As they discuss their “merger of equals,” John Haley and Dominic Casserley emphasize a willingness to let the chemistry between their two legacy organizations develop naturally, rather than through top-down directives.
Haley, CEO of the newly created Willis Towers Watson, and Casserley, the company’s deputy CEO and president, sat down with Risk & Insurance® at the RIMS convention in San Diego to talk about the progress of their company since the Willis/Towers Watson merger was completed in January.
The merger combined a benefits firm with a global large cap network — Towers Watson — with Willis, which had a strong large cap presence in commercial property/casualty insurance broking globally, but was best known as a middle market player in the United States.
“When Dominic and I were sitting down and talking about this, we thought the real prize is if we can create an environment where we have people working together and where we think of ourselves as an integrated firm,” said Haley, a Rutgers University mathematics major who rose up the ranks from the early roots of the Towers Watson organization in 1977.
Sure, the two leaders talk to their teams about their talent mix and the business opportunities the merger presents.
But since the firms merged in January, Haley and Casserley say they have been happy to let members of the two legacy firms reach out to one another, to start solving customer challenges together under their own steam and see how they gel as teammates.
He reiterated that point in a May 6 WTW earnings call with analysts.
“As I travel to the various offices and see firsthand the collaborative sales efforts and hear about our market success, it’s clear our colleagues are not waiting for a top-down integration mandate or reporting tools to go to market,” Haley said.
“We don’t know exactly what all the new capabilities, the new products and services are going to be,” Casserley said in San Diego in April.
“We do know that we are creating a unique organization, which is truly global and which is integrated as opposed to operating in silos,” said Casserley, a University of Cambridge graduate who before the Towers Watson marriage oversaw the completion of Willis’ acquisition of the large French brokerage Gras Savoye and its 3,900 colleagues at the end of 2015.
Willis bought its first stake in Gras Savoye back in 1995, taking a third of the French firm at that point in time.
The Relevance of Scale
Both men lead firms with a history of making big deals.
Just to name a couple, Towers Watson was formed by the merger of Towers Perrin and Watson Wyatt back in 2010. Haley oversaw that merger.
A big part of the Willis middle market presence in the United States stems from its 2008 acquisition of Hilb, Rogal and Hobbs.
Scale comes into the Willis Towers Watson combination in a couple of ways. Haley sees the fact that Towers Watson and Willis are coming together as two same-sized companies as an advantage.
“It is much easier to create a working environment when you have two roughly equal-sized firms than when you have one that is much larger than the other,” Haley said.
Pre-merger, according to company statements, Willis had more than 18,000 employees. Towers Watson had approximately 15,000.
Scale, as in bigger size, is also a consideration in the investment realm according to Casserley.
Among other responsibilities, Casserley oversees investment and reinsurance for WTW.
“The merger enables an uptick in client service and enables us to make some investments that might have been harder for us to do as separate firms,” Casserley said.
Although both Casserley and Haley have plenty of experience in acquisitions, and this is a busy time for M&A in general, Haley said Willis Towers Watson and its leaders are concentrating on clients and merging their cultures, rather than casting about for more acquisition targets, at least for now.
“For the first 12 to 18 months, it would have to be an exceptional opportunity,” said Haley.
“It would have to be unique and something that if we let it pass we would never have the chance again,” he said.
As it stands, the global reach of Towers Watson and its client list are a grand opportunity for Willis.
“One of the things we know is that if you don’t have the relationships ahead of time it is very difficult not to finish second,” Haley said.
“The merger enables an uptick in client service and enables us to make some investments that might have been harder for us to do as separate firms.” — Dominic Casserley, deputy CEO and president, Willis Towers Watson
On the other side, adding the legacy Willis expertise in property/casualty insurance broking gives legacy Towers Watson team members one more tool to bring into their conversations with clients.
“We have client relationship directors that are responsible for understanding their whole business strategy and for understanding the key people and for bringing together the appropriate subject matter experts. What we are doing now is we are adding one more subject matter expert,” Haley said.
“We are not asking them to do something new or fundamentally different from what they’ve done before.”
