Steve O’Gorman heads the Marine and Energy sector at ArgoGlobal, part of Bermuda-based Argo Group and the operator of Syndicate 1200 at Lloyd’s. Insurance Marine News interviewed him at the end of April at ArgoGlobal’s head office on St Mary Axe, opposite “the Gherkin” and just around the corner from Lloyd’s headquarters.
O’Gorman began his career in broking, as a marine hull, cargo and liability broker at Sedgwick, based in those pre-Marsh days on the roundabout opposite Aldgate East station. Joining a company as senior underwriter for marine cargo in 1997 that was shortly afterwards taken over by CNA.
O’Gorman came to ArgoGlobal from CNA, where he had been European underwriting director, transport and logistics, where he built an underwriting department that grew to a team of nine underwriters which wrote more than $20m a year in premiums.
He had previously been based in Paris, first as continental European marine underwriting manager, then, after a stint in London as whole-of-Europe marine underwriting manager, as country manager for France for all lines.
“That was quite an interesting experience, away from marine, although marine was part of it and I still had my Europe marine manager head. It was across all lines, which was really a big challenge for me, especially in a foreign country and in a foreign language”, says O’Gorman.
He then came back to the UK and became underwriting director for the growing sector of renewable energy at CNA. “That was an interesting challenge as well”, he says, “and a very different line of business from marine. From my experience of working with underwriters in different lines, renewable energy is one of the most complex lines of business there is, because the underwriters are in most cases dealing with both property and casualty insurance. They are looking at the property damage and the liability aspects of the risk. Then, within the property damage, they have to be experts on natural catastrophe, because there is very often a natcat exposure that goes with it. They also have to have an engineering brain — sometimes even an engineering background and qualifications – because the machinery breakdown aspect of renewable energy is such a critical part. The risk selection relating to that is very high. I was very lucky to have a strong team of people, most of whom had engineering qualifications, who were very good at what they did and taught me a lot about that part of the business. Renewable energy is a fast-growing, rapidly developing segment, and in its early days the insurance of it went through some difficulties because it was proto-typical.”
I asked whether price-setting had been a problem, and O’Gorman noted that at his previous company there had been a centre of excellence in Denmark, which was one of the pioneers of windfarms offshore, so a great deal of experience had been built up. That had permitted the accumulation of data. Therefore, although renewable energy was a fast-developing segment, without the historical data that you would for example find in the marine segment, there had been usable data available.
Transport And Logistics
O’Gorman’s final role at CNA was building a multi-product offering for the transport and logistics sector. He notes that CNA had a slightly unusual insurance structure in some areas in that it was a customer-centric industry vertical. Profit & Loss was about all lines with a customer rather than being measure by individual product line. “We built products including property, casualty and marine which included freight liability, contractual liability, shippers’ interest, cargo and professional indemnity. So there was a full multi-package product”, he says. O’Gorman built this virtually from scratch, which he says seemed to capture a need within the market. He also notes that, from his experience in France, in the transport & logistics segment it has been common in continental Europe for the segment to offer a multi-line package of property, casualty and marine.
At ArgoGlobal the syndicate business for 2016 came to $625m in gross written premiums. Marine and energy business was 18% of that ($113m). That was split 42% ($47m) energy (both onshore and offshore, with the larger slice being offshore), and 58% ($66m) marine. Marine lines are cargo; hull/yachts, and liability. Within the marine lines sector the split is 40% cargo ($26m), 40% hull & yachts ($26m) and 20% marine liability ($13m).
The 2016 result at ArgoGlobal saw 19% year on year growth in GWP, the strongest growth coming in the marine liability segment – the newest segment. The marine and energy business at Syndicate 1200 was started in 2011, starting out predominantly in energy and then adding marine lines.
O’Gorman says that, on the energy side, “the industry has taken a downturn over the past few years. So the activity is depressed and this has obviously created some issues sector-wide. In the Lloyd’s market, energy had an accident year ratio of 105% in 2016.” However, O’Gorman observes that the energy industry itself is showing signs of stabilization with the oil price steady at just above $50. “Although it is still fragile, there’s a positive outlook in terms of the offshore energy industry.
But on the insurance side there is still a lot of capacity. Supply is plentiful and demand is stagnant, given the depressed oil price and the depressed industry, and it’s really the absence of catastrophe losses that is keeping everyone in the game at the moment.” He says that ArgoGlobal has not substantially increased the size of its energy business over the past couple of years, simply because industry activity has been so depressed.
Marine liability & cargo areas for growth
Marine liability and cargo is where O’Gorman’s division is focusing its growth. He says that in hull and yachts the best description would be consolidation. ArgoGlobal recruited hull & yacht class underwriter Mike Thompson in December 2016 to head up both the lines. On the hull side he is supported by Davinia Melachrinos, while on the yacht side Thompson has recruited Karen Montellier, who used to work with him at Endurance Lloyd’s syndicate 5151. “We have a strength and depth in resources on the hull and yacht side, but it is quite a difficult market in terms of profitability, so we aren’t growing it substantially at the current time”, says O’Gorman, observing that essentially there is currently a pricing problem. He says that in part this is linked to the depression in the energy industry, because there are many laid-up vessels in the offshore supply sector. Another factor is the global economic downturn of a few years ago, the effects of which are still being felt. “But generally it’s just about the overcapacity on the insurance side, which has limited our ability to secure significant growth, O’Gorman says.
