Winners and losers in the technology revolution

In attendance:

1 Simon Gregson, Novae

2 John Muir, Willis Towers Watson

3 Peter Mungeam, Aon Benfield

4 John Racher, Xuber

5 Martyn Scripps, XL Catlin

6 Steve Williams, Xuber

CHAIR: Wyn Jenkins, Intelligent Insurer

Is the London Market starting to adapt to the influx of new technologies?

Steve Williams: For those that were at TINtech in June, one can hear a slight change in the pace of the mood music. Rather than “do we need to change?” it’s now “how do we change?”, which is encouraging and we’re very keen to make it happen. We have somewhere in the region of 60 brokers and a similar number of carriers in the market. So if we have an involvement in all of them, we want to make sure that all of that is relevant.

John Muir: More than 20 years ago I attended a session in Lloyd’s around electronic trading and the market’s been talking about this for years and years but it seems at last for the first time it actually has a bit of traction. As long as it’s done in the right way and it’s done to the benefit of all parties then I think it has a good chance of succeeding.

John Racher: Digitisation and the fact that corporations are thinking more globally about their operations has changed things. It means that there’s more focus on easy technology trading and as part of that you’re going to get electronic submissions, but also wider technology initiatives that impact global companies: that is the big change over the last five years.

Peter Mungeam: There’s a realisation that a lot of money can be saved in the back office that wasn’t previously recognised—technology isn’t the blocker here, technology is relatively cheaper to bring in than it was 10 or 20 years ago.

What factors are driving organisations to change?

Simon Gregson: It’s still a struggle. Long-standing practices of independence around the underwriting teams are hard to get past. They want to work in their own way and they don’t have a desire to work in a consistent way, and consistency is essential for successfully implementing systems in. I’m wrestling with that at the moment.

There’s also a lack of understanding of the implications across the rest of the organisation. Some of the drive for change is coming from the need to do better financial reporting. Better operations require better underwriting data. Our focus is how do we enable underwriting teams to easily capture the data, how do we give them the tools that provide the flexibility needed, but focus on the small number of things that have to be precise.

Martyn Scripps: Generally speaking, underwriters aren’t involved in administration of the policies they have underwritten. These are typically processed by underwriting assistants or their back office and because the majority of the London Market Target Operating Model (TOM) modernisation to date has been accounting based, underwriters have not been directly affected. Therefore underwriters have not had to change any behaviours or processes in recent times. With the launch of Placing Platform Limited (PPL), the market and not internal operations is asking the underwriters to alter their behaviour, thereby creating the shift to modernise.

Racher: The mergers and acquisitions that have happened over the last two or three years, and continue to happen, drive a behaviour of looking at systems, of looking at operations, looking at processes across a new joined-up organisation. That’s the time to do something and it feels as though that this is the catalyst for change within many organisations.

Mungeam: I get Simon’s points that carriers feel they are doing ok, so why change. It’s a soft market and markets have been doing quite well. I can understand the questions that come from some of them: “why do we need to change?”.

On the other hand you’ve got a really clear report from London Matters, which puts the problem right in front of us so some companies see an opportunity to embrace the TOM and introduce more efficient systems. An example would be PPL, which has been a key moment for the London Market.

I understand the challenges within the underwriting community and yes, the TOM team and the market need to do a better job to show underwriters/carriers what success might look like and give them clearer examples.

Gregson: The TOM isn’t an impetus for change at the moment; PPL and electronic placement takes a lot of work off the brokers and I get that but my underwriters don’t get a huge amount of benefit from this implementation. Muir: We still have to create a Market Reform Contract (MRC) and then instead of taking it to you through paper, we put it through PPL and that’s it. We still have to produce your policy—which by the way we don’t have to do anywhere else in the world—and all we’re doing is sending it to you electronically instead of pushing it around on a piece of paper for you to scan in.

Mungeam: We’re not taking away the face-to-face broking of that business and I think this is a good example of some of the initiatives under TOM, such as PPL and the Central Services Refresh Programme (CSRP) not being articulated well enough. There remain many who don’t understand the benefits of electronic transit but they are getting there.

Muir: There are benefits but the benefits are mostly downstream as opposed to for practitioner underwriters and brokers. They create efficiencies for audit, they create efficiencies in accounting and settlement, they create efficiencies in claims. What you’ve actually captured, electronically, is the contract and that makes it more portable and generally more efficient, so there are efficiency gains but it would be a myth to suggest that our broking people are all excited about PPL because they are not.

Williams: Is that because of a lack of communication between your broking systems and PPL?

Muir: Virtually nobody would want to make a sizeable financial investment to integrate placement of PPL into their main core systems because we’ve been bashing away at this in various guises, to my certain knowledge, since 1991. We’ve already blown up tonnes of money, integrating something that has never happened; we want to see this happen before we integrate. It’s a huge investment for everybody and I don’t blame underwriters or brokers who sit there saying “let’s see if we can get our people to change their behaviour first”.