“The grand prize is having our folks work together across lines and work cooperatively with clients to identify and solve those problems.” — John Haley, CEO, Willis Towers Watson
Casserley stressed that the fact that Willis can now take advantage of Towers Watson’s large cap relationships doesn’t mean that Willis is turning away from its strength or its relationships in the middle market.
“This is not a pivot,” Casserley said.
The merger also allows the benefits-focused legacy Towers Watson employees to bring yet another tool to their clients, the insurance expertise of the legacy Willis employees.
“We don’t know what the solutions we come up with will be,” Haley said.
“But we do know that the human side and the risk side are related. We think they are not only related today but they are going to be increasingly related in the future.
“The grand prize is having our folks work together across lines and work cooperatively with clients to identify and solve those problems.”
Casserley said how the Willis Towers Watson colleagues find those solutions as part of a new, integrated platform is an exciting unknown.
“It may well be applying property and casualty techniques to a benefits problem and vice versa,” he said.
“Or it might be applying an actuarial analysis to a property/casualty risk in a way that hasn’t been done before. You won’t know that until you see the teams literally intertwined,” he said.
Brokers: A Buyer’s Market for Captives
Today’s market offers captive insurance companies a particularly advantageous time to upgrade their investment portfolios. However, they must be willing to give up unrewarding practices in favor of more ambitious opportunities.
“Simply put, it’s a buyer’s market,” said Boston-based Josh Stirling, managing director and senior vice president, U.S. insurance, Sanford C. Bernstein & Co. “If you’re a captive owner, it’s probably a good time to buy more reinsurance or buy down your deductible or self-insured retention.”
In this environment, Stirling said, captive buyers are seeing more competition from reinsurers and primary companies that want to help them manage their risks, offering them favorable coverage at lower prices.
“With pressure from carriers and reinsurers to compete for business, this provides captive buyers and their brokers substantial leverage to negotiate for better value with their risk-taking partners,” Stirling said.
“If you’re a captive owner, it’s probably a good time to buy more reinsurance or buy down your deductible or self-insured retention.” — Josh Stirling, managing director and senior vice president, U.S. insurance, Sanford C. Bernstein & Co.
“This will lead to more opportunities for brokers to create value by partnering with carriers and reinsurers to design new coverages to better protect captives,” he said.
Added Gary Greene, Franklin, Tenn.-based Raymond James & Associates senior vice president-investments and managing director: “Captives of all sizes need to have an asset strategy, and ‘parking’ cash in the bank is not an asset strategy.
“Captive owners tend to hyper-focus on their liabilities and miss the opportunities with their assets. In doing so, they run the risk that their assets are misaligned and may increase overall risk.”
Greene noted that, overall, he believed prospects for captive growth remain favorable.
But given that interest rates have remained subdued since 2008, many captives have experienced an interest income shortfall from their actuarial forecast, Greene said.
“As these shortfalls have persisted,” Greene said, “captives found themselves recognizing the importance of developing an appropriate asset investment strategy that complements their liabilities.”
Captive owners generally remain cautious about accepting investment risk, yet they find the option of sitting in cash unpalatable, Greene said.
“So we see captives moving cash away from bank accounts and into low-to-moderate-risk investments,” he said. “Things like government and corporate bonds, with some captives venturing into diversified equities portfolios.”
Tim DePriest, Glendale, Calif.-based managing director for Arthur J. Gallagher & Co., noted that a captive should have in place an appropriate level of excess insurance to protect the group should a large catastrophic loss occur, or if over the course of the year the aggregate dollar amount of losses exhausts the premium that has been collected.
“Transparency is very important in running a captive effectively,” DePriest said. “Members should be privy to the inner workings of the captive, such as service costs and the revenue that is derived by the administrator or broker, as well as regulatory requirements.
“Members are essentially ‘owners’ of the captive and therefore should understand their investment.”
DePriest also offered some advice on domiciles.
“Vermont and Bermuda in particular are attractive because of their favorable regulatory and tax environment,” he said.
“While other states in the U.S. are exploring ways to make themselves more attractive for captives, they do not see captive programs as a growth area.”
Sanford C. Bernstein’s Stirling said that one area for captives to explore in today’s market is working closely with brokers to take advantage of new sources of capital.