Brown water expertise increased
IMN asked why ArgoGlobal says that it is focusing on brown water business . O’Gorman says that brown water is where the insurer has its knowledge and its preferences for the risk characteristics specific to the brown water segment. “It’s there that we see us adding the most value into that segment as a specialist”, he says. In addition, ArgoGlobal’s line size and market position make it more relevant to that segment. (ArgoGlobal marine cargo lines are up to $25m. Hull & Machinery – mainly brown water – is also up to $25m. Yacht is up to $30m.)
Another factor is that brown water tends to be non-cargo-carrying – offshore supply, tugs, etc – or lower-value cargo carrying, and this means an avoidance of accumulation risk between hull and cargo lines.
That said, O’Gorman emphasizes that ArgoGlobal supports and in some cases leads blue water placements, provided the quality of the client is good and the price is right, but the majority of focus and expertise is brown water.
On autonomous, ships, remote-control, and cyber.
ArgoGlobal knows that cyber is a big issue, says O’Gorman, with the cyber aspect of autonomous vessels it is a major risk. On autonomous vessels themselves, O’Gorman says that “clearly it’s the regulatory framework that is going to drive this, because the international conventions and international maritime law will have to be adapted to enable the use of autonomous vessels”. One interesting aspect of autonomous vessels, he observes, is that although with drones, trains and to some extent cars there appears to be an acceptance of the concept “with ships, it seems that at the moment the concept of a completely unmanned ship turning up at , say, Southampton is alien”. In that regard ArgoGlobal sees vessel autonomy as being slightly behind other transport sectors, both in terms of the shipping industry itself and also the insurance of it. “We also think that there could be an enhanced risk of piracy/theft, because if the ship is unmanned it is more vulnerable.”
An issue tied to regulation and not yet established is the question, where does liability sit? This problem is already impacting the motor market. If a driverless conveyance causes an accident, will the owner or the manufacturer be liable?
O’Gorman thinks that we are looking at a 20-year timeframe before true autonomous ships come into widespread ocean-going service. “I see it as a gradual, iterative process of automation. Each new generation of vessel or vessel equipment will require fewer human beings, and autonomy will almost creep up unnoticed,” O’Gorman says. He also notes that, with so many claims today in the marine sector being a result of human error, automation may drive down that type of claim, but increase other kinds of claims.
Would the risks remain marine liability risks, or would they perhaps be assigned to a new “cyber” liability department?
O’Gorman says: “I would like to think that it would stay as a marine market risk, or at least some aspects of it; partly because we are still talking about international risk here. Property and Casualty is very often focused on individual territories, whereas the whole point of the marine business is that it either involves many different territories and the relevant national laws and regulations, or it’s subject to international maritime law. So I think that expertise of the legal framework and the international risk will still be valuable to risk assessors in the insurance industry, and that the marine market should therefore have something to add in that regard”.
O’Gorman observes that the Lloyd’s marine market in 2016 experienced a loss of £129m, a combined ratio of 106%, (108% on an accident year basis), and that this followed an accident year combined ratio of 105% in 2015. He says that this is not restricted to Lloyd’s, with these results replicating across the wider London/UK market and in the international markets. “We see it as a consequence of several years of reducing prices, but also of increasing acquisition costs. All of that has to be taken within the context of the fact that there hasn’t been a significant marine market loss event in 2016.”
O’Gorman says that there is a highly consolidated broker market in London and a highly fragmented carrier market, meaning that carriers have less ability to influence price and cost. “I don’t think that we are going to see a sudden hardening due to capacity withdrawal. But we are seeing some signs of stabilization.”
He says that the renewal rate change number is now a metric that is being measured quite closely by underwriters and it will be a key metric of the extent to which the market is stabilizing. ArgoGlobal sees it as “a key indicator that will differentiate the price-setting leaders. It’s a measure that can demonstrate the extent to which a price-setting leader is able to articulate and defend the value of the product and service they are providing”.
ArgoGlobal believes that, after two years of relatively poor numbers, customers will be keener on suppliers perceived as reliable. Market stability is good for them. “If the underpricing is starting to threaten market stability, then what we need is leaders with an assertive attitude, the confidence in their technical price and a deep knowledge of the customers’ requirements. They need to know how their products add value, and they need to be able to communicate that value and convince the customers of the merits of pursuing a long-term strategy by sticking to their established leaders”, O’Gorman says.
ArgoGlobal is a leader in some cases and intends to be so more often in the future. It currently leads less than half its marine business but more than 20% of it. “I feel quite positive about market stabilization, but there is overcapacity and we will not see a sudden hardening, and certainly not without a significant market event”, he says.