Scripps: I should underline that the underwriters I have been speaking to are generally positive about wanting to see the PPL work. They don’t quite see the true downstream benefits that could come out of it, but in terms of the electronic placement platform, they’re quite positive about it. There have been questions and challenges, yes, but they’re positive.

Racher: Ultimately a lot of the information that is generated from this, will come back to the underwriter, will be served up in analytics, in extra reporting, more intelligence about the risk, about the performance, the history, so they will start to see the benefits.

Gregson: It’s an act of faith that we will engage with this, it doesn’t make things harder or easier but we can see there is potential behind it.

Mungeam: Electronic trading platforms have been around for many years and I think that one of the things the market has suffered with is that they haven’t been used particularly well. I remember working with the G6 doing peer-to-peer electronic trading. When we first started to do that the underwriters and the brokers were saying “We don’t want to do this, we don’t see the value, we don’t see the benefit” and yet after about two weeks of sending the business through electronically, the underwriters suddenly realised that all of the information was coming through very early.

They could sit in the office or at home, they could view the risk at their leisure and they could bind the risk electronically. In some cases lines had already been written before brokers went in. Our brokers are working closely with our clients and carriers 24/7 who know the business inside out, they are mostly interested in the final price. They don’t always need someone at senior level to go in and spend 15 minutes with them to come back with a wet stamp.

Brokers want to be able to market their business quickly and efficiently and underwriters supported that saying that it works really well. There was also information flowing through to their back office. For an underwriter to have an integrated underwriting platform and to have information flowing through end to end is a major benefit. What we need to do is to make sure that we use PPL in the manner that it was designed.

Williams: On one hand, it’s hard to understand why this is hard to envisage. If you look at the general insurance market, if you look at the life insurance market, if you look at the pension and wealth management, over the last two decades they have all been through similar sorts of evolutions where there has been a need to change and there has been a lot of talk and an industry platform has evolved and there has been support of that to an extent.

When it starts to come through and they see all the forms are pre-populated and there is plenty more that I can do to that, with access to tools and enrichment of that data and then the use of that data later on, it all becomes clear. Then what typically happens is, the technology as it evolves enables not just support of those trading platforms, but also the ability for distributors and carriers to collaborate directly. We live in a multichannel world. We live in a multimarket world.

Is the key to that the ability to support, not just PPL and the merging opportunity PPL, but the potential beyond that? Brokers with their own portals and an ability to submit electronically? It feels to me, having been through these previous industrial revolutions, it’s a bit like saying you don’t need rain. It has to happen, hasn’t it?

Gregson: There is a difference in “it’s got to happen” and when it will, so you can kind of see it’s inevitable. It’s a timing issue. Right now I have no prediction of when I can start taking messages out of PPL and doing something with it. There are two sides to that, I don’t know messaging is going to be available and also I don’t know how my business wants to change the way they will work in response to that, or even if they will.

Is it a leadership issue? Is that part of the problem?

Muir: We have a lot of strong leadership around change but we’re just not very good at execution. There is a difference between the two and there are always conflicting priorities. The trouble with the marketplace is that you are in danger of going at the speed of the slowest moving ship in the convoy, which typically in this marketplace is at a dead stop. My point is, if this market carries on tolerating paper, the practitioners will carry on using it. As a community we need everybody to want to change and to recognise, it’s our individual responsibility to change our own organisation and not to expect someone else to change it for us. That’s my concern.

Williams: You get a strong sense that there is a line of people all with an invested interest not to step out of line and I wonder whether they are an influence here.

Muir: What’s interesting to talk about is what do we want the London Market to be? Are we happy for the London Market to be a kind of market of last resort, or a hard-to-place market or a market that you had to go to because it’s got capacity?

If that’s all we want it to be, we should stop modernising, and carry on as we are, because let’s be honest under those circumstances we can pretty well do it as ugly as we like. Actually what I believe is that the London Market undervalues what it has to offer and we can make ourselves profoundly attractive to a far bigger segment of opportunities.

Can you identify a catalyst that can change all of this?

Muir: One day, we may wake up and say “someone has stolen my breakfast”.

Mungeam: We need to understand what makes the London Market attractive or unattractive and for many brokers globally, it’s an expensive place to trade, we know that. So while we might feel comfortable at this moment in time, subtly there will be something that changes and potentially we’ll lose a significant amount of business. Only then will someone say “oh we want change” but it will be too late. We’ve already started the journey and we’re making good progress under TOM. PPL of course is not the only electronic trading platform.

Do you think the brokers are ahead of the carriers, in terms of this way of doing business?

