Welcome to Profiles in Risk, I am your host Nick Lamparelli.
On this episode, I will be trying something new…an experiment.
No one knows this, but this podcast, Profiles in Risk was NOT supposed to be a podcast. The original concept I had for Profiles in Risk was that I would write a recurring blog where I would dissect and analyze the patterns and styles of famous, and sometimes obscure risk takers in fields such as finance, risk management and of course insurance. I was even thinking of examining risk taking strategies & decision making in sports, politics, law and war. The original name of this hypothetical blog was Profiles in Risk Taking.
A year ago, Tony, Carly and myself decided that we would do a podcast together. We would discuss insurance current events, insurtech startups and insurance careers. And as we approach our 1 year anniversary of our first episode and as I reflect on what we have done with the podcast and where I would like it to go, going forward, it keeps crossing my mind that my original concept of Profiles in Risk Taking, while initially a blogging concept, might just actually work in audio format as well. As a general rule, humans are terrible at managing modern risks. Buying low and selling high, while such a simple rule of thumb, is just flat out really really difficult to accomplish. That there are people out there who have created a masterful track record of controlling their emotions and make rational and effective decisions in the face of risk is really interesting to me. I want to learn from them and I think you will too.
So from time to time I will interrupt the normally scheduled broadcasts of interviews and other fun on Profiles in Risk, with special episodes of Profiles in Risk Taking where I will introduce a person, book or concept that I think is remarkable and will discuss that on the show. And because of the nature of those shows, I will have the transcript of the audio, along with links and other tidbits available as show notes, just in case you prefer to read or do some additional research yourself. SO let’s get this started.
Welcome to Profiles in Risk Taking, again, I am your host, Nick Lamparelli. On this episode I will be discussing the life of Cuthbert Heath. Most of you will have never heard of Cuthbert Heath. He is barely known in the US. But ask anyone who is highly familiar with the Lloyds market or London markets and they are sure to know him. Mr. Heath is the man who is often called the Maker of Modern Lloyds. The first time I read a reference to him was in a book entitled “A Crack In The Edge of The World” by Simon Winchester. This is a book about the Great San Francisco earthquake of 1906. It’s a book about plate tectonics, but in it is a passing reference to the immense damage of the quake and its insurance implications. If you are like me and are struggling to find time to read more books, go to the how notes where I reference and Insurance Journal article which describes the reference in the book in detail.
The event bankrupted 12 American insurance companies and 2 European companies. As most of you are aware, a giant conflagration erupted that burned most of the city of San Francisco. Back in those days, there were no property package policies. What was sold to property owners were entirely fire only policies, so it mattered greatly to property owners that their losses were deemed to have been caused by fire first and not earthquake first. If the original cause of loss was earthquake and fires occurred later, then there would be no coverage. This isn’t too dissimilar to current issues we see with losses occurring from water or wind, where in the majority of cases, flood is excluded.
As mentioned in the article I reference (HERE), a fifth of all claims were not being settled on the basis that adjustors could not determine the cause of loss, which would have been earthquake or fire or strangely dynamite, which was being used to blow up buildings to create fire walls and not surprising, potentially exacerbated the fire.
Regardless of all that, in steps Cuthbert Heath. Mr. Heath was a Lloyds underwriter and responsible for a growing book of business. A man making a name for himself in London, the biggest insurance market in the world. Mr. Heath cables a message to his San Francisco agent and tells him “Pay all of our policy holders in full irrespective of the terms of their policies”. For those of you keeping score at home, what Cuthbert Heath says is, no matter what caused the loss, fire (which was covered) or perils such as earthquake which were not covered, pay the losses and make these people whole.
