Last Chance Saloon: London Market doomed if modernisation fails

The London Market Target Operating Model (TOM) is a set of initiatives to modernise the London Market and help it overcome the deficiencies unveiled in the London Matters report by the Boston Consulting Group.

The report showed that the London Market is falling behind in reinsurance premium growth compared to other hubs such as Zurich or Bermuda, and losing market share as a consequence. It also showed that the London Market was missing out on opportunities in high growth regions such as Asia, Latin America and Africa, where its market share was declining.

London’s competitiveness is under threat as other locations are investing heavily, the report said.

As part of TOM, on July 11 the London Market Group (LMG) introduced a digital platform called Placing Platform Limited (PPL) that allows brokers and underwriters to exchange information.

“PPL is there to streamline the bits of work that are inefficient and helps to make the market easier and more cost-effective to do business with,” says Shirine Koury-Haq, Lloyd’s director of operations and LMG board sponsor. In addition, a so-called Central Services Refresh Programme (CSRP) is being created to enable brokers to submit premiums and claims electronically.

“CSRP will greatly reduce the unique and very significant administrative burden of dealing in London, particularly for brokers,” Koury-Haq notes.
Overall, the initiatives have been launched to reduce the cost of doing business in the market and enable businesses to grow, she says. But “the challenge is ensuring that the systems are adopted and their usage increases,” and therefore TOM needs all members of the London Market “to get behind it for a real collaborative effort,” Koury-Haq says.

DEATH BY CONSULTATION

Modernising the London Market is a complex process as it needs the support of around 200 broking firms, 1,800 underwriting organisations and three market representative bodies.

“If you are part of the market you’ve got to consult the thing to death. We go at the speed of the slowest, which is frequently stopped dead,” says John Muir, managing director of technical & operational practices GB at Willis Towers Watson. “We don’t have any ability to impose mandates or anything like that,” he notes.

Previous attempts to digitise the market with e-placing schemes such as Kinnect and Inreon have failed. This was mainly because these projects were done in isolation, without the collective support of the market, says David Ledger, chairman of Placing Platform Limited board.

In this respect, the latest attempt has better chances to succeed as it has the broad support of the market. PPL has been formed jointly by the International Underwriting Association of London, the Lloyd’s Market Association and the London & International Insurance Brokers' Association.
Also, the sense of urgency to make the market more efficient has grown since the previous attempts, making the introduction of new technology this time more likely to be adopted by practitioners.

The London Matters report “gave everybody quite a shock,” a market observer who wants to remain unnamed says. “That’s given people a very serious wake up call,” he notes. In addition, “there is a super abundance of capital in the world” which represents a “major threat” to the insurance industry in general and has caused a significant drop in rates.

“People are now waking up to the fact that they need to concentrate on improving efficiency and making ourselves more competitive so that we can write premiums at a lower rate without causing significant losses,” he says.

The idea that change is needed has become more widely accepted within London Market stakeholders. “There is a wide recognition at the very top of companies that this is essential,” Muir says.

ENTRENCHED OPINIONS

Support is particularly high for CSRP, which is set to make the exchange of claims and premiums easier. “Accounting with the London Market via the bureau is a big challenge,” Muir says. “It’s far more complicated and time-consuming than it should be—it’s off-putting. Paying premiums to the bureau for subscription market business is ridiculously convoluted,” he says.

CSRP is expected to shorten the time to payment and reduce mistakes and all the work should be completed by 2017, Koury-Haq says.
As a result, the headcount in the back office might fall, but this is unlikely to trigger significant resistance because the need to lower costs is widely seen as necessary, the market observer says.

London’s expense ratios are higher than its peers’, putting it at a disadvantage for more price sensitive risks, according to the London Matters report.
But not all is likely to run smoothly, as resistance to change can be expected in the front office where stakeholders are more influential and powerful.

“We are now talking about the stars—the extremely well paid brokers and underwriters who daily engage in face-to-face combat within the Lloyd’s building or within company market players outside of it,” the market observer says. “They are the people that have the most entrenched views on how their business is conducted,” he says.

“They chose this insurance market in London particularly because it is a face-to-face environment where they get to negotiate with their counterparty and see the sweat on their brow,” and they fear that this feature may be removed as part of the modernisation process, he explains.

