of the broker me or third-party administrator, providing whoever does it, does it well and efficiently. Now that speaks real to WNS in terms of what they do for us in that back-office bit. It's the front-office bit that really interests me as to what we can do with that. I mean the amount of data that's available in the public domain now is extraordinary from where it was even 10 years ago. You know, what D&B have, in terms of data information on companies is unbelievable, actually, and most of that comes from public available information. Some of it doesn't and that's probably where they're Alpha is that they got more information, which isn't in the public domain. But there's a whole ton of data in our industry, but it's virtually useless, because it's not the same, it's not formatted in the same way. Now, AI allows you to format data, using AI to do that for you. And you can do it in a nanosecond. None of us yet have your mind around how we can properly do that and make use of it. And for me, the next two years at Convex, we are hell bent on getting the top end of the curve and saying, there's different way of doing this.
Sam TN 12:17
There's a separate conversation, I think, for our Convex and D&B relationship, because, and I know your team already talking about it, there's a ton of tooling and technology that's applicable to exactly what you’ve just said. And helping you guys differentiate through some of the Dun and Bradstreet products. But let's take a moment to talk, you spoke at the very start about Paul Brands, okay. You've known Paul for 35 years. I'm not even 35, that's a long time. And it's ultimately people and relationships that make businesses successful.
Stephen Catlin 13:08
Yes, funnily enough, I was thinking about this this morning in a different context, because I spoke to him this morning about we're doing a town hall next week, as to how we're going to do it. And I'm going to really talk about the history. And he's going to talk about the future, and trying to explain to our people, what we want to look like in 10 years’ time, and how we want to be viewed in 10 years’ time. And one thing I'll be talking about is actually, there's some things that don't change over time. And that's how you treat people. I think we were known for treating people internally and externally fairly and consistently. And that's the culture. That's the value add if you like of the business proposition, and we will be hell bent on keeping that and improving it. So that's a bit of the past that has been a tremendous value to us in raising the money from a reputational point of view. Also beneficial to us in terms of distributions, attitude at Greenfield. But now what Brands has to drive is how we actually use that to be the insurance company of the future. One of the CEOs of one of the largest broking houses said to me November of last year. He said, “Steven, I'm so excited about what you're doing. I want us to be part of it. And I'm not just talking about it financially. But it seems to me that you have the opportunity to create the insurance company of the future of 10 years’ time. And I can't see anybody else around at the moment, who's got that opportunity”. So that's why I say we're blessed to be given the opportunity.
Sam TN 14:31
And I speak – I'm slightly biased here because I know a number of people that have worked with you for a very long time including my wife's godmother in fact, who was with you since I think day one.
Stephen Catlin 14:40
Three months in, she gave me a three-year rolling commitment she left 30 years later.
Sam TN 14:45
There you go. So how many people in new business at Convex have you worked with previously, how many people are there in the business? How many people do you think you'll grow to? And you know, how are you sourcing that talent?
Stephen Catlin 14:56
Well, today we have around about 130 people. And of that 130 people just under 50%, we will have worked with in the past. About 25% came straight from AXA, 25% who are ex Catlin employees or ex Excel Catlin employees. 75% of the people who have joined, asked to come work for us, blown away by that. It's an amazing statistic for a Greenfield naturally. Again, I think it speaks to how we treated people historically, number one. Number two, everybody knows that Paul Brand and me, we grew up in the business, we understand the coalface. We're not a distant management. We're a here and now management. And I think it also speaks of that was a lot of people in the marketplace who are not very happy in their current environment. For the coalface is too distant from management. It's been some tough years and people feel insecure, unloved, uncared for. You know what, it's not that difficult to resolve those type of issues if you treat people properly. I mean, there's a linkage here, where we're benefiting from the past, which is giving us the opportunity for the future. And I've always been cross when I said, somebody, “why did you do that?” And they said, “oh but I did that last year, Stephen” and “I said I didn't ask you that question, I asked you why you did it this year. The whole point is that we've got to be prepared to embrace change day by day.
Sam TN 16:16
So, we've talked about the business. We've talked about the people in the business. One of the things, one of the many things, but one of the things you became most famous for.
Stephen Catlin 16:25
Or infamous, even.
Sam TN 16:26
Or infamous, both you and the Catlin business, was your client centricity. It's something that a ton of people have talked to me about. I know it's something that's front of mind for you at Convex. You know, in light of talking about data, data is something that can help you understand your customer or client better, it can give you that 360 view, it can help you service them in a way that's actually meaningful. As the industry changes, how do you think that will change for the client?
Stephen Catlin 16:54
Well, I turn it around a little bit and say, if it's exceeded what we've tried to achieve, the first thing we're going to do is help the client understand his risk better. So you know, I've always believed actually that our primary job is to help a client understand what risk is, understand what risk he has, understand how we can mitigate that risk, how we can aggregate that risk, and the right at the end, decide whether it's better value for him for me to transfer that risk on to our balance sheet from his, which is more capital effective for his balance sheet. That's where we add value. But it's a process. I think the technology opportunity isn't just for our benefit at all. It's for the clients benefit as well, and we can help them better understand what they've got.
Sam TN 17:38
Yeah, that makes a lot of sense. You talking about understanding risk and mitigating risk sounds a lot like what we do, but you guys are the different end of the spectrum. We're going to finish up I think on a on some lighter hearted questions. Someone who kindly helped draft some thinking points, said that by your own admission, you began life in the industry as a tea boy, which frankly, I don't know if I can believe or even imagine.
Stephen Catlin 18:01
Perfectly true I assure you.
Sam TN 18:04
What advice would you give to a tea boil or a tea girl who's starting out in the industry now?
