A few “good men”
The nature of underwriting has changed, but not the importance of reputation.
Credit relationships are reversed in the insurance business. The primary product of an insurance company is the sale of an intangible promise to pay, so the onus is on the buyer to ensure that the seller’s financial security is up to scratch. A wealth of credit ratings are on offer to help buyers make that judgement, but anyone who remembers the London insurer and one-time stock-market darling Independent Insurance knows that such ratings are not full-proof. For those who don’t recall that minor debacle, Independent’s ratings suffered what became known as the “precipice plunge” back in 2001: they plunged from acceptable levels to garbage in a matter of weeks, when it was discovered that their reserving practices did not involve setting aside reserves. Buyers need more than credit ratings to gauge their markets’ wherewithal.
Reputations are like gold in the insurance business.
Reputations are like gold in the insurance business. So it has been for centuries: brokers and buyers have never been indifferent to the quality of the underwriters they choose (or shy away from). During the era of private underwriting, which was the norm the world over until the eighteenth century, everyone preferred to have ‘good men’ sign their policies. The phrase referred to underwriters (they were always men) with a reputation for wealth and good character, which in combination pointed to an increased likelihood that they would be inclined to pay claims. In an early example of variable pricing, clients were typically willing to pay a point or two more for the scratches of ‘good men’.
In 1682, for example, the Philadelphia merchant James Claypoole insured John Spread on his return voyage from New England “personally against capture by the Turks at 2 per cent by good men”. Those buying insurance have demanded good men (and those selling have proclaimed them) since at least the early 1600s. When challenged about the general security of London’s individual underwriters in 1720, John Barnard, one of the greatest underwriters of his day, told a Parliamentary enquiry into marine insurance that “there are about one hundred Persons of very Good Repute, who Insure Ships and merchandizes at Sea”.
Presumably underwriters of lesser reputation also operated in Lombard Street, Change Alley, the coffee houses of the City, and on the Royal Exchange – and they were to be avoided. Everywhere, whenever premium rates looked attractive, risk-takers flooded the business. In British India in 1781, when marine insurance was just getting off the ground there, one anonymous correspondent to Hicky’s Bengal Gazette complained bitterly that “lately you can hardly shake a Plantain Tree, but out flies an underwriter.” Brokers have for centuries provided a portcullis against underwriters of bad repute. John Julius Angerstein told Parliament in 1810, after 54 years in the business, that he was “very careful with whom I open accounts… I would rather trust to one man with right feeling than to two or three other.”
The reputation effect went both ways. When presented with a dodgy claim, Angerstein admitted of the Lloyd’s market in 1810, “where they see a mistake, private underwriters will pay a man of character, but where it is for a man they suspect, they will not do it.” A solid reputation is important from every angle.
Today the nature of underwriting has changed, but not the importance of reputation. Buyers are still concerned that their insurers will be financially strong when the time comes for them to meet claims. It is as important as ever to be one of the ‘good men’. These days an insidious soft market dominates much of the business, which makes the importance of using ‘good companies’ – today’s equivalent – more important than ever. In a market where reputation is everything, issuers need a powerful communications partner to get their message across to the widest possible audience.
That’s what we’re here for.