First moves to winning in the hard market

Given its impressive ranking – 12th in this year’s Top 50 – and strong financial record, QBE has been strangely reluctantly to sing its own praises. The Australian-owned insurer, a commercial lines specialist in Lloyd’s and the London markets, has deliberately kept a low public profile.

That’s about to change. In their plush offices at the beautiful Plantation Place, just minutes away from Lloyd’s, on Fenchurch Street, QBE’s chief executive Steven Burns and chief operating officer, John Neal, CHK, meet with Insurance Times to outline their business model for the next three years and explain the thinking behind a raft of changes announced earlier this month. If things go just half as well as they hope, other insurers had better watch out: when the market takes its next turn, QBE intends to come out top of the pile.

Burns and Neal are friendly, relaxed and charming in a professional way, but a little restrained – perhaps unused to the press being in their quiet, carpeted office, where glass walls separate spacious meeting rooms and banks of computers, mountains of ring binders cover all spare surfaces, and a sense of calm, quiet industry pervades.

They are keen to talk about QBE’s rebranding and restructure, which was announced on November 5. With effect from 1st January 2008, its businesses, Limit Underwriting Limited, Ensign, MBP and DA Constable Syndicate 386, will shed their own brands and move under the QBE umbrella. At the same time, QBE European Operations will move from 12 individual business units and syndicates to eight product-focused underwriting divisions, namely: Casualty; QBE Re Europe; Property; Motor; Marine & Energy; Specialty; Aviation; and British Marine.

Under the new structure, which the company has been working on for more than two years “behind the scenes”, all eight product divisions will have access to both Lloyd’s and company paper – an unusual arrangement which, Neal believes, demonstrates QBE’s commitment to empowering its underwriters – a theme on which both men are keen to expand throughout the interview, and claim as something of a USP.

No jobs will be lost (in fact, they’re recruiting), and, as well as the Lloyd’s and London company markets in which QBE already has a strong presence, underwriters will be able to take their products to market through seven UK regional underwriting centres and 15 European branches.

If all this sounds like little more than paper shuffling, its worth looking beyond the organisational changes to the motivation that has prompted them: growth. While Burns and Neals’ calm manner and modulated tones do not overtly advertise an aggressive growth strategy, listen closely to what they say and you will see this is the name of the game. QBE is getting its UK and European operation in shape for when the market hardens – a couple of years away, Neal reckons.

Though Burns and Neal remain imperturbable throughout the interview, it sounds as though some soul searching has led up to this moment. “We’ve not properly exploited the UK market or our European offices,” says Neal – that calm manner once again disguising the significance of the admission. From this follows the new strategy, which has three stated aims: to boost QBE qua brand; to position itself for growth and diversification; and to enhance distribution capability both in the UK, outside London, and in Europe.

Burns explains why. “We run a relatively conservative business model,” he says, referring to the global group. “Central to QBE’s business model is keeping the volatility out of performance, so we made record profits - for example in 2005, despite the hurricanes - by careful risk management and not being over-exposed.

“So, within that constraint, it means that to carry on growing the business in Europe, we have had to move away from the London-centric model, which inevitably means [moving to] the UK regions and Europe, and targeting lines that aren’t catastrophe exposed, or clashing with our London market operation.”

“To carry on growing the business in Europe, we have had to move away from the London-centric model

Steven Burns, chief executive

Keeping the volatility out is clearly the watchword for QBE, in its relations with the outside world as well as its financial management. In the first instance, this will mean focusing on the core lines of property, casualty and motor –strictly in commercial lines as the business has no plans to branch out into personal.

So far, so good – but how does QBE plan to go about expanding its presence in the UK regions and Europe?

Neal explains. “The first aspect is leveraging the position we have already created - if you look at the product suite we have got, we have built strong relationships with brokers and/or clients, but maybe haven’t maximised our penetration with a client, or with a given broker,” he says – another admission that QBE has not, to date, punched above its weight.

“So first up is leveraging some uniformity in terms of explaining what QBE is about and what our capabilities are. The second is looking at where we have been successful in product knowledge we have developed in London and seeing if we can transport that across the group, working with QBE colleagues.

“That could be in Europe, it could be in Asia, or in Australia. If you take the Asian market, we [in Europe] have got a range of products that we are looking to work with and they have got the distribution capability – it’s a partnership, we think we can operate off the back of the QBE franchise.

“In many ways, the opportunities are actually in front of us - it’s just us reorganising our business so we can take those opportunities.”

So expect QBE to come knocking on your door. It is taking advantage of the soft market to arm its troops for the attack when the market hardens. To this end, acquisitions are not on the horizon right now – “we have a very tight acquisition model and we would not be prepared to pay the prices we have seen people paying for market share at the current time”– but pretty much a foregone conclusion in 18 months to two years time.

Throughout the interview, Burns and Neil come back time and again to their focus on the future, creating the strong impression that this month’s announcements are merely the tip of the iceberg – the first move of the pawn on a much bigger chess board.

“When the UK market is in reverse, we recognise it is fiercely competitive and we are certainly not looking to steal the Aviva or R&SA high ground, but we think there’s a strong opportunity sat just behind that market for a specialist commercial insurer, that is very focused in terms of the clients he wants to work with, giving a complete service proposition,” says Neal. “There’s a lot of ambition, but it’s ambition in a context - we are not trying to take the market on headlong.”

As QBE expands its reach across the UK and Europe, it will be looking to brokers to distribute its products – currently, more than 99% of its products are distributed through brokers, a model that will not change in the foreseeable future. While the reorganisation will not impact on day-to-day trading– “brokers will be accessing the same underwriters in exactly the same way” – there will be more on offer.

“It's not a question of not sleeping at night. It's the reverse; there are not enough hours in the day to do everything that we want to do

John Neal, chief operating officer

Neal says: “Those underwriters have now got a far wider offering that they can discuss with that broker, and that’s part of the opportunity of what we are doing. It allows use to more carefully explain, through each underwriter, through their broker relationships, the capability that QBE can offer – I think we have been slow to explain that.”

So, brokers are key to this whole plan and, according to Neal and Burns, have already demonstrated their support. The pair say that the “people factor”, internally and externally, was the biggest risk they faced in reorganising the business, but believe it has been dealt with by getting underwriters to buy-in, and brokers to work closely with them.

Brokers can expect some changes from QBE. Like all big insurers, the organisation is keen to explore the “three way” relationship between insurer, broker and client, and Neal hints at possible tweaks to the trading model.

“We can take lessons from other markets, in particular the commercial lines market, and get a lot more efficient about the way in which we trade with each other,” he says, banging a drum that will be all too familiar to brokers. “We need to think about partnering with brokers and not duplicating the effort - we should be prepared to work out who is going to take on what responsibilities, such as risk management, or the way in which documentation flows down the line between us and ultimately the end user.”

But these changes are to be expected from any insurer and, as Neal emphasises, the company’s commitment to the broker channel is unswerving.

True to form, neither he nor Burns will admit to a sleepless night while hatching these plans. When asked about the risks involved, Neal gives a characteristically politic answer, advising “stepping back and looking at the QBE story”, which he believes is a tale of “moving quite quietly into a very strong position as a commecial insurer”.

As for the future: “What we have got to make sure we do is take the opportunities in front of us – that’s our challenge. Where others have attempted or failed to make the best of the UK market or to exploit European capabilities or to join themselves up more efficiently globally, we have got to go in there and make sure we do make a success of that. It’s not a question of not sleeping at night – it’s the reverse - there are not enough hours in the day to do everything we want to do.”

Will QBE succeed where others have failed? In the words of a certain politician, never underestimate the determination of the quiet man.