This is a complete game changer for Lloyds and Mr Heath. Both Lloyds and Cuthbert grew incredibly after this event as both developed a reputation for honor. The Lanasters in the Game of Thrones are known as the family “that always pays their debts”, well Lloyds became known as the insurance entity that would be there for their policyholders even in the worst of times. This also fit very well with my internal compass on who we should be as insurance professionals, which is to act with honor and pay what is do to keep our promise to make our promises to make our policyholders whole. Reading this confirmed my feelings about what I do for a living. It made me want to research this guy with the funny name even more.
A quick search in Google pointed me to a book that was actually written about Cuthbert, entitled Cuthbert Heath, The Maker of Modern Lloyds by Antony Brown. I’ve added the link to the show notes for you. The book is very inexpensive and can be purchased on Amazon for less than $5 used. I highly recommend picking a copy up. A lot of this book is interesting in that it describes Mr. Heath’s life and how he got into insurance and into Lloyds. But also this book is loaded with insurance gems that truly inspired me with the hopes that our industry can lift itself from the reputation that it currently possesses, which is one in which we look to shirk our responsibilities.
So let’s start with the Lloyds of London pre-Heath.
From its very inception, Lloyds was in the business of predominantly insuring marine exposures. In the late 19th century, fire cover was just starting to emerge as line. It was small for sure.
Here, a young Mr. Heath tried something that had never been done at Lloyds. Specifically, he formed an underwriting syndicate that reinsured fire risks. This was extremely important in the history of Mr. Heath but particularly, the Lloyds market. As read from the Brown book:
“ The 26 year old Cuthbert Heath’s acceptance of the Hand-in-Hand reinsurance (Hand-in-Hand was the fire insurer – NL) is a milestone not because of the nature of the risk itself, but because of the manner of acceptance. True, he was in one sense helped once more by his father. But he was helped far more by what was now strongly emerging as his own underwriting temperament – a freshness of approach which saw no reason not to do a thing simply because it had never been done before. In the words of D.E.W. Gibbs:
‘Heath found the novelty an attraction, not a deterrent. If there was a reason to prevent him from writing the risk it must lie in the quality of the risk itself. If the risk was a bad one, then either the rate must be raised to an appropriate level, or it must be turned down. But a risk that had nothing against it except it novelty was the best of all risks to write, for the underwriter who accepted it would be starting on the ground floor and establishing himself as a market before his competitors’
What Cuthbert Heath had achieved, and got away with, was the formulation of a heresy. He had dared to deny that the business of Lloyd’s was above all to write marine risks. It was the first step, but it was as nothing to what would follow.”
Perhaps it is just confirmation bias, but these two paragraphs truly reflect a conviction I have about how underwriters and underwriting units need to think about how they deploy capacity effectively.
First, there is that little dig about how the industry, in its conservative nature, is fearful of doing things that have never been done before. But as was strongly pointed out in the quote by Mr. Webb, is that novelty is a great ally to have. Emerging risks are the place to be. Why? Because there is no or little competition. You as the underwriter set the market. You dictate the rates, you dictate the coverages and exclusions and best of all, if you can establish a profitable market in the new line, you establish the brand for the market. Sure it’s risky, and there is not a lot of data to support your decisions, but if the alternative is to fight it out day after day in a crowded market and ultimately be part of a commoditized product, then I take novelty every day of the week.
The second gem here is something I have said on many a podcast recordings, which boils down to, there is no such thing as bad risks, only bad prices. You as the underwriter may find an exposure so severe with potential risk that you don’t think your price will be economically viable in the market, which might be right, but that does not negate that there IS a price which does justify the writing of said risk. If you can get that price, you should.
Going after novelty thus became the business model for Mr. Heath. He was the first underwriter to offer loss of use cover. He put himself in the property owner’s shoes and thought about what a large fire loss would do to their business. Sure, he was there to get the building back up off the ground, but what about the months of lost revenue from not having the building operational. If you think about it, for catastrophic loss, just covering the asset is useless if when the asset is returned, you are already out of business. Loss of use cover was a natural empathetic extension to a traditional property policy. Of course, Mr. Heath was lambasted for it and was even brought in front the a governing board at Lloyd’s by other members. After being admonished, Mr .Heath continued to sell the coverage. Imitation being the sincerest form of flattery, within years, every Lloyd’s syndicate writing fire insurance, offered loss of use cover.