Stephen Catlin 18:09
Well, it's a very different landscape today than it was 46 years ago, that was when I started. So, life has changed quite a lot in that time.
Sam TN 18:17
Tea is still made the same though.
Stephen Catlin 18:18
Yeah, you still make tea in the same way. There's no shortcut to anything in life. If you want to do well work hard, and you know, go the extra mile. Build relationships with people. Build relationships with clients. Put yourself in the other person's shoes, when you negotiate, try and understand their needs. Those fundamentals don't change, actually. What does change is the thing is far more technical now than it was years ago. Which is good. But, by the way, there's nothing wrong with common sense. And I get concerned when I watch underwriters being dictated to by models, per se, but the models are not perfect. They can't be, they’re only as good as the construct of the model and the quality of the data that goes into the model. And very often neither are perfect, which is why when we have these big losses, actually, the modeled output isn't that close to the actual reality. So some of the things of the past is still there. And certainly you wouldn't be upset of a company with 25,000 pound paid up capital now, let me know. Put it into context, starting the Greenfield, when we had nobody on the payroll at all on the first of May, by first of January we have 130 people. That is 30% more than the people we had at the time of 9/11. And that is the difference between then and now. Because there's far more regulation. There's far more compliance. Not a bad thing, by the way, if it's appropriate. You have to be part of a much more sophisticated team now than you used to be. But that doesn't mean to say there’s not the opportunity to learn the business from the ground up. I mean, our age demographic at the moment is quite high. But I'm hoping that within three years, it will be much, much lower. We want the millennials in, they think differently to me, you think differently to me, you’re younger than me. Your experience in life is very different to mine. It does affect how you think how you approach life. And the ones that are 10 years younger than you, they are different to you as well, actually. And certainly when you’re thinking something about digitalization.
Sam TN 20:11
We spoke about diversity actually a little bit over the last couple of days we spent together here in New York. And age diversity is actually something that people often forget about. So it's it's really encouraging hearing you talk about it. And that's because it creates that knowledge transfer. We're learning from different experiences. We're learning from different viewpoints. And you spoke at the very beginning about your journey today and that you're learning every day still. If we talk about learning through your career, who have been some of your business mentors? Who have been some of the people that you've learned the most from?
Stephen Catlin 20:42
I think it started with my grandfather, actually, who lost a lung through mustard gas poisoning in the First World War. During the Second World War, he was a captain mainwaring, but he also run a printing business, about 40/50 people, which in those days was a decent sized business. He got bombed out twice in the war, and the second time he was bombed out, he went back and the factory was raised to the ground. All his workforce turned up, and he said you better go home because I can't pay you, I haven’t got any money. And he was called Jack, and they said, “no, Jack, we trust you. We know you’ll pay us when you can, we’re working. How do we rebuild the business quickly?” That to me is real leadership. I remember him telling me that story with some encouragement when I was about 10. I've never forgotten it. How you lead people. My boss, I've only had one boss really in an insurance Brian Evens. He certainly taught me a lot about how to manage people, not employ people, funnily enough, but to manage people in terms of business relationship. And used to say to me, “Stephen, I know you're right, you know, you're right. For God's sake, stop telling the broker you're right”. And I didn't like it being said, but it was a very, very important lesson to me to tone it down. And I've never forgotten that one. I think as you go through life, I could go on and on and on about this, but there are various people who have been very helpful to me. And often competitors actually. I use Michael Butt as an example, who's Chairman of Axis. He's always treating me like a human being and if he thinks I’m doing something wrong, he'll tell me. I remember going for supper one night with him in Bermuda at his place. He said, “Stephen, there's something I need to tell you, is that okay?” “It's okay, but I know I’m not going to like it”. And he said, “Stephen, you're perceived as a visitor on the island” – this is in Bermuda – “you're not seen as being part of the island. You need to do something about that”. And I hadn't thought about it. Until then, and I did. And I changed my modus operandi immediately. And within six months, I was part of the island. And the instigator of that was Michael. And I could give you a ton more stories like that from different people.
Sam TN 22:41
To different people that have helped in different times.
Stephen Catlin 22:45
And I've always tried to reciprocate by trying to help people like you, if I can. I probably can't, but at least I try.
Sam TN 22:50
That's not true. I’ve got a long list of things you can help with, no only kidding. Stephen we're running out of time and we’re in New York; there's a lot going on and your attention now needs to be somewhere else.
Stephen Catlin 23:00
Well look thank you so much for talking to me. I'm flattered that you should take interest and I enjoyed the conversation.
Sam TN 23:04
Excellent. Well thank you very much. And for those that are listening that want to find out more, you actually have a book out, not that we're pushing the book, but people can continue to read about you. Or just google your name.
Stephen Catlin 23:14
The book is actually written for people don't understand insurance, maybe counterparties or undergrads or new joiners to try and demystify our world in which we live. We use five words when we need one word most of the time, the jingo in insurance is unbelievable, so I've tried to simplify it. I've also tried to talk a bit about the journey that we've been through, and that includes the bumps in the road. And funnily enough, remembering the bad bits is the most difficult bit because the way we think we push it to the back we forget about it.
Sam TN 22:42
Stephen Catlin 22:44
Yeah, it's actually quite survival industry. So when I'm trying to recall something happened 30 years ago, it was incredibly difficult, but that's why I wrote it.
Sam TN 22:50
Why it sounds to me like the advice that you'd really give a tea boy or tea girl is, read my book.
Stephen Catlin 23:55
I wouldn't unless they can't sleep of course.
Sam TN 23:59
Yeah that’s also true. Stephen, thank you.
Stephen Catlin 24:02
Sam TN 24:03
It’s been great.