Safeguarding middle market businesses

Recording Date: 10/20/23
Air Date: 11/15/23

The middle market is made up of 200,000 mid-size businesses that play a vital role in the U.S. economy by generating approximately $10 trillion per year. Alex Wells, Head of U.S. Middle Market at Zurich North America, discusses the importance of protecting these businesses by meeting their insurance needs. Middle market businesses are vulnerable to economic, cyber, social, legal, regulatory and natural catastrophe risks. Wells delves into the fundamental roles that insurance companies, risk management and AI play in mitigating these risks to help keep mid-sized businesses stable and secure.

Guest:

Alex Wells
Head of U.S. Middle Market
Zurich North America

Alex Wells is the Head of U.S. Middle Market for Zurich North America, where he is responsible for driving a dedicated focus and oversight of our investment in redefining and profitably positioning our middle markets business. Wells joined Zurich in 2020 from Chubb, where he was Executive Vice President and Chief Underwriting Officer for Commercial Insurance. Prior to that, he was Executive Vice President, Commercial Insurance Regional Manager for the Northeast and Mid-Atlantic regions, and North American Manager of Chubb’s Specialty Casualty and Construction, Aviation and Public Entities underwriting units. He also held a variety of other leadership and management roles within the Chubb and ACE organizations.

Host:

David Hilgen
Future of Risk co-host
Editorial Content Manager

David is Editorial Content Manager for Zurich North America, working primarily for the company’s brand journalism site, Future of Risk. In addition to co-hosting the Future of Risk podcast, he works on external communications in support of Zurich’s sustainability efforts, manages media interactions with Zurich spokespeople and writes articles and thought leadership pieces.

Episode transcript:

DAVID HILGEN: There are some 200,000 mid-sized businesses in the United States. These businesses generate about $10 trillion in combined revenue and almost a third of private sector gross domestic product. Their greatest strength is often their flat organizational structure and agility, which allows them to quickly respond to customer needs and marketplace opportunities. They are essential businesses that form the backbone of the U.S. economy, but they are also exposed to a host of economic, legal, social, regulatory, and natural catastrophe risks. Welcome to Future of Risk, presented by Zurich North America, I'm David Hilgen. Our guest today is Alex Wells, Head of U.S. Middle Market for Zurich. As such, he and his team work closely with mid-size businesses to help them identify and manage their risks. Alex, welcome to the podcast

ALEX WELLS: Thanks, David. Happy to be here.

HILGEN: Alex, I want to start off by defining the middle market. What do you consider to be a middle market business?

WELLS: Sure, that's an open question among a lot of people in a lot of different industries. Broadly, Zurich defines the middle market as businesses that have less than a billion dollars in annual revenue. It can be all the way down to startups with no revenue, if they're looking for the type of insurance products that a slightly larger account might be interested in. So, rather than focusing solely on revenue, we have a number of different account characteristics we look at just to make sure that we're assigning the right category of our business to help those types of accounts with their insurance needs.

HILGEN: Okay. Well, that makes sense. I want to go a bit deeper here. Can you highlight some of the differences between say, a middle market business and a larger global entity?

WELLS: Well, as you said in your lead-in, many of our middle market business partners are very flat organizations. So, they often have executives and management that have to wear multiple hats relative to their operations. So, specifically related to insurance, many times they don't have a dedicated department of risk that looks at insurance risk or risk more broadly. That really falls within a finance part of their organization. Sometimes even the CEO or the CFO directly is handling that type of work. So, they tend to have these resource constraints because they're much flatter organizations. They don't tend to have a lot of specialized resources even outside of the insurance space. They look to external third parties to help them understand a variety of those things. They also tend to have very focused areas of business, whether that's geography or product lines, or the types of clients that they have, which tends to focus them and makes them very good at that business, but it also means that they tend to have a concentrated type of risk relative to a lot of different parts of their organization.

HILGEN: Well, that makes sense. So, what are some of the biggest risks that middle market businesses are facing today?

