Forces Shaping the London Market

In attendance

1. Justin Emrich, chief information officer, Atrium
2. James Livett, associate director, London & International Insurance Brokers’ Association
3. Tom Payne, director, market operations, Lloyd’s Market Association
4. Steve Reid, partner, business strategy, DXC Technology
5. Stuart Shipperlee, managing director, Litmus Analysis
6. Adrian Thornycroft, programme director, London Market Target Operating Model (TOM)
7. John Warwick, managing director and partner, ILS Capital Management
8. Steve Williams, director, business development, DXC Technology

Moderator: Wyn Jenkins, managing editor, Intelligent Insurer

Why does the London Market need to address these issues?

Steve Reid: First of all I’d like to say it’s a pleasure to have so many people around this table to have a debate on this subject, which is quite far-ranging. Obviously, we know there are many pressures facing the London insurance market and there are many actions in train to address those challenges.

Working for a technology company such as DXC we aim to take our clients on a digital transformation journey. We can bring new capability and independence to the London Market to add to the domain expertise that was core to the Xchanging business. Xchanging has been criticised for its technology capability but DXC changes the landscape for us. In many industries and in insurance, DXC has transformed customers and taken them on a digital journey.

If I can use the analogy some transformations can be ‘supertanker’ transformations, where you have large scale projects that take years to achieve a return on investment. In contrast, the DXC approach is very much the speedboat analogy: very short bursts of incremental functionality and business value being delivered to our customers.

That may not be evident to those of you who know the Xchanging of old, but it will become evident as DXC drives forward. Today for us is about listening to your views around the table and perhaps contributing a few points of our own, but really it’s just to have an interesting debate on the challenges facing the marketplace and what we need to do to address them.

Adrian Thornycroft: Various reports show London has been losing market share and that has a lot to do with the cost side because we are making it too difficult for customers to access all our good stuff and we have complicated processes, paper-rich processes. We just don’t get close enough to customers and we don’t make it easy for customers. The whole point of what we need to do is make it easy to do business with us.

There’s an amazing set of capabilities in terms of knowledge and experience in London, but we make it hard. Some of that comes through in cost, so we have all these layers of stuff that are painful to deal with, and it’s expensive. Globally, we are losing it and we need to change.

James Livett: For me, it is also down to innovative products and innovative pricing, something that this market doesn’t do quite as well as it probably did 25 to 30 years ago. We shouldn’t hang all our problems and potential solutions at the door of technology. What do people come to an underwriter for? They come for the price, and the conditions and terms of the contract, and not necessarily whether you have the shiniest piece of kit in London.

John Warwick: That applies to the agility of the people to do business. They are not able to do that as quickly because of more complex processes in the market.
Thornycroft: Yes, there are much more complicated processes now than before—I totally agree. And if you take some of this complication away you can get the thinking going, not the checking.

Livett: Back in the day I used to take a slip up to see underwriters in Lloyd’s, and they would whack a stamp down, and say ‘thank you very much, do you fancy a pint?’. It doesn’t work like that any more. It has to go through all sorts of assessments and oversights. The market has fundamentally changed and we haven’t kept up with it.

Justin Emrich: I can’t agree with all that. One of the USPs we still have in Lime Street is the ability to empower underwriters to make decisions. That does differentiate us from our competition.

I think there is however, an emergence of new products which are challenging the way we do things. The notion of an application form which asks you 50 questions is disappearing, to the point where there are new entrants out there creating products which ask the customer hardly any questions. They are deriving the answers through all sorts of intelligent means, followed by instant payment, and no paper. This is what we need to be striving towards.

Tom Payne: Isn’t the problem deeper than that? Ultimately, the Lloyd’s market’s capital model doesn’t lend itself to being nimble. You have to set your business plan six months in advance, and you don’t know what the market will do. If you want to take advantage it’s tricky. If the way you deploy capital in itself isn’t nimble, as a market we have lost that nimble ability—the way we assign our capital prevents it.

Equally, when hurricanes are tracking through the Caribbean, I wonder if there were high frequency trading organisations that were looking at that hurricane saying ‘I’m going to trade off the back of that. I’m either going to short stock or I’m going to buy’.

My wonder is whether there is a future whereby a proportion of the capital that gets deployed by a managing agency can interact with other capital to operate in a far more nimble fashion to take advantage of new products or new opportunities that may sit outside their initial business model.

Thornycroft: At the moment, that’s how we do things and that works. When we are modernised and have data moving around, you’re going to get the innovative underwriters saying ‘I’ve got new ideas’ and they are going to push the boundaries. Surely the market is going to say ‘it doesn’t work for us to keep saying no and let’s work through that’.

Payne: That’s driven the wrong way around isn’t it? That’s saying that operational technology changes the desire for the market to alter its model of operation. It should be that the managing agencies today say ‘that is how we want to operate and that’s what we want to do’ and operations in technology will be a product of that.