For his next act, Mr. Heath stepped into personal lines. Upon being asked half-jokingly to insure a property for burglary, Mr. Heath responded with two words that he has become legendary for…”WHY NOT?” For Cuthbert, it was his job to find a way to provide the coverage, not to outright decline it. If he could find a way to provide coverage and get the appropriate premium, then “why not” indeed.
Mr. Heath continued to innovate using his “Why Not” mantra. Personal burglary policies provided the insight to provide commercial burglary policies for jewelers both within premises and in transit. Mr. Heath developed the first Jewelers block policies. Mr. Heath obtained and expanded, probably the finest global earthquake maps anywhere for that time. It was said that well into the 20th century, Mr. Heath’s maps were so advanced that he far out-distanced any other underwriter when it came to insights around frequency and severity of earthquakes.
Mr. Heath was one of the first underwriters to insure Fidelity coverage for employee dishonest and in the early 20th century, his syndicate was one of the first to cover employer’s liability and workers compensation.
Also, in the early 20th century, Mr. Heath wrote disease insurance, which would payout if the insured contracted a specific disease covered by the policy. Of course, being that this was the early 20th century, big cities such as London were prone to have catastrophic epidemics. Given that a catastrophic epidemic outcome was always around the corner how could Mr. Heath justify providing such cover? Simple, to get the policy, you had to be vaccinated. And just like that Mr. Heath ties risk management directly to an insurance policy protecting both his customers and his capital.
In the early twentieth century, Mr. Heath enters the greatest emerging risk to ever arise in insurance…auto insurance. 1907, Mr. Heath sells the first Lloyd’s backed auto policy and in 1912 sells the first fleet cover to a meat-packing company in Chicago. Chicago and Chicago brokers incidentally were very critical to the success of Mr. Heath and of Lloyd’s. Many of Mr. Heath innovative products were derived from requests via the Chicago brokers.
During the first World War, Mr. Heath sold bombing insurance to property owner’s fearful of loss from bombs being dropped by German Zeppelins. For those of you wondering how in the world Mr. Heath could even price such a peril, there is a quote from Mr. Heath in Antony Brown’s book.
“to arrive at a premium in spite of the apparent uncertainty. We knew roughly how many airships Germany possessed, or were likely to possess, and we also knew roughly how many bombs they could carry and also the area of possible damage by one bomb. Taking London as the example, it was easy to ascertain what premium should be charged to cover probable risks. I remember being very much surprised when I discovered how much of London is represented by open spaces. In the end I multiplied the probable hazard by six and thought I should be on the right side”
Knowledge is power and Mr. Heath does 2 things that every good underwriter should do. One, he builds his own case by assembling clues from the data that exists. He didn’t need claims data, he takes an end-around and out-flanks the problem. Secondly, he figures he needs a margin of safety, something that I will discuss time and again across all risk takers I discuss in this show, and he multiplies his best estimate by 6. Coincidentally, this is something I do with every single account I underwrite in my daily work.
Other firsts from Cuthbert Heath were workers compensation retro plans and bundling wind cover into the property policy. Even after Mr. Heath’s death, the Heath syndicate were early participants of satellites and nuclear power. Heath was fond of saying that each risk should be evaluated on its merits, and the proof is in the pudding, Cuthbert Heath was on the cutting edge during his entire career and his foresight and courage was a major factor in the Lloyd’s brand that we know today.
Mr. Heath was inducted into the Insurance Hall of Fame in 1966.
That completes my profile of Cuthbert Heath as remarkable risk taker. I hope you were able to take away something from this and I ask for any feedback you can provide for this series, including any other remarkable risk-takers.
My name is Nick Lamparelli and until next time. thank you.
Insurance Hall of Fame