CHUCK THE MONTBANC PEN

For hundreds of years brokers and underwriters have been taking notes on a piece of paper when negotiating a risk at Lloyd’s, crossing bits out on a contract that they want to change. “What they don’t realise is how much mess that leaves behind them,” the market observer says. “Armies of administrations are required to take that and turn it into an executable contract, which is where we spend a lot of money,” he says.

Technology such as the PPL platform is not designed to remove the face-to-face negotiations but to support them, the LMG stresses, adding that it is really supposed to avoid mistakes and make the process more efficient.

If adopted, the new technology is likely to change the way brokers and underwriters work in the market. “The days of the Montblanc pen and the A4 sheet of paper are numbered,” the market observer notes. “I’d like to think that in five years, the tool of choice for a broker will be an iPad, and the method of choice for an underwriter will be the ability to swipe that iPad and maybe write on it with a pen, to sign it one way or another.”

SMALL STEPS

The introduction of PPL is being done in stages. In a first move, the platform is used to exchange documents.

“It imposes the least amount of change that we can get away with the broking community, but it does then provide the infrastructure to brokers to integrate to the platform and thus send data as well as the documents,” the market observer says.

He expects the documents to eventually disappear altogether and that contracts will be constructed based only on data provided. “But that would be far too big a change from day one,” he notes.

What could prevent practitioners from adopting the new technology is that they fail to see the sense of urgency and the risk they are creating by ignoring the opportunities the new technology offers. Some do not see the problem and “feel that everything is fine; they do not understand why we can’t carry on as always,” says Muir.

While practitioners may be oblivious to the commercial pressures, investors are certainly not ignoring the fact that the sector’s profitability is being squeezed from two sides. On the one hand, a low interest rate environment is pressuring carriers’ investment returns. Re/insurers are facing difficulties in finding investment opportunities offering reasonable returns at acceptable risk levels. In addition, a soft market is weighing on the liability side.

“Market conditions are increasingly putting pressure on pricing, which is in real danger of becoming unsustainable across the board,” Koury-Haq says.

In order to be able to compete globally in this soft market and remain profitable, underwriters in the London Market may be required to reduce costs. Once all the TOM initiatives are fully adopted they will generate savings of £223 million a year for the carrier market, Koury-Haq adds.

UNDERWRITING IN THE DARK

The modernisation of the London Market is not solely about costs, it is also about speed, particularly in the important and growing delegated market, says Paul Latarche, partner at IT consultancy specialist Moore Stephens.

The delegated business, where the underwriting authority is being given to a coverholder, is currently done via line slips and binders in the London Market. As a consequence, a carrier finds out what risks it is writing up to eight weeks after it’s been written, Latarche says. During the time carriers are waiting they have no information on the business that is being written.

“They don’t know how effective their products are, how competitive they are from a price point of view or how many quotes they had to go through in order to win a piece of the business. And they have no sense or feel of how competitive, how efficient they are as a marketplace,” he explains.

For example, to successfully operate in the mid-market, which comprises the space above personal lines and below the real specialty risk, carriers need to be quick and responsive, Latarche says. In this market segment, carriers in London have to compete with local carriers around the world that can get quotes back quicker and potentially, at a better price, he says.

In 2015, LMG piloted a project where a risk quoted and bound in Australia was digitally transferred straight into the processing bureau in London, reducing the possibility of human error, data loss and data corruption by removing the need for rekeying and manual manipulation of data, Koury-Haq says.

“Information that used to take 60 days to arrive in London is now available in a week,” she notes. In addition, the nine days a month a coverholder used to spend creating spreadsheet orders for each contract has been reduced to zero, which makes London much more attractive and easier to do business with, she says.

The technological changes, if successfully implemented and accepted by market participants, should improve conditions for London carriers to grow their business. London-focused carriers are likely to particularly benefit more from innovation.

“If you are a global insurance company and you have capital placed locally in various areas you may well see the PPL platform as being complicated and hard to envisage,” the market observer says.

“But if you are a predominantly London underwriting company, you may well look at the electronic platform as being an excellent opportunity to stretch your business because you could see business coming in through channels that you would not normally have no access to.”
Members of the London Market are investing significant amounts in the modernisation—costs are budgeted at £270 million, another reason why this attempt to enter the digital era should succeed.

“If this doesn’t work, all other alternatives will be enormously more expensive. It could ultimately result in a market that is dramatically reduced over the next decade,” the market observer warns. “We’re drinking at the Last Chance Saloon here.”