Steve Williams: It provides the data that is needed for proactive decision-making. The journey we’re on is with modernisation, getting off paper, and providing digital data that every other business has got to do to make more nimble decisions. I agree with you: capital structure is a constraining factor.

Stuart Shipperlee: There is a dynamic tension between a desire to be more flexible and innovative, and the capital structure and maintaining the ratings.

To what extent is the market able to evolve and innovate?

Emrich: There’s enough headroom in our plans to be able to experiment with new product ideas. We can then be weaving these opportunities into our plans in the year and if they look like they will amount to something, we can plan for them next year.

Other things come into play when deciding which platform to use; the cost of processing could well be part of it.

Livett: I keep referring to the London Matters report, we are behind but so is everybody else. There’s nobody out there massively better than us but many are worse. That’s why we get a lot of sub-broking. It’s expensive being a Lloyd’s broker. You’ve not just the Lloyd’s hurdles to get across, you have the processing hurdles. Specialist processes makes specialist systems. Also, they need specialist people, and they are expensive.

Reid: I guess the good news is the Central Services Refresh Programme (CSRP) and other initiatives will take that complexity away. The big global brokers will embrace it, but as we know the brokers tail off a cliff in terms of size after about number 6 on the list. Will the traditional Lloyd’s brokers change and adapt?

Livett: We have done a lot of work on our online portal to help with that. At the moment we still have a lovely new front door which is CSRP, but it has sometimes 30-year mainframe systems behind it. I started in the market 30 years ago, I’ve got old, fat and slow in that time and so too have the systems.

Williams: Sometimes it’s not the chunk of software in the back office doing the number crunching that is the problem, it’s being able to access the data and get it back out. What CSRP is doing is enabling all of those systems despite their age to be accessible, to be modern.

Livett: I think technology will ease the burden, and I don’t think it’ll solve the problem.

Shipperlee: There seems to be a wider issue which the London Market needs to address in its distribution cost structure. Take an architect who practises in California: they work with a retail broker, who has expertise. The broker thinks it should be placed in Lloyd’s and works with a Lloyd’s broker to do so. Then there’s the conversation with the underwriter.

Having and sharing this expertise costs money at each part of the chain. Somewhere along the line, logically, London needs to ensure that it is the primary source of the expertise.

Thornycroft: As we modernise and start using data in a better way, the changes are coming, but we have to get there first. We have to get to the point where we can enable that stuff. It’s very tough if you’re the person being disrupted but it’s totally got to happen. Otherwise you go back to the starting point and we remain too expensive and too complicated.

Shipperlee: There’s capital and there’s expertise. And distribution. Whether it’s broker or MGA or carrier, in time those delineations will have changed.

Emrich: I also think we’re guilty of thinking of the London Market as only having one way of processing one type of business and it couldn’t be further from the truth. How you underwrite an oil rig is completely different from how you underwrite your book of restaurants. You need to throw lightweight technology type portals at this type of account, whether that’s owned by the carrier, the broker or the MGA. That’s going to vary, there is no one size fits all.

Williams: That’s part of the issue with technology as well. Technology is great at taking something routine and automating it. You say let’s digitise everything, let’s have everything as data rather than paper, but then you start looking at all the slips in the market—the amount of variants between business slips is colossal.

Automating that and having a consistent process to take it in in a structured format is impossible. Until you start getting to new technologies, which is changing rapidly, things such as AI where you can explain to it where it says particular field, such as name and address. That may appear anywhere on a document, that a normal processor wouldn’t be able to read. When AI is in the process it finds something that looks like a name and an address, learns, and starts to be able to read different slips.

Emrich: We are going through a short hiatus here, maybe it’s going to take us five years to get through it, where we’re trying to turn from analogue to digital. But the technologies are here and we are starting to use them. I don’t think we will be digitising analogue documents forever, because obviously we need to digitise at the point of creation, not later in the process once they’ve been scanned, etc. There are going to be some forward-thinking brokers who realise this will be an opportunity and will be on that bandwagon early.

Thornycroft: Trying to say we can’t do this stuff until AI has matured is wrong. With the volume of transactions we have in market, to cross that hurdle is tiny. Compared to the volume of transactions that other industries are dealing with, don’t tell me that banking, wholesale, retail and commercial haven’t dealt with the volume we have. At the moment we are stuck doing it the same way and the barriers to getting there are mainly our own nervousness of change.

Williams: Technology providing a solution to an industry that is unable to standardise, will happen. But that doesn’t mean the industry’s responsibility isn’t to standardise and find ways of capturing data at source and making sure that it travels through in a way that everybody can understand.

What is the asset that the London Market needs to try and protect?

Emrich: People and talent.

Williams: In my book, if we don’t modernise, we lose the people, we lose the market. I think it’s about making it accessible and easy to use.