WELLS: That's a good question. I think if you would ask a CEO of a mid-size business what they're worried about, they're going to say the same things that if you go and ask a global type of account. They're very concerned about the economy. They're trying to predict the future of their space that they're in. They're also concerned about talent acquisition and understanding how they're going to attract and retain their talent. Of course, they're looking at a lot of natural hazards in today's world, particularly if they're in certain geographies around the United States that are experiencing more natural catastrophes than they've seen in the past.

HILGEN: You mentioned earlier about these middle market businesses not having the team of risk managers to help them manage risk. Can you go a little bit more into that — about their limited risk management resources and how that can be a challenge when you're running a business?

WELLS: Sure. So, I'll use one example that's in the news a lot right now, which is cybersecurity. So, when you start thinking about very large organizations, they have teams of people that are dedicated to securing their cyber exposures … making sure that everything is lined up. They understand what their risk is and they're buying insurance appropriately for that. When you start to look at a middle market account, they certainly usually have an IT department but they might not have cyber risk specialists. We just recently completed an acquisition of a company called SpearTip, which as an example, does monitoring for mid-size businesses to help them understand at the front end where their vulnerabilities might be and what the risks are, but also provides ongoing monitoring of all of their IT systems in order to identify threats and be ahead of those threats. That's the type of specialized expertise that mid-size businesses look to the outside to try to provide. Sometimes they hire them through vendors. In our case, I think we offer a lot of things in the insurance space but it's not always easy to know whether your insurance company offers those types of services and products. So, that's why you need a good broker and you need a good insurance company, and they can kind of walk through all of the things that might be available that will support [bringing] that expertise into those organizations.

HILGEN: I know that collaborating with outside companies — and [that] could be insurers or brokers or outside firms — is very important, particularly with cyber. One of the issues that keeps coming up — and I know you've written about this recently — with businesses large, small and in-between is the rise in these high jury awards, also known as “nuclear verdicts.” Why is this a concern for businesses?

WELLS: I think it's a concern for the businesses; it's a concern for society. There's no “magic pot” of money somewhere to pay for these outsized jury verdicts, right? It all ends up coming back to the consumer and the businesses that have to pay for the products or services. When we look at it from an insurance perspective, we get to see a broad range of the lawsuits that come through. We understand sort of the history of litigation and so we can see the trends and the changes. What we're seeing right now is really a ramp up in the number of eight and nine figure jury verdicts … so, tens of millions to hundreds of millions of dollars. They're driven in through a number of different causes, not the least of which is they have a very sophisticated plaintiff's bar that's found some new ways to provide litigation funding which allows them to be much more aggressive in their attacks on businesses. It creates an incentive for them to delay and create a lot of development activity within the insurance marketplace. This litigation finance is often not disclosed to the jurors or even to the court, so it's hard to know where this is happening, but it is a major cause of concern relative to us and to the business partners that that we have. The real challenge is that it's keeping people from getting fair settlements. When people are injured or there's damage to their property … that's what we're here for in the insurance industry — to give you that sense of security and have an ability to recover and be made whole. This societal trend toward social inflation and litigation abuse really changes that dynamic and it creates a very adversarial situation. We all pay for it. An interesting discussion I've had recently with some folks is, could you determine how much of a product or service that you're buying … how much of that price is determined by this sort of external litigation that is really funding these plaintiff's attorneys? And in many cases, it's a significant percentage of the cost of a product or a service and the general population just isn't very aware of that underlying cost that is essentially a tax or an inflationary-type charge that really drives up cost for everybody in society.

HILGEN: I imagine for a middle market business, they probably don't have the legal resources to fight these cases. So, having an insurance company that can address these issues is beneficial, I imagine?

WELLS: It is critical and it doesn't always happen, because not everything is covered under insurance.

HILGEN: Sure.

