Alex Letts lists the benefits of peer-to-peer trading for the London market.
There has been a lot of talk, and perhaps not a lot of understanding, about the efforts in London to create peer-to-peer (P2P) trading. What the participants mean by peer-to-peer is not really the point. What they get from it, and how the rest of the market can benefit, is far more important.
At its most pure, P2P trading would envisage each underwriter maintaining a separate electronic bridge into each of its brokers and, therefore, each broker maintaining a separate bridge into each of its markets. This bridge will allow the counterparties to set up an automated process for handing-off notifications to each other's systems at the right moments in the process, with a corresponding data message. This would allow systems to be updated with key information (eg quotation, binding, endorsement, or settlement) automatically and without re-keying. How this is done, whether by each company itself or through RI3K's trading service, is the choice of the companies involved.
RI3K charges per transaction, but not for maintaining a data bridge, whilst bypassing RI3K and going direct throws the onus and cost of maintaining the bridge onto the participants, but obviously avoids RI3K's charges. It all depends on your model – do you outsource this effort or do you resource for it internally, if you can find the specialist web services expertise? All parties are using the same core P2P technologies.
The real question though is not what choice to make, but what the benefits are of this electronic trading breakthrough. The key benefits are around audit trail/compliance and data entry. In the first instance, technology allows electronic risk distribution (as does email) but with the added benefit that there is a series of controls and records of the distribution process.
The second major benefit is data transmission. P2P technologies in carriers, brokers and RI3K are enabling the parties to interchange the key data elements needed for processing risks, endorsements and soon, accounting and settlement. This is the arcane back-office stuff that most underwriters don't see, but it is where much of the cost of doing business lies.
There is still some ground to be covered but Aon has already announced that it intends to trade electronically in 2006. For its markets, this is the beginning of the creation of a slick, auditable, compliant business process with lower back-office costs.