Lisa Watson looks at how technology has been instrumental in the modernisation of the London Market.
As soon as someone mentions the word modernisation, it's all too easy to immediately think of new technologies implemented as a means of promoting more modern working practices. Many insurance or reinsurance practitioners see modernisation as key in providing them with the competitive edge they need to remain a powerful force in the emerging global economy. But if the technology is there and is viewed as a facilitator of modernisation, why aren't more practitioners using it?
There is a more fundamental issue; that of organisational change. It has long been recognised that the London market needs to become a more viable place in which to transact business. The LMP initiative has been put in place to address exactly this issue. The reforms primarily relate to strategic development of this market's key competencies, fundamental to retaining its competitive advantage. LMP aims to make the London market operate more efficiently, reducing frictional costs by improving premium cash flow and reducing the amount of time it takes to process claims. There is an obvious `fit' between these strategic changes and technology, but if technological change is forced upon the market without buy-in from the users, the whole initiative will be at risk.
Technology has a hugely important part to play in implementation of the reforms, but only after the business benefits have been articulated and agreed. Only then will the LMP reforms have the ability to make London as cost-effective and efficient as any other insurance centre.
Change brings challenges
The downside is that implementing any corporate strategy means change. Not only is it problematic to decide upon and plan change, it is even more difficult to implement it if the organisation has not been used to embracing change. It is an unfortunate fact that when change meets culture, culture will normally win. What is required is a firm belief that these reforms are for the good of the London market as a whole, and of direct benefit to the individual practitioners.
Last year, whilst these plans for reform where well underway, September 11 dealt the market a huge blow. This has changed a number of companies' priorities, with organisational focus moving from corporate strategy to operational activity. What happens next? Ultimately the effects of September 11 must have strengthened the argument for providing greater clarity in operating practice and improved service. But how is this to be achieved?
The market needs to refocus on corporate strategy, revisiting the plans to implement the reforms in place. It needs to ask itself a simple question: why are we in business? The answer lies in the following definition of strategic development: `... the direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a changing environment, to meet the needs of markets and to fulfil stakeholder expectations.' (G Johnson and K Scholes, Exploring Corporate Strategy).
Efficiency is the key to achieving this. To change the workings of the London market is going to be a gradual process. At each stage technology will be ever present, providing a framework for implementation. Alongside LMP, organisations need to put strategies in place to reduce frictional costs and to increase profitability. This is an area where technology can play a more immediate role.
Onus on risk management
The events of September 11 has placed greater emphasis on the importance of risk management as a major discipline within insurance and reinsurance, and provided the impetus for organisations seeking better ways of reporting on their performance and maintaining tighter controls. This can be reduced to two important areas of corporate strategy; understanding the business and understanding risk.
In order for an organisation to increase profitability, it has to have a sound understanding of areas of highest revenue and related costs. Current methods often dictate that a disproportionate amount of time is spent producing management reports and analysis offering this information. Once produced, these reports only provide a snapshot in time, and offer no chance of asking retrospective questions or of building future scenarios. The resolution lies in a more immediate means of business reporting, enabling managers and business analysts to access relevant information online and focus on a particular area of the business, or on the organisation as a whole. Decision support systems such as this are available and address these issues, delivering an easy to use solution for decision-makers.
The next level is to understand risk in more detail and how it relates to monitoring business performance. Any insurance business has to generate cash flow both to cover its internal expense and to buy reinsurance protection. An in-depth understanding of the assets, which represent risks, enables an insurance company to buy this protection in a cost-effective manner. Underwriters regularly employ computer-based techniques to address the complexities of portfolio risk aggregation. Powerful database systems are available that record details of all insurance and reinsurance policies that are current, and that can aggregate risk on the basis of a variety of aspects, such as type and client. These database systems can also aggregate on the basis of geographic location, if suitable data is available. Furthermore, Geographic Information Systems (GIS), in conjunction with these conventional database systems, are used to assess exposure, and potential loss, to a modelled loss scenario. The use of GIS, supported by the necessary aggregation tools feeding deterministic exposure models, could have an immediate effect upon the bottom line performance of the majority of insurance practitioners, enabling them to make better underwriting decisions and more efficient use of reinsurance.
With the insurance world changing around us, the London market is now in the position where it has to fight to keep both its reputation and its revenue. This is what LMP, and individual companies' corporate strategies, attempt to address. We are faced with a changing culture globally, in a more competitive market. Greater competition means that the importance of operating within tighter controls, with tighter margins, maintaining healthy profit and cash flow even through the hard times, is paramount. In this article I have touched briefly on two key and available technologies, aimed at supporting operational activity and saving on frictional costs. Solutions such as these can offer huge cost savings operationally, but they are also flexible and capable of adapting to changing market requirements. The greatest impetus to change is success. Improving financial results reinforce the necessity and desirability of change, helping to create an appropriate organisational culture.
By Lisa Watson
Lisa Watson is marketing manager for ROOM Solutions Ltd. She can be contacted at firstname.lastname@example.org