Interview: Jonathon Davey - Getting back to underwriting basics

The biggest challenge in setting up Primary Broker Services has been recruiting quality staff, according to chief executive Jonathon Davey.

The underwriting agency started trading in August 2002 and has grown to 22 staff, half of whom are involved with underwriting. Davey says he plans to take on more staff between now and the end of January, adding that he feels he is on a permanent recruitment drive.

He says: "Finding good quality staff has been one of our biggest difficulties. We demand high standards and finding people is not easy. It has taken a long time to put together a good team."

Many members of the PBS team have transferred from bigger insurers, with five recent recruits transferring from NIG. Davey says underwriters are easier to tempt to move because their skills are under-utilised elsewhere.

"When you talk to underwriters, most of them feel stifled, restricted, oppressed, and fed up because they're not allowed to use their underwriting skill and judgement," he says. "They don't underwrite any more, they read from a screen or a guide."

Davey says PBS is different to other insurers as it underwrites each risk. The agency aims to write commercial risks of between £5000 and £50,000 premium and its average risk currently stands at about £10,000 premium.

He believes risks of this size should be individually underwritten.

He explains: "In the packaged small and medium-sized enterprises, there is a market for auto-rated products. Good luck to Royal & SunAlliance's Enterprise and projects like that, but when you get into the larger premium spend the risks require a little more thought. I think the majority of the business we write is not auto-rateable."

Davey continues: "Putting together manufacturing wholesale and distribution-type risks at £7.5m sums insured for £40,000 premium is hard. If you want to delegate that kind of responsibility to a computer, fair enough. I prefer to pay people who've got the experience, gut feel and the nous."

Davey believes that larger insurers' blanket exclusions mean they miss good risks in difficult sectors, and he criticises them for taking what he describes as a "broad brush" approach.

"We might agree that certain classes of business are not particularly profitable and we might not do them," he says. "But you'll find one every now and again where you think, that's a good business, it's well house-kept."

Davey agrees that this approach is more expensive, but claims that PBS' loss ratios are better than 50% and "would be the envy of the industry".

He adds: "If you're talking about a standard flower shop there are plenty of businesses much more competitive than us - but that's not our market."

Davey believes that working in partnership with good brokers is instrumental to finding these risks. He believes that good brokers can help identify well-run businesses and cut out fraud, pointing out that moral hazard is part of any risk.

"Assessing that moral hazard is much easier if you have a relationship with the broker," he says. "Good business comes from good brokers but you'll only get to know if they're a good broker by getting close to them. We want to set up relationships where we trust them and they trust us."

Davey believes brokers appreciate good underwriters too, pointing out that brokers placing £40,000 risks do not want to feel that they have more underwriting experience than their insurer.

"Brokers are often passionless about where they place a risk," he says.

"They place it on price because they've got an overrider on that account, because the rep came in yesterday to ask for more business. We want them to actually talk to underwriters, to broke the risk."

Aiming for this special relationship means that PBS cannot work with many brokers but Davey says he is comfortable with this. The company currently has 150 brokers on its books and has written business for 130. Davey says: "We only want a limited number of brokers because we want to maintain high levels of service and flexibility within an account."

Indeed, Davey says he does not want to work with bigger brokers because their power distorts the relationships he hopes to establish. "There are certain brokers that we won't deal with and we have made a conscious decision not to deal with any of the nationals and some of the big, local super-brokers," he says.

Big and demanding

"We feel they are perhaps too big and too demanding, not in terms of service but in terms of 'We've got a big account with you so you'll do what we want'. But we won't. It would be bad if we kowtowed to big players that get demanding. That's not what we're about, we're about relationships."

Despite this, Davey says PBS will only deal with professional brokers.

He says most PBS brokers also have a premier relationship with at least one major insurer and that a couple of his contacts earn more than £50m premium income per year. "We go for the quality end of the market, so it's not surprising that they have other premier-type relationships," he says.

