The Intelligent Quarterly from the publishers of The Insurance Insider

Summer 2018

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Dan Ascher

"This has got to be against company policy," jokes Validus CEO Ed Noonan as he, two of his top executives and their entourage crowd into the same panelled elevator to reach a conference room in the New York Stock Exchange, where they are due to ring the closing bell later that afternoon.

Validus started life as a short-tail catastrophe reinsurer with $1bn of capital in 2005. Less than two years later it had acquired Lloyd's syndicate Talbot and was preparing to go public. Since then it has launched alternative capital vehicle AlphaCat; expanded into Latin America, Asia and the Middle East; and bought Flagstone Re, IPC Re and agricultural reinsurer Longhorn Re.

More recently, the Bermudian acquired specialty insurer Western World in 2014 and Crop Risk Services earlier this year.

Now the business has a market cap in excess of $4.3bn and subsidiaries with offices around the world.

But Noonan isn't willing to stop there.

"I think you have to start with our vision statement for the company, which we've never published but it's been the same since the day we started," he says. "That is: 'Global domination leading to the ultimate enslavement of mankind towards arguable purposes'."

Broker compensation
In recent months, one could be mistaken for thinking that the executive views broker facilities as the main obstacle standing between him and his dream of becoming supreme leader of the human race.

He has previously been outspoken in his view that brokers' clients are only "passively aware" of compensation arrangements.

"They're not actively focused on the fact their business isn't being offered to some of the markets that paid their claims for years because the insurers don't participate in some broker's facility," Noonan told sister publication The Insurance Insider earlier this year.

But speaking to Insider Quarterly in the conference room overlooking New York's iconic Wall Street, he was somewhat more measured. "In some ways some of these facilities actually make perfect sense," he muses.

"If a broker can arrange $250mn of terrorism capacity in advance with a broad slate of Lloyd's syndicates, that's a genuine service to the client, therefore that's a very sensible facility."

But, he insists, the client should have a say in the intermediary's compensation for structuring the deal, which they don't today.

He writes off other facilities as "incentive schemes" for brokers that fail to add efficiency and neglect to provide clients with the full range of coverage alternatives.

The executive's other pet peeve relates more broadly to the cost of doing business at Lloyd's. Or in Noonan's words: "The market inefficiency is really quite stunning."

But, he says: "That's not a criticism of Lloyd's, the institution, or any particular syndicate."

"It's just a fact of life that the [general and administrative expense] ratio at Lloyd's is completely unsustainable."

He says that paring back broker remuneration and the general cost of doing business would inevitably mean that more of the premium dollar would go toward claims payments.

"It wouldn't stick to underwriters' ribs because we tend to compete down to whatever our acceptable level of return on capital is," Noonan explains.

"So Lloyd's would be much more efficient, much more competitive and of much greater value to the global market," he concludes.

Stifled innovation
But Noonan's next point should - at the very least - be the focus of some existential reflection for those on the Corporation's upper floors.

He says "the UK's desire to be the model pupil under Solvency II" has led to "the ultimate set of belts and braces" regulations and capital requirements, which have stifled the market's capacity for innovation.

That, he says, has left Lloyd's "at the sharp end of the spear".

He continues that the level of capital the Corporation demands in order for underwriters to write any new class of business puts carriers at a competitive disadvantage.

"Lloyd's was a great entrepreneurial forum for underwriters and Names who were willing to take risk and put their own capital at risk," Noonan says.

"But the regulatory regime has really choked that out of the market, such that Lloyd's is no longer an innovative centre anywhere near the scale it once was."

He goes on to say that things would have to change for Lloyd's - and the London market more broadly - to maintain its position as the global centre of excellence for specialist risks.

Further, he adds, Lloyd's is missing out on another class of business that has until recently been a staple for the market.

"The US wholesale distribution market is bringing less business to Lloyd's than it used to," Noonan says.

He questions why an American retailer would take their business to Lloyd's and have an independent wholesaler collect 7.5 points of commission to place it in London, when it could be written at home. Those savings, he says, could be passed on to customers or retained to expand profit margins for carriers.

"Lloyd's distribution costs are leading to disintermediation, hence also the rise in local markets around the world."

When opportunity knocks
Referring to Talbot, Noonan says Validus has been letting the syndicate shrink, explaining that it "isn't a great time" to be growing the business. "We're trying to preserve margin rather than market share."

But he continues there will be a time when opportunities present themselves more broadly at Lloyd's, adding that Validus will be happy to grow again when they do.

"We haven't wavered on our commitment to London in any way shape or form, nor our commitment to Lloyd's," he says. "We just think that Lloyd's could be so much more and doing so much better."

Instead, Validus has its sights on the US for growth. Noonan says the American market, while "fully competitive", still has more room for growth than any other major market in the world.

"We see better opportunities here," he says. "We're not growing as if it's a hard market in the US. It's just the world's biggest market and there's more room in the US market for growth."

Noonan was speaking just two days after an event that many feared could cause an upheaval for the business community in Validus's native Bermuda.

After the general election on the island, Bermuda's Progressive Labour Party (PLP) regained control of the House of Assembly from the business-friendly One Bermuda Alliance (OBA), which had been in power since 2012.

But Noonan didn't share the concern of others on the island. "We started the company under the PLP, the company flourished under the OBA, and so I tend to think the Bermuda government in general has done an excellent job of creating a climate for international business to thrive," he says.

"We don't start with the view that the PLP is somehow unsupportive to business - the track record is just the opposite."

But he appears to have somewhat less faith in the US government. Asked whether Bermudian reinsurers would be forced to consider moving onshore if American lawmakers slap the proposed border adjustment tax (BAT) on offshore carriers, Noonan retorts: "You see a possibility of any tax change in the US? You see the possibility of anything getting done in the US?

"This [the BAT] is clearly fake news," he says.

This article was published as part of issue Autumn 2017

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