Global Reinsurance's guests were Mark Birrell, Benfield Greig Interactive; Ian Bullen, director - insurance markets, Sherwood International Group; Paul Chadburn, IT director, CNA Re, London; Doug Chisholm, director insurance industry solutions/marketing for Hewlett Packard; Ian Dilks, chairman-European insurance group, PricewaterhouseCoopers; Ross Gow, public relations and marketing- Sherwood International; Monique Hessing, e-commerce development manager, ERC Frankona, London; Jonathan Ludbrook, managing director Munich Re UK life branch; Pat Newberry, head of insurance consulting, PricewaterhouseCoopers and Vernon Southey, solicitor and consultant to Barlow, Lyde & Gilbert. Global Reinsurance editor Lee Coppack acted as moderator.
Lee Coppack: Would each of you explain briefly your involvement in e-commerce? Monique, may I start with you?
Monique Hessing: I have been working in the City mostly with a background in mergers and acquisitions and in that capacity, I joined General Electric. Last year I joined ERC Frankona and more recently I joined Tim Carroll's (chief executive of ERC Frankona's non-life operations)management team as his e-commerce leader in the UK. Some of you may have heard of ReInsurance On-line (RIO) which we launched in January, so we will be actively, aggressively expanding in this area this year.
Doug Chisholm: I am responsible for Hewlett Packard's insurance industry solutions and marketing worldwide, so our interest here really follows our e-services initiative announcements last year. It is really in the entire infrastructure and support area for electronic commerce and for e-services.
Pat Newberry: I am responsible worldwide for PricewaterhouseCooper's insurance consulting practice, and, of course, my interest is the e-commerce revolution as it is affecting this industry enormously and it is affecting very much what we do with our clients. We, too, are interested in the technical infrastructure but also in business direction, business strategy and the implications for our clients of e-commerce.
Ian Bullen: Sherwood are an IT solutions provider to the global insurance market, and our interest here is to look at the dynamic issues that companies are facing to try and embrace e-commerce in terms of running their business. For the sort of solutions that Sherwood hopes to bring to the market, it is very important in terms of understanding customer needs.
Ian Dilks: I am responsible for PwC's European insurance practice. My responsibility, complementary to Pat's, is the implications of this on our clients more generally and on all of the services they require of the organisation including but not just from the management consultancy.
Ross Gow: I run the PR and marketing for Sherwood. I believe there is a paradigm shift in the way that insurance and reinsurance is being sold and as a solutions provider, so I am keen to discuss and comment on e-business issues which I believe are central to the success of the industry going forward.
Mark Birrell: BGIL. We build and manage trading web sites specialising in the insurance business. We have currently got six sites up and running and trading and in the next 12 months, we anticipate we will launch another 20 trading web sites.
Jonathan Ludbrook: My main responsibility is the life and health reinsurance of Munich Reinsurance here in the UK and Ireland, and in that capacity I agree with the comment that e-commerce threatens to change the nature of our business, so that is my interest. I also have a role on a steering committee within the Munich Re reinsurance group, which is there to manage and to steer the business and IT of the group, so I have a broader perspective on e-commerce.
Paul Chadburn: I have worked in the London market for some 18 years providing systems support to the reinsurance companies Swiss Re and CNA. CNA Re is particularly proactive in utilising EDI in London and America. In the United States, we are pioneering with Brokers Reinsurance Market Association (BRMA) the use of EDI transactions to improve efficiency within the reinsurance industry. We are obviously looking to e-commerce and EDI to provide benefits to clients and savings for the company.
Vernon Southey: I am a corporate and commercial lawyer, and a consultant to Barlow, Lyde and Gilbert. I also have a number of non-executive directorships, including in the insurance industry. As to my involvement in e-commerce, I have been in the City dealing with insurance matters for over 25 years, therefore the role they give me is more of a strategic one. One of the roles is what I might call strategic handholding. It is a two way process - using the business lawyer's perspective to advise clients how to move things forward. When it gets down to the technical and nerdy level, somebody else who really understands these things takes over. The other way is the reverse - trying to help the firm understand what changes are happening and are about to happen and try to predict - which, of course, I cannot possibly do - how the insurance market will change, so the firm can be in a position to offer the right services at the right time.