“For example,” Stirling said, “captives might consider going to the alternative markets and issuing a CAT bond, such as that issued by New York’s MTA after Hurricane Sandy, and captives with long-tailed reserves might look to partner with alternative managers offering reserve financings that allow the captive owner to profit from the alternative manager’s lower cost of capital.”
Stirling emphasized that, with the market in such a changing environment, it’s a very important time for someone who runs a large captive with a lot of money at risk, to optimize their product to take advantage of the low cost of capital that’s coming into the industry.
Bespoke Cyber Coverage
Raymond James’ Greene said that, “As our world expands, companies are being exposed to new kinds of risk that the commercial market doesn’t have the history to price efficiently.”
He cited cyber risk as a prime example.
“Cyber risk insurance is tremendously expensive to purchase, so very few companies, captives among them, are fully covered,” Greene said. “New technological developments are changing the way we live. Driverless cars, 3D printing, nanotechnology all promise an exciting future, but they also alter the environment for risk.
“But a captive insurance company can be a great vehicle to finance cyber risk,” Greene added. “Since the captive is a private insurance company insuring risk only for the parent company, the captive can structure a bespoke coverage that specifically fits the parent company and charge an appropriate premium based upon the company’s actual risk mitigation policies.”
“As our world expands, companies are being exposed to new kinds of risk that the commercial market doesn’t have the history to price efficiently.” — Gary Greene, senior vice president-investments and managing director, Raymond James & Associates.
Additionally, if the parent does a good job managing the risk, they can potentially see return of those premiums back to the parent, Greene said.
He also noted that there is one major hurdle on the near-term horizon that will significantly change the way many captives operate.
That hurdle, said Greene, has a date: Oct. 14, 2016.
“As we have seen, captives have a propensity to avoid investment risk by maintaining very high levels of cash-type investments,” he said. “A favorite cash alternative investment has been money market funds. Captives have long used these funds because of their perceived stability and safety.”
But on Oct. 14, new regulations will go into effect that will significantly change the way money market funds operate, and in turn how many captives handle their investments, Greene said.
“These changes include requiring money market funds’ values to float like any other mutual fund,” he said.
“Additionally, money market funds may impose redemption fees or so-called ‘liquidity gates’ that could be triggered if the liquidity levels of a specific fund fell to specified levels.
“Developing a strategy to deal with these events is going to be a challenge for many captives.” &
Commercial Auto Warning: Emerging Frequency and Severity Trends Threaten Policyholders
The slow but steady climb out of the Great Recession means businesses can finally transition out of survival mode and set their sights on growth and expansion.
The construction, retail and energy sectors in particular are enjoying an influx of business — but getting back on their feet doesn’t come free of challenges.
Increasingly, expensive commercial auto losses hamper the upward trend. From 2012 to 2015, auto loss costs increased a cumulative 20 percent, according to the Insurance Services Office.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow,” said David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty at Liberty Mutual Insurance. “As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
For companies with transportation exposure, costly auto losses can hinder continued growth. Buyers who partner closely with their insurance brokers and carriers to understand these risks – and the consultative support and tools available to manage them – are better positioned to protect their employees, fleets, and businesses.
Liberty Mutual’s David Blessing discusses key challenges in the commercial auto market.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow. As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
–David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty, Liberty Mutual Insurance
More Accidents, More Dollars
Rising claims costs typically stem from either increased frequency or severity — but in the case of commercial auto, it’s both. This presents risk managers with the unique challenge of blunting a double-edged sword.
Cumulative miles driven in February, 2016, were up 5.6 percent compared to February, 2015, Blessing said. Unfortunately, inexperienced drivers are at the helm for a good portion of those miles.
A severe shortage of experienced commercial drivers — nearing 50,000 by the end of 2015, according to the American Trucking Association — means a limited pool to choose from. Drivers completing unfamiliar routes or lacking practice behind the wheel translate into more accidents, but companies facing intense competition for experienced drivers with good driving records may be tempted to let risk management best practices slip, like proper driver screening and training.