Thornycroft: Agreed and we have to change our skills. We have to look at the skills we have now, which is more face-to-face and conversational. That will still be important but not as important. To be a fully participatory broker or underwriter, you will need additional, different skills in the future.

Payne: We want to keep the talent here.

Livett: I do think that sometimes we beat ourselves up too much. The skillsets are changing, fundamentally changing. My father retired three years ago, one of the reasons being he was fed up with change.

Emrich: We need to reverse-mentor. We cannot afford to lose our top talent prematurely. The younger generation might get all the technology and think they know it all, but I don’t think they do. They don’t have the depth of knowledge.

Thornycroft: Yet the older generation is where the lowest volume of retraining is now yet they have the broking and underwriting knowledge. We need to keep this knowledge and add the new skills.

Emrich: There are structural changes that could help but the industry as a whole is behind when it comes to flexible working arrangements.

Shipperlee: There are cultural expectations that would need to change. It can seem as though people are happier to see staff spend the afternoon in meetings in the pub, than allowing them to be working at home.

Reid: At DXC we have a flexible working policy and have reduced some of the office space which encourages a certain way of working. The approach is to give people the ability to manage their workload and private lives the way they want to. It doesn’t work for every role but it does for many.

Williams: Much depends on whether you look at the concentration of skill in a geographical area as a benefit. Let’s call it a case study of DXC. DXC has accountants, lawyers, HR, which provide a global function. But where those functions reside doesn’t matter, so why don’t we put them somewhere low cost? How do we then engage with those, reduce office size, and automate interaction?

I work from home three days a week and use Skype. It doesn’t matter where people are. To your point, if an older generation can embrace the technology, they can work from home and yet still contribute. It’s also eroded a concentration of skill in an area.

Shipperlee: I would contend that the extent of the concentration of London EC3 and other centres involves a human dynamic. This is one of the reasons the banking industry didn’t spot the financial crisis coming, they don’t have that physical concentration of talent communicating in the same way. They don’t have people having offline conversations with competitors about what the risks they are taking reflect.

That doesn’t happen anything like as much in banking as it does in the London insurance market, where these discussions can happen in a non-structured manner.

Thornycroft: For a perfect conversation between a Japanese person and an American, make them mathematicians. Make them artists and it’s impossible. But a great deal of what goes on is not purely mathematical. That is a strength of this market.

Payne: You might have to accept the fact that there may be a condensing of the knowledge base in the market.

Thornycroft: Don’t you think that’s where we can compete again? At the moment if we’re too expensive, you take out some cost, and get a bit of concentration. Then you think about the innovative products and tasks you can do because you have a new mindset and we can compete again. Other industries are also poor at digitising.

Payne: I still believe if we don’t have capital structures that allow you to take an opportunity that presents quickly, it becomes a constraint.

What’s the situation with recruiting the right talent?

Payne: If you look at it, other sectors have a much larger intake of diversity. One, they realise Oxbridge won’t necessarily give you what you need. Also, graduates now recognise Lloyd’s as being an attractive place to work. Fundamentally they are the future of the market.

Warwick: That’s why the brokers have gone away from hiring only graduates and are going for A-level graduates, who straight out of school, have more patience and settle into their roles more quickly.

Payne: There are times I prefer to take someone with five years’ experience from A-levels rather than someone who has a degree.

Emrich: There’s no shortage coming through the door, but we must ensure we keep them else we risk their finding the industry too slow.

Warwick: The other thing is they often have to service a £50,000 student loan after university. So they have to go for the big bucks. They have to look around.

Thornycroft: But when the administration is out of the way, there will be new creative-type roles where you can pay better than those who push paper.

Payne: It’s a very pointy structure in most companies, which is a problem, because until the person at the top moves on there is little room to move up.

Livett: In the technology space, the salaries are through the roof.

Thornycroft: This shows the skillsets changing, and they will blend and merge as they have over time.

Emrich: The word insurance sounds dull, we need to think about renaming the whole thing. It’s got to become a more attractive package: risk management, asset protection. Maybe they sound better.

Payne: We need to stress the comfort insurance can give to people, in terms of taking risk that they may not do otherwise if they didn’t have it as a safety net. It’s trying to get people to understand that it’s an opportunity to drive society forward on the basis of innovative products and we have to call it insurance because it’s a useful term. You have to change that conversation.

Emrich: We had a young cohort looking at insurtech recently who are offering a different paradigm. The concept of being able to insure what you want when you want opens a whole new set of possibilities.

Warwick: What about the exclusions of policies over the years that we couldn’t cope with, and the deductibles? In America there is $4 trillion of deductibles on the coastline from Mexico to New England. If you can insure that, then you can bring premium to the market.

But I don’t think people coming into the industry now expect to be there in 40 years’ time. They come in and think ‘I could go to Zurich, I could go to Bermuda’. It can work for the market and can work against it.