Shelter in the storm

When UK chief executive Martin Hudson spoke to Post in January, on the eve of his company's rebrand to simply Travelers, he stressed his intention to mirror the US footprint from a products perspective internationally. The stated ambition was to roll out two new industry-focused products every year that would close the gap and - perhaps - begin to build towards the commercial prominence of its parent company across the Atlantic.

After all, following the 2004 merger of St Paul and Travelers, the combined entity now ranks as the second largest writer of commercial property insurance in the US, and sits at number 89 on the Fortune 500 list of largest US companies.

Fresh off a flight from its Hartford headquarters, Mr Hudson proves to be a man of his word, as he fills in the blanks for brokers as far as the 2008 plan of action is concerned. Having entered the accountants' professional indemnity market since the turn of the year, he reveals that biotechnology and financial institutions are next on the product hit list.

By Autumn of this year, Travelers will unveil a new product for this sector - a development Mr Hudson says fits well with the insurer's existing technology practice here in the UK. Indeed, just last week, it announced the hire of Jayne Gardner, previously technology development underwriter at Chubb dealing with life science and information network technology risk. Ms Gardner takes up the newly created post of practice leader for medical technology industries within Travelers' techsure underwriting team.

As for the launch into financial institutions, he anticipates a quarter four timeframe - determined to take its time as far as product development goes for this sector bearing in mind its current unpredictable nature.

Planning and getting the end proposition right is crucial, he explains, for launching into a sector that could be seen as asking for trouble. Indeed, Mr Hudson wryly admits he is "pleased we have not launched into this industry before now", describing it with a hint of irony as "an interesting time" - - something no one would disagree with.

He explains that another new hire has been secured to lead this practice - again from a UK competitor - who will join later this year.

Economic slow down

Asked how FI could be viewed as an attractive prospect under the current economic climate, with significant claims expected to hit as a result of the global credit crunch and sub-prime mortgage crisis that kicked it off, Mr Hudson replies: "Obviously the banking sector is going to emerge from this current crisis in a slightly different shape with different products and an amended view on its systemic risk as well as what it needs to charge for its capital."

Conceding that he is "not smart enough" to know what this will look like in the end, he explains that Travelers will create a product that "fits what emerges from the carnage" and that US colleagues are helping to develop and build the necessary platforms for delivery. FI is already recognised as part of the insurer's product suite in the US and, as for the UK manifestation, he says the end product "clearly needs to be underpinned by what the industry will look like in the future".

As for what dictated biotech and FI as the choices for launch in 2008, Mr Hudson explains the different drivers: "Bio-tech in particular has been in response to broker demand over quite a long period; for three years at least brokers have been asking for another informed market as there are only a couple of serious players. This is not something everyone does." FI, on the other hand, was driven more by the opportunity to leverage US expertise.

Given the lead time required, plans are already afoot regarding options for 2009, although Mr Hudson is not prepared to divulge more at this stage as research projects are still underway. But he emphasises that there is "no magic formula"; Travelers looks at what it does in the US but not here, asks what would make sense, conducts research and asks brokers what they want from a UK risk carrier.

"Replicating the US footprint is not an end in itself," he explains. "We are not slavishly doing it. The reason for expressing it as such is to transfer value where appropriate for our UK customers, where it makes sense.

"What is important to communicate to brokers is that we are constantly thinking about potential new product offerings. And we want them to be broker-led, so if there is anything they want us to offer I encourage them to let me know. We will pay attention."

Back in January, Mr Hudson made the same plea to brokers regarding additional regional locations for underwriting centres, with Bristol tipped as "certainly a possibility". So has he been inundated with requests? No, he smiles "but the offer is still there", adding that he expects to have at least one other office up and running in 18 months time, stressing that Travelers will be "responsive to demand".

"Underwriting centres are there to produce business and provide a local service; they exist for the benefit of brokers. There is no point just pitching up and saying 'we've arrived'."

As for Travelers Syndicate Management, Mr Hudson has expressed a desire to leverage the Lloyd's platform and use it to expand into international territories where appropriate, stressing it will not follow blindly (Post, 31 January 2008, p2).

He explains that such emerging territories are viewed more as a "distribution play". "Given our product set - the question we ask is whether there is market demand locally? If so, we will think about it. If not, we will not try and create new products."

Travelers now offers five distinct classes under the Lloyd's operation: accident and special risks, aviation, global property, marine, and power and utilities. Marine was bolstered last May by the acquisition of specialist underwriter Galatea Underwriting Agencies and Mr Hudson reveals that a new team has also been recruited to expand its interest in the yacht market.

The insurer already has a presence in Lloyd's Shanghai operation with underwriters on the ground participating in facultative reinsurance and is looking forward to the advent of becoming a primary licensed insurer in China, having received approval for a representative office last September.

But Mr Hudson points out that this road will be a relatively slow one to travel: "It is likely to take at least another three years - that is nothing personal, there is just a clearly defined set of periods laid down by the Chinese regulator." However, he fully intends to use the time wisely, viewing this as an ideal window to learn about the Chinese market.