WELLS: So, there certainly are places where these types of mid-sized businesses get themselves into a situation [they can't handle] on their own and that's very difficult. That can be an end to an enterprise. That drives small to mid-size businesses out of business even if they win in the courts. The time and money that it takes to defend those cases can bankrupt them and really put them out of business. They don't have those resources, but even if they have insurance, there's the added problem where they have to determine how much insurance they should buy every year. Historically, a good insurance broker could give you some guidance as to how much liability insurance that you should buy and you could feel pretty good that if you bought, if you followed that recommendation, that would be enough to cover the potential for a claim that came through, and you'd have the insurance company there backing you up, and it would be something that you knew your business was going to be able to survive. Unfortunately, now even mid-size businesses are having these “nuclear verdicts” and the jury awards hundreds of millions of dollars for certain situations. Unlike big global Fortune 500 companies, a mid-sized business is generally not buying hundreds of millions of dollars’ worth of liability insurance limits, right? So, they actually have to be worried about, “Did I buy enough insurance?” Because if I only bought a $25 million policy and the jury award comes back with 50 million or a hundred million dollars, it can be a changing event for that enterprise.

HILGEN: That's interesting. So, I want to talk a little bit about artificial intelligence … AI. It seems to be in the news all the time now. How can and how are insurers using AI to help customers manage risk?

WELLS: Well, we don't know yet where this is going to go. I think that most people who are working with AI who are thoughtful will acknowledge that we're not sure where this is going to end, but it is very exciting. There are a lot of opportunities to improve the insurance transaction, the way we do business and how we support our clients with artificial intelligence. I mean, we do a lot of work to make sure that we understand our clients. Artificial intelligence can allow us to go into a lot of public space and collect information about our customers. That allows us to craft insurance products insurance services and just a general way of doing business to better align with what that customer needs. I think that's really important, especially in the mid-market type business because everybody can research and understand what Coca-Cola does and that is something that underwriters can get your hands around and understand that risk. Mid-size businesses generally are not public companies. So, there isn't a lot of defined documents that let you understand the operation of the account and the risks that they might have. So, that takes a lot of work for a middle market insurance company to understand the individual nuances of an account. Artificial intelligence can reach out and collect a lot of information, very quickly, that an underwriter otherwise would spend hours or days trying to pull together, collate, understand and be able to then use that to craft a business decision.

So, you're able to speed up the whole process for the clients. Frankly, we are also able to use many of those AI tools to create insights that we can give back to our clients about the type of risk that they have relative to the type of risk similar accounts have. AI allows us to collate that information and really drill down and provide something very helpful back to those kinds of clients and say, “Okay, you're in a certain industry and we might have general observations about that industry and the types of risks that are in that industry, but you specifically have certain characteristics or attributes that are like somebody in another industry and we see this type of risk or these types of claims coming from this other industry that you should be worried about, too. We should explore those insurance products that might protect you from things that otherwise we wouldn't necessarily have thought about.” AI allows us to connect dots and in a way that is different. In the past, that's been something that underwriters had to spend a lot of time to do and now we're able to use some of those tools. Albeit, this is very early, right? So, it's in its infancy, but we have some pretty high expectations in terms of what we might be able to get out of it.

HILGEN: Well, any kind of intelligence — artificial or otherwise — is better than no intelligence at all, I always think, and despite concerns about it, it's clear that the human element will remain in the insurance industry. It's a very human business,
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WELLS: I think the insurance industry, more so than most industries, has had a history of having to understand how we take data and use it responsibly. You know, data is neutral. It's how you use it, right? As an industry, we have learned a lot of lessons over a long period of time because everything that we do is based upon data, right? Data privacy and protection is core to the industry and certainly to Zurich. I think Zurich is a leader in that space. And then, those use cases are very important to us, right? There's a way to provide value to our clients and create a lot of upside to more sophisticated risk management for clients who otherwise wouldn't be receiving that type of insight … and do it in a very responsible way.

HILGEN: Interesting. Alex, I want to thank you for joining us on this Future of Risk podcast.

WELLS: This was great. It was a real pleasure. Thanks, David.

HILGEN: For Zurich North America, I'm David Hilgen.