Mungeam: Yes I do, because business is starting with the brokers. Without the brokers working together in a collaborative manner, this was never going to happen. We came together and we have been working on this initiative for a few years now. There are no competitive advantages for us to be trading through PPL and we feel that we’re giving the market a great opportunity to survive.
Muir: Let’s look at the other barriers, they’re worth examining. Contract certainty fixed the documentation game. The London Market does complex policy documentation faster than anybody else on the planet. I don’t know whether we should congratulate ourselves, or perhaps thank our regulator—I always believe that they were the ones who changed that game. But that does show one thing, that we were able to extraordinarily change our proposition and modernise it under duress.

Mungeam: The fact that CSRP is there proves that the back office wasn’t working in the London Market. We’re doing this for the London Market to make it more efficient and it’s costing a lot of money to be able to do that. Is there a point where the technology gets so good?

Williams: There is a genuine case for action in that London becomes more efficient. That sounds like it’s happening. If we then focus on the barriers, that would be something that would be of interest in understanding, trying to figure out how we could remove some of those barriers and make it quicker and easier to adopt.

Gregson: Technology is not a barrier.

Muir: We should adopt the non-bureau electronic accounting approach with the bureau tomorrow. You know how well non-bureau electronic accounting goes. It’s great for us, it’s great for you. You get your money faster, our clients get their claims paid faster, it involves fewer people and it has higher levels of automation for all parties. It’s a repeatable model; you can use it with all sorts of different carriers.

Mungeam: Ruschlikon is relatively simple compared to accounting with the London Market and it’s taken us an enormous amount of time to understand the complexities of the 35-year-old historic systems that we have inherited.

How the infrastructure actually fits together is extremely complicated and there are hundreds of different scenarios that can occur when you have the leader who has agreed to something but the following market hasn’t necessarily agreed. From a broking perspective we want to be able to pass on premiums quickly and collect claims more speedily. We don’t need to receive multiple messages back from every single carrier, but it starts to get really complex when you’re messaging 20 carriers.

Racher: How much of that complexity is driven by regulations and market requirements and controls? Obviously that’s a very important thing for a subscription market, but does that inhibit the use of newer technologies in a bureau environment?

Mungeam: The infrastructure and the technology aren’t the problem, it’s the complexities of what the carriers require and the reporting that they have to do and the processes that they have to go through before an agreement can be reached to accept a premium or pay a claim.

That complexity needs to be taken out and historically the burden has been placed with the brokers. The brokers have to work out all the tax calculations and non-fundamental splits, through Lloyd’s Premium Advice Notes (LPANs) and processes, etc.

You wonder whether it is the right roadmap to follow whereby you’re trying to maintain the 35-year-old systems and keep them going. Or maybe the solution would be to say “let’s build a completely new system for the London Market”.

Muir: You need to recognise that there is a simpler way of looking at this, if we’re placing a piece of business, say with XL Catlin, and we place it with XL Catlin in New York: it’s a multistate, multijurisdiction, we agree the whole premium, we know we’ve got the right licences so the tax obligations will be clear in the contract and the premiums are agreed and we pay it to XL Catlin and then they manage their regulatory and tax obligations and they are perfectly happy to do that.

This is how insurance works globally. Except uniquely in the London Market, where there is the expectation that the broker coordinates all that work for the bureau. For brokers paying bureau premiums, it’s the same amount of money as for non-bureau but with a lot more hassle.

Mungeam: Looking at the statistics across the London Market for the last five years, I can see very clearly that there is less business coming from certain regions—you might not see that at an individual syndicate level but we definitely see that slide taking place, very slowly.

In most regions the majority of businesses is being placed in the local markets. They often have enough local capacity, so what’s the attraction for making them want to come to the London Market?

We make it really complex to trade here and there are enormous costs. Yes, the bureau provides services and there’s a cost for providing those services. Underwriters have just accepted these costs every year but they will start to reduce significantly as we move into digital market with electronic trading. It’s in your control.

Muir: We’re a relatively small voice in a very big crowd when it comes to London Market modernisation. We’ve invested significant time and effort into initiatives associated with bureau electronic accounting and electronic endorsements and actually our return on it has been poor compared to our own in-house modernisation and technology investments.

Gregson: The MGA coverholders have a huge amount of flexibility at a low level and it surprises me there isn’t more coming through there; if you’ve got an innovative insurance idea, a coverholder relationship with Lloyd’s is really a great way of starting.

Muir: That business model ticks all the boxes. The structure of it is extraordinarily efficient, you can invest heavily, for example Miller has invested hugely in technology and provided something that is really good for coverholders, really state-of-the-art, and also really good for the insurers. Issuance of documentation is straightforward, commoditised stuff, so that comes out like a speeding bullet. They can have third party administrators or claims authority, which hoover up 99 percent of the volume of all claims.

They can calculate the premiums a lot more easily, and typically it’s all domestic business.

It works like a dream, because it covers all the things that we don’t have on major account placements—the accounting works like a dream, the credit control works efficiently. Now that this one side of the business is working very well, don’t you think we should be looking at the bits that aren’t going well?