Consequently, he says Travelers is currently focused on "digesting Shanghai and Singapore", where it also has a presence, with nothing else on the immediate things to do list; "although we will clearly pay attention to what Lloyd's does next".

Personal lines potential

With the momentum that appears to be building in the commercial arena, and specialist, industry-focused products set to be unveiled on a regular basis, is Travelers not also keen to export its US parent's expertise on the personal lines front? After all, it is also ranked as the second largest carrier in this market across the Atlantic.

Mr Hudson describes this as a "never say never situation" in the UK, stressing there are no such plans at the moment, "but we do not have any philosophical reason why not". He points out that Travelers does offer personal lines products in Ireland and that this could, theoretically, be used as a "learning platform". However, he reiterates: "We have our heads full with commercial developments in the UK."

This includes smaller ticket commercial business - something else the insurer is big in over in the US. But surely this market is already saturated with players competing on price and vying for commoditised business? It hardly seems to fit with Travelers' existing specialist commercial business.

"It's just a huge sector of the market," says Mr Hudson in defence of this stated ambition. "If all we thought we could bring was more capacity that would be a poor reason and would never be a driver."

Three people from the US are currently working with their UK counterparts in the SME unit to work out what Travelers could bring to the UK, he reveals. "This is not in terms of products but pricing and selection technology as well as operational platforms. The fact this market is arguably saturated is not, on its own, an argument not to struggle and strive to do something intelligent and differentiated."

Travelers intends to be "incremental in its approach" to SME and Mr Hudson concedes it will be "another year before we can articulate our sense of ambition in terms of scale".

Economic exposure

Returning to the current macro-economic climate, it cannot go unnoticed that Travelers is a major player in the professional indemnity business - an area traditionally hit badly by spikes in claims that flow from downturns and big hits on the property market. So is Mr Hudson concerned about his company's potential exposure on this front?

Explaining that the PI business accounts for 25% of gross written premium, Mr Hudson is quite bullish in reply. "The only thing surprising about the current state of the housing market is how long it has taken to reach this point. We have been thinking about this for a long time and clearly have tools at our disposal to deal with the challenges thrown up." These tools include risk selection, with careful consideration being given to the accounts Travelers is writing in the solicitor and surveyor markets as well as appropriate reserving.

"Our other tool is pricing; six months ago we put rates up quite affirmatively in our mortgage brokers' book and will do the same relative to exposure elsewhere. But because we are prepared we are not in a panic. There will be no knee jerk reaction."

Turning his attention to the current pace of consolidation in the broker market, how is this impacting on Travelers' agency base as it only works closely with 300 brokers? Surely this figure is inevitably shrinking as some of its partners get swallowed up by the consolidators?

Mr Hudson says the simple answer to this question is, yes, "some of the deals done in the last few months have consolidated existing relationships for us - but that's the case for almost everyone of any scale".

So, despite having to seek out and add new agencies, Mr Hudson says the good news is "there's no shortage of emerging brokers that fit our product set and management style. We are observing a tier of professionals, below the level of owners in the consolidated brokers, and they are no less entrepreneurial than their bosses."

Changing landscape

Nevertheless, in terms of the changing distribution landscape and commission structure being adopted by some of the current consolidators, he told Post's sister publication Professional Broking in February that he regards models at the extreme end to require "the complete purchase of the soul - industrialising the value proposition in order to extract additional margin from the risk providers". He said Travelers works "very poorly" with this group "partly because of the economics; I don't think some of the profit commission structures pay the risk capital provided by the insurer to support the transaction. In that structure, when things go badly, they win and I lose. It's a mug's game."

Coming back to this theme and the concurrent blurring of lines between insurers and brokers, as the former buy the latter in some instances, he says: "Firstly, I want to reiterate that it is not our strategy to ever own brokers but this trend creates both challenges and opportunities. It is a challenge for us if the business model that the consolidated business moves into is unattractive and there are examples of that. But equally there are examples of consolidators we can continue to have a perfectly decent relationship with.

"The point of Travelers is to create shareholder value and there are two problems from my perspective with the most egregious end of the consolidator model. First, insurers are required to outsource to the consolidator all the things you can use to create shareholder value - underwriting, claims management, loss control and risk management. Without those tools you can create shareholder value but there is less opportunity. Secondly, the balance of risk reward at the worst end is almost exclusively in favour of the consolidator - insurers are taking risk with all the downsides that go with it coupled with a limited amount of upside because of a structure of profit commissions that is deeply unattractive."

He stresses, however, that his criticism does not stem from personal interest alone. "My broader concern for the market is the more premium and, therefore, the more risk capital embedded in that structure the less attractive an investment our industry is - and that's not sustainable."

Mr Hudson says that, from a client and broker perspective, his worry is they are not aware of these "tectonic plates" that are "building tension" and could cause a market correction - "a correction like the one in 2001 that we are trying hard not to replicate. This will not be appreciated by clients and wasn't by brokers the last time around.

"That is one of the worries keeping me awake at night."