Davey concedes that the hard market helped PBS pick up brokers as capacity dried up elsewhere. However, he believes that brokers would not have placed the business if they had not been convinced by the agency, and adds that PBS is not a home for distressed business. "We are not a market of last resort," he says. "I dare say that brokers were more willing to listen to our story because of the hard market, but the only reason we got the business was due to the service we offer.

"Often when you take on a new broker you find that the bottom drawer is opened and all the stuff they haven't been able to place anywhere else is brought out," he adds. "They have no great expectation that we'll write it, they just give it a try. That's not what we're about, and we very quickly re-educate brokers."

In fact, Davey warns brokers to place business carefully in hard markets, pointing out that under the Financial Services Authority, brokers will be obliged to check the financial security of their insurers. He says: "I think there are many sectors that have been opportunist in setting up to take advantage of the hard market."

He adds: "The new capacity that came from places like Bermuda and Gibraltar is still only just hitting the market. What worries me is the capitalisation levels of some of the new businesses setting up. While perfectly legal, they are not particularly well-capitalised."

Though an underwriting agency, Davey says that the backing of Primary Insurance ensures that PBS can place business with secure insurers. PBS sets out what percentage of each risk each insurer will get at the start of the year and says that having Primary Insurance helps persuade other insurers to sign up.

"The insurers get whatever their share is," he explains. "The majority of business stays in the Primary Group, roughly a third goes to an A-rate international insurer and the balance goes to Lloyd's. We have flexibility and stability because if Lloyd's decides it doesn't like our business we've got our own insurance company."

Davey also points out that having a group insurer on board assures the other insurers that PBS does not follow the infamous path of previous underwriting agencies, which gained a reputation for burning insurance companies and moving on year after year. "It offers a large degree of comfort for our brokers and other insurers."

This arrangement has also given Davey a degree of comfort, ensuring that he has easy access to capacity rather than having to beg, borrow and steal to place business. He says that he is not obliged to place business within the Primary Group, however, and adds that he will not necessarily place business with Vega, the Primary Group's new broking venture.

"If we have the opportunity to keep things within the group then the standard vertical integration model offers a lot of flexibility. However, if I decided that I didn't want Primary Insurance on the risk next year I would be free to do that. We're not averse to trading with Vega but I'll vet the brokers that join it just like any other."

He continues: "If a broker joining Vega was right next door to one of my existing brokers, it is highly unlikely that we would trade with them. I have a responsibility to my trading base and I wouldn't want to throw that away. I'm not under any pressure from the group to include any other part of the group."

Name consideration

The Primary Group backing has allowed PBS to open its latest venture, a satellite office based in the Rural Insurance Group office in Harrogate, that Davey is confident will write millions of pounds of premium during the next year. However, Davey is also reconsidering PBS' name and whether to drop the Primary connection so that the agency can stand on its own feet.

"When we formed this business and started trading last year, the association and financial strength of a group transacting $450m (£267m) premium income lent us massive credibility," he says. "It was prudent to maintain the name and association with Primary Insurance Company and Primary Group. Whether that remains the case going forward is something that we have discussed."

Davey also hopes to widen PBS' product base next year, adding products such as legal expenses, engineering and personal accident as well as expanding into more liability-led risks. Davey believes the agency has the potential to double in size organically next year, though he is also seeking acquisitions.

One of those acquisition targets is insurance companies, as Davey believes PBS could become too large to be an underwriting agency and need to set up as an insurer in its own right. However, for the moment he is focusing on organic growth.

He explains: "We're enjoying growing at the moment. I don't want to restrict it by making plans about something like that. A lot of insurers in this country are like oil tankers, we're a speedboat. You can be a pretty big speedboat and still be quite manoeuvrable."

CV

2001: joined Primary Broking Services

1995: formed MasterPlan, the insurance schemes marketing group

1994: joined Sirius Group (formerly Policy Master) and is responsible for business development in Western Europe

1990: became general manager of Loxton Business Systems, a specialist provider of IT to the insurance industry

1987: returned to the UK and became a manager in a major retail chain.

Jonathon Davey was born in the UK but educated in Hong Kong. After finishing his education, he became an inspector in the Hong Kong police.