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If you asked anyone in the London market what would cause the Lloyd’s underwriting room or EC3 to close down you would either have been greeted with scoffs of incredulity or some description of an apocalyptic disaster.
However, it wasn’t a war or some natural disaster but a global pandemic that forced the underwriting room to be shut for the first time in Lloyd’s 334-year history.
Even before the closure the number of underwriters and brokers had been dwindling in the Square Mile as Covid-19 caused firms to take serious action and mandate home working.
However, this would not have been possible before the advent of the internet and desktop computers, which have allowed more and more risks to be transacted online.
E-trading, or electronic data interchange, is becoming more and more prevalent in the insurance industry. Whichever way you define it, whether it is submitting risks by emails, via an external platform or a company’s own internal system, electronic trading has long been heralded as the future for the insurance market.
Both brokers and carriers can exchange more information and place more business digitally than they have ever have done previously, with the latest figures from PPL showing that up to 80 percent of risks are now placed electronically.
There is also a proliferation of platforms, with brokers and carriers creating their own internal platforms and technology companies or InsurTechs advocating for their own solutions.
More and more risks are being placed electronically than ever before, but will a future where all risks are placed digitally be a utopian or a dystopian one? Is such an outcome actually feasible and, even if it is, is it desirable? In addition, what is standing in the way of the market getting there?
The most prevalent argument as to why progress on e-trading has been slow has been due to people and culture.
The maxim goes that the traditional insurance industry does not embrace change – or anything new – and older brokers and underwriters do not want to switch to a system that is not a classic binder of paper, and want to keep up the face-to-face ritual of going to a pub in EC3 to thrash out a deal.
According to Bronek Masojada, Hiscox CEO and chairman of PPL: “The challenge is not the technology capability but how to persuade people to implement and persuade people to change.”
Louise Day, director of operations at the International Underwriting Association, adds: “Anything new has issues with acceptance and the London market has no single body to drive behaviour, no one organisation only paying bonuses to those that trade electronically and no CEO to tell everyone to ‘play nicely’.”
However, Lloyd’s mandating electronic placement has created a “tipping point” as “no one can ignore” e-trading anymore, Day notes. “It has also proved it is possible to trade electronically and [has] spawned investment in alternative platforms. Competition will inevitably drive more innovation and better platforms.”
While culture is an important factor, it is not fair to tar all underwriters and brokers with the same brush.
According to James Willison, managing director and executive vice president of Web Connectivity, which provides messaging services and structured data solutions to the London market: “Brokers and underwriters use tech in their day-to-day life. They are not against tech but the benefits have not been sold to them.”
Willison adds that e-trading in its current form means that brokers and underwriters have to backfill information, so it has not actually made the process more streamlined.
“It is adding steps in to the process. That is the challenge, because it doesn’t make your life easier [and] it should.”
Marcus Broome, chief platform officer at PPL rival Whitespace, says: “I often hear people say that it is solely a technology problem or it is a culture problem but it is both.”
One stumbling block cited is where the e-trading agenda is set. If it is set internally then it is seen as the responsibility of the IT department, which is likely to have many other responsibilities, but also may not want to look for external partners who they might feel are encroaching on their territory.
Simon Cooter, who is a strategic adviser at e-trading InsurTech Quotall, says: “Having people responsible for seeing that part of the marketplace is important. Innovation and digital transformation are left to IT teams, and IT teams aren’t interested in funding partners, [because] they fear it will take [responsibility] away from them.
“It needs people in the business to say, ‘What are we good at and how can we integrate components to make us better?’ You can’t do that sat at a desk – it needs real focus or we will be left behind.”
It is not only a question of resistance to change on the part of individuals working in the insurance industry. The technology that is available and the way it interacts with current systems also presents a challenge to implementing wider e-trading.
Willison says the proliferation of e-trading systems is a positive in some ways, as it drives competition and spurs innovation. However, with Lloyd’s alone involving around 17 different registered electronic trading partners, there is a growing issue of duplication. In order to do business electronically, an underwriter or broker has to remember 17 different logins and how to use 17 different systems.
The familiar problem of legacy technology also rears its head, as e-trading products have traditionally been built around companies’ existing legacy systems.
Quotall’s Cooter says: “The chance of doing it on legacy technology is practically zero. Either you invest in new technology or you work with a new InsurTech or FinTech – but you work with those who are really good at what they do.”
Masojada adds that updates to systems also pose a challenge as with every update companies have “to go through stages of grief”.
Another issue that is commonly cited is that e-trading initiatives are often overambitious and promise the moon when they should just be trying to get off the ground successfully. As Masojada says: “In London we gorge on ambition and then wonder why we have indigestion.”
He says that timelines can also sometimes be overambitious, while underwriters would prefer that a project was delivered in 12 months and be on time, rather than being promised a six-month turnaround, only to have the delivery deadline repeatedly pushed back.
A final stumbling block is that e-trading has not been uniform across certain risks, meaning that certain syndicates and businesses that specialise in more complex risks are not able to electronically trade.
As Tom Clementi, CEO of MS Amlin Underwriting Limited, says: “The volume of risks that are end-to-end transacted through the risk life cycle, from quote to bind, via electronic platforms is still relatively low. The biggest challenge for the industry will be placing more complex risk types via electronic platforms.”
Increasing the uptake
These issues have had their impact on the take-up and efficacy of e-trading, but they are increasingly being recognised and addressed by the insurance sector.