Distracted driving, whether it’s as a result of using a phone, eating, or reading directions, is another factor contributing to the number of accidents on the road. Recent findings from the National Safety Council indicate that as much as 27% of crashes involved drivers talking or texting on cell phones.
The factors driving increased frequency in the commercial auto market.
In addition to increased frequency, a variety of other factors are driving up claim severity, resulting in higher payments for both bodily injury and property damage.
Treating those injured in a commercial auto accident is more expensive than ever as medical costs rise at a faster rate than the overall Consumer Price Index.
“Medical inflation continues to go up by about three percent, whereas the core CPI is closer to two percent,” Blessing said.
Changing physical medicine fee schedules in some states also drive up commercial auto claim costs. California, for example, increased the cost of physical medicine by 38 percent over the past two years and will increase it by a total of 64 percent by the end of 2017.
And then there is the cost of repairing and replacing damaged vehicles.
“There are a lot of new vehicles on the road, and those cost more to repair and replace,” Blessing said. “In the last few years, heavy truck sales have increased at double digit rates — 15 percent in 2014, followed by an additional 11 percent in 2015.”
The impact is seen in the industry-wide combined ratio for commercial auto coverage, which per Conning, increased from 103 in 2014 to 105 for 2015, and is forecast to grow to nearly 110 by 2018.
None of these trends show signs of slowing or reversing, especially as the advent of driverless technology introduces its own risks and makes new vehicles all the more valuable. Now is the time to reign in auto exposure, before the cost of claims balloons even further.
The factors driving up commercial auto claims severity.
Data Opens Window to Driver Behavior
To better manage the total cost of commercial auto insurance, Blessing believes risk management should focus on the driver, not just the vehicle. In this journey, fleet telematics data plays a key role, unlocking insight on the driver behavior that contributes to accidents.
“Roughly half of large fleets have telematics built into their trucks,” Blessing said. “Traditionally, they are used to improve business performance by managing maintenance and routing to better control fuel costs. But we see opportunity there to improve driver performance, and so do risk managers.”
Liberty Mutual’s Managing Vital Driver Performance tool helps clients parse through data provided by telematics vendors and apply it toward cultivating safer driving habits.
“Risk managers can get overwhelmed with all of the data coming out of telematics. They may not know how to set the right parameters, or they get too many alerts from the provider,” Blessing said.
“We can help take that data and turn it into a concrete plan of action the customer can use to build a better risk management program by monitoring driver behavior, identifying the root causes of poor driving performance and developing training and other approaches to improve performance.”
Actions risk managers can take to better manage commercial auto frequency and severity trends.
Rather than focusing on the vehicle, the Managing Vital Driver Performance tool focuses on the driver, looking for indicators of aggressive driving that may lead to accidents, such as speeding, sharp turns and hard or sudden braking.
The tool helps a risk manager see if drivers consistently exhibit any of these behaviors, and take actions to improve driving performance before an accident happens. Liberty’s risk control consultants can also interview drivers to drill deeper into the data and find out what causes those behaviors in the first place.
Sometimes patterns of unsafe driving reveal issues at the management level.
“Our behavior-based program is also for supervisors and managers, not just drivers,” Blessing said. “This is where we help them set the tone and expectations with their drivers.”
For example, if data analysis and interviews reveal that fatigue factors into poor driving performance, management can identify ways to address that fatigue, including changing assigned work levels and requirements. Are drivers expected to make too many deliveries in a single shift, or are they required to interact with dispatch while driving?
“Management support of safety is so important, and work levels and expectations should be realistic,” Blessing said.
A Consultative Approach
In addition to its Managing Vital Driver Performance tool, Liberty’s team of risk control consultants helps commercial auto policyholders establish screening criteria for new drivers, creating a “driver scorecard” to reflect a potential new hire’s driving record, any Motor Vehicle Reports, years of experience, and familiarity with the type of vehicle that a company uses.
“Our whole approach is consultative,” Blessing said. “We probe and listen and try to understand a client’s strengths and challenges, and then make recommendations to help them establish the best practices they need.”
“With our approach and tools, we do something no one else in the industry does, which is perform the root cause analysis to help prevent accidents, better protecting a commercial auto policyholder’s employees and bottom line.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.