O’Gorman expects there to be overcapacity, but he also expects there will be underwriters who are able to make money, not only because of their risk selection and their underwriting judgement and skill, but also because of their ability to articulate the value of the product that they are supplying and to defend it through adequate pricing.
“Because of the two years of market loss on an accident year basis, the business that is in the market today, as it renews, will continue to renew at a loss unless there is either a change in exposure or a change in coverage, or somehow the acquisition or expenditure cost manage to reduce. So, if that business renews at the same or lower prices, it would suggest that there will continue to be a loss, which I think is going to make some capital providers think twice,” concludes O’Gorman
O’Gorman says that “Argo Group’s leadership had the foresight a number of years ago to create a Malta-based European insurer – Argo Global SE, which acts as its primary insurance vehicle for accessing, servicing and underwriting EU business that is not presented to the London or the Lloyd’s market. That European company has branches in Malta, Zurich and Paris. That gives us options when Brexit finally happens, irrespective of what Lloyd’s does.”
So while ArgoGlobal waits with interest to see what happens with access rights to financial services, including Lloyd’s, it does have the European company option already in existence.
“With the insurance entities that we have licensed in both the UK and Europe, we are not expecting significant disruptions to our insurance activity,” says O’Gorman.
However, he accepts that business would be impacted if UK trade volumes fell as a result of a deal not being reached, although most of ArgoGlobal’s marine clients are domiciled outside the UK. “We are refining our plans at the moment to take our offering to the market, irrespective of what Lloyd’s does. We saw that Lloyd’s had chosen Brussels as the place for its European branch and that seems to me to be a coherent decision.”
Sea transport companies will be affected, because 31% of lifted UK container ports’ volumes come from EU trade, rising to 78% on RoRo. “But the hardest hit is going to be road transport. In the event of immigration restrictions, that could add to what is already an acute shortage of truck drivers in the UK; could this hasten moves to unmanned vehicles, who knows? But at Argo, we feel we have many options open to us”, O’Gorman says, concluding that “a lack of passporting is not a dealbreaker. It might create additional burdens, if you have two regulatory authorities that you have to comply with.”
On ships getting safer, and bigger.
“Each underwriter will obviously work to its capacity which is driven by its capital as well as its reinsurance arrangements, so, depending on the values that are being asked to be insured the underwriters are obviously going to write their lines accordingly based on the capacity that they have available. I would therefore imagine that, unless there is a consolidation amongst insurers, as values increase, percentage line sizes would come down accordingly”, says O’Gorman.
He adds that it is clearly a concern, as those values start to accumulate – not only on vessels but also in ports. Cargo insurance operates on a warehouse to warehouse basis, so it’s an issue that the cargo community is considering how to deal with. Currently this is difficult because it is very hard to know where cargo is at any one time. O’Gorman observes that the modelling companies are looking at how to assess as accurately as possible the potential exposure in ports.
ArgoGlobal marine sector and elsewhere: plans for development
ArgoGlobal expects to continue to grow its leadership position, says O’Gorman.” We want to become more recognized as an established leader. That will obviously be at different rates of progress across the different marine and energy lines, with more focus on the marine side than on energy at the moment, although it is a general aspiration across the whole division.”
However, ArgoGlobal only intends to do that where it can make a difference in terms of expertise and/or added-value services. O’Gorman emphasizes that it is not just about undercutting prices and it’s not just leading for leading’s sake. “We are working on plans to enhance our abilities in a few areas that are of interest to us, namely renewable energy, third-party logistics, which is where I have some experience, and fine art & specie. We are already involved in all three of those areas, and we would like to push that forward in terms of growth.”
O’Gorman explains that third-party logistics (3PL) are where a company would outsource its supply chain management – the transit and storage of their goods is managed by a third party. It’s therefore warehousing risk, transport risk. The main risk if you are insuring those companies is a contractual liability, “so it requires a deep understanding of how logistics contracts work, specifically when it comes to liability for physical loss or damage to the owner’s goods”. However, it also requires an understanding of the liability for financial loss that might be assumed under contract, for example delay in delivery.
O’Gorman hopes to bring his experience in building businesses that serve European and UK retail brokers to Argo. The mainland European and UK retail broking market is also very competitive, but Argo is looking for ways to access it through differentiation. “One of the reasons we want to do that is that we see it as a complement, or perhaps even a counterbalance, to our slip-based, wholesale subscription international business in Lloyd’s”, O’Gorman says. The products would predominantly be cargo and the logistics business, possibly some fine art & specie. O’Gorman observes that marine hull is much more London-centric and much more wholesale broker-centric. Marine liability does have some opportunities, but that is also quite a London-centric activity.
ArgoGlobal has small-team operations in Singapore, Shanghai and Dubai. “What we are looking to do is maximize the benefit of that investment and to increase the collaboration and make sure that we have a consistent underwriting strategy.
Notes: Argo Group had GWP of $2.16bn, with ArgoGlobal being one of four main divisions and contributing $625m of GWP in 2016. The other divisions are excess & surplus lines, Commercial Specialty and International Specialty (the last being the smallest of the four groups while the other three are roughly on a par with each other).