One factor that has been highly influential in increasing the flow of e-trading is Lloyd’s mandating of increased electronic placements, in addition to the compulsory reporting on accepting in-scope risks, and the recently-added submission statistics.
Lloyd’s targets, and the naming of the best and worst syndicates in this respect, has made e-trading a priority and put it firmly on the agenda for many firms.
The same kind of mandating and targets are being used in the London company market, but having the oversight and impartiality of an external body, such as the London Market Group (LMG), helps to make the process more transparent and independent.
Another driver is the growth in use of external InsurTech partners, with companies like Whitespace garnering support from the likes of the British Insurance Brokers’ Association, MS Amlin and others. As such partnerships, which for many firms are still fairly new, start to bear fruit, the notion of an InsurTech-enabled transition to e-trading will get more buy-in from the market and encourage increased take-up.
InsurTech partners will also learn the intricacies of the insurance business and will be able to adapt their products for different clients, meaning that electronic trading should be possible across an increasing number of classes.
When talking about electronic trading it is inevitable that, sooner or later, one has to consider the potential impact of global technology giants such as Facebook, Amazon, Apple, Netflix, Google and Microsoft.
These companies are often regarded as the bogeymen of the insurance world, with opinions varying dramatically as to whether their input to the industry is desirable or beneficial.
In a recent InsurTech impact report consultancy firm Oxbow Partners said the entry of these companies into the market would not “signal a death knell to incumbents”, as non-insurance entities wouldn’t necessarily want to carry insurance risk. The consultancy firm advised insurers to do their utmost to “connect to these super-gatekeepers and serve their needs effectively”.
“Big technology firms will be profitable intermediaries for those carriers who can deploy capital efficiently,” it noted.
The overall sentiment among insurance market participants appears to be that 100 percent e-trading is not a desirable outcome, as it will fail to account for the unique value-add of the human touch. The argument is that an underwriter or broker who has been working in their sector for years – decades, perhaps – can add something to a transaction or relationship that can only be learnt over time.
The most recent statistics from the LMG show that in the fourth quarter of 2019, Lloyd’s syndicates accepted 73 percent of in-scope risks electronically, at the point when the risk was bound, beating its e-trading target by 3 percentage points.
Considering that in 2018, when the reporting mandate was introduced, the average number of risks accepted electronically was 29.6 percent, this is definitive progress. This is also partly due to the fact that more risks have been onboarded to the system.
The target for the next quarter is 80 percent, and while there has demonstratively been progress, increasing the amount e-trading remains desirable.
“We are miles away from where need to be with technical side, to remove inefficiencies and duplication. A huge increase is desirable,” Cooter says.
Masojada says that 100 percent e-trading is not necessarily desirable, however, with 80 percent take-up set as the target for PPL.
He says more of the process could be done electronically and that there will come a time when the whole process is digitised to some extent.
“At the moment we are doing the core stages but not the entire process. We have digitised steps one and two of a four-step process because everyone was focused on that. Step one is quotes, step two is bind, step three is claims and step four is accounting and settlement.”
There are also areas that could be done completely digitally, according to Web Connectivity’s Willison.
However, even the complex risks should not be ruled out of e-trading completely and may just need a perception change.
Tom Squires, head of Aegis’s online platform Opal, says that rather than thinking about what risks can be done electronically, insurers should think of what can’t be done electronically and then work backwards.
Future initiatives, such as the risk exchange from Lloyd’s, may also drive e-trading closer to 100 percent take-up, according to MS Amlin’s Clementi.
Future of e-trading
Given the challenges – and perhaps the undesirability – of achieving 100 percent e-trading in the insurance market it seems unlikely that a totally electronic marketplace will be achieved in the short term, if at all. But that does not mean that e-trading will not become a ubiquitous part of life in the insurance market.
Events like the current coronavirus pandemic throw into sharp relief the need for more flexible working – not as an optional extra, but a must-have for the future of business.
The City has gone quiet, with the majority of brokers and underwriters mandating that employees work from home to curb the spread of the virus. Coronavirus has inadvertently shifted e-trading from a backburner issue to something that could make or break businesses.
According to Quotall’s Cooter: “There has been a tendency to take existing product and build e-trading solutions around the front of that. Now businesses are actually designing propositions around digital. This is how customers are doing things and that is much more exciting than applying additional front end to something that isn’t suitable.”
A new generation of underwriters and brokers who have grown up in a digital age will increasingly embrace and rely on e-trading, according to Willison.
Whitespace’s Broome says that technology has increased expectations and the industry will similarly want more from e-trading platforms, with usability becoming an increasing focus.
The next big developments will be made around structured data, which in turn will allow more complex risks to be electronically placed.
Systems will also become application programming interface-enabled so that they can integrate seamlessly in to a broker’s or underwriter’s current workflow – taking the effort out of electronic trading.
More external partners will drive competition and innovation, potentially pushed by an influx of technology companies which are increasingly seeing opportunities in the insurance space.
“If I was working for any insurance company I would look at where the world is going to change. It is going to change faster – and in the next five years more than at any other time – and you either get that and get to front of the queue, or you don’t,” says Cooter.
There may come another time, like during the Covid-19 outbreak, where – even if they want to – people in the insurance industry are not physically able to meet face-to-face to transact business and build relationships. Increasingly, e-trading technology should be seen as the tool that can facilitate that human interaction.