Lee Coppack: I would like to start by being a little provocative. Do you feel that the wholesale and reinsurance industry has the IT infrastructure of its basic operational processes sufficiently organised that it ought to venture out into electronic trading and e-commerce?
Monique Hessing: I think e-commerce is not an IT driven thing. This is a customer driven, new way of doing business and whichever way we go, we have to be ready to provide our customers with the services and products they require. IT and all the developments on the technology side are really the facilitators to make it work.
Pat Newberry: You can readily see in the world about you - the old world and the new world. A, you do not have time to think about fixing the old world, because customer needs will overtake that. B, it probably sounds like the magic bullet, but it may be the new technology offers some ways of trading and dealing that avoid having to sort some of the problems of the industry of the past. It may be better to try to get to the new world quicker and treat the old world as a legacy problem.
Ian Bullen: The wholesale market is very different to what I call the general insurance or the classic life and pensions market. I sense it will continue to stay a professional market and, therefore, its challenges in embracing either EDI or e-commerce are very different from those who are there to get to a mass customisation market. My belief is that wholesale companies need to work on the service element of this relationship, rather than just the acquisition of business or worrying about brand loyalty which is the thing that clearly affects- the composites, the CGUs, the Royal & Sun Alliances in the general insurance or life and pensions business.
Paul Chadburn: You have to look at what e-commerce is there for. What is its purpose? One is to surely provide service to the client, and you ought to make it as easy as possible for the client. We have all done business on the internet; you go to the site. It is easy to do; it is easy to click on the screen. It takes you through. It is finished, done and out of the way. You have provided a service. The other side is that it is all very well making it nice and easy for the client to give you their business but if you do not pay the claims or the administration side of your processing of their business on time, they might come to you for a first time on a piece of new business, but they surely will not renew with you. We are still in a market where you do have relationships with clients, insurer, reinsurer and broker. We have the ups and downs of the whole market. It goes in cycles; you bank the money when you do not have the claim to safeguard the rate when you do. How e-commerce will affect that, is a very difficult question.
Mark Birrell: With these trading sites, you have the ability to build sites which can function and acquire business but you have got to be able to produce statements, run claims services, all that back office work as well. Separate trading sites is what we specialise in, but if you have them separate from your system which creates the speed of service and all the requirements of your customers, you can still run the systems that you have in place. I think that is where you have to differentiate. You do have the ability to create specialist products, increase the business and service the business in a much more productive manner.
Ian Bullen: Isn't it one of the great worries about this whole revolution that there is actually no one single magic bullet that is going to fix the problems? It is a whole array of complex problems, and managing legacy systems is going to be the biggest challenge as you go into this brave new world. The issue is how do you get business process improvement that comes out of that.
Mark Birrell: Do you not see that as an internal problem? That is a separate issue to creating sites to improve your distribution.
Ian Bullen: Like most companies, 90% of problems are internal rather than external.
Monique Hessing: You must not let the way you handle your dealings with your customers be driven by your internal legacy systems, because what is our answer going to be when we get a new player in the market - Reinsurance.com - that starts from scratch? Then we get to the relationship point - are relationships going to continue to be as important as they are for this business going forward? Will our business be able to sustain a new player coming in with absolutely no relationships? If the answer is yes, then we just have to sort out the whole legacy problem if we want to survive in this market.
Jonathan Ludbrook: There are two points there, aren't there. One is relationships; the other is legacy. One of the changes for e-commerce is that it significantly reduces the barrier to entry for Reinsurance.com. The other side is that it significantly increases the barrier to exit for existing players. It could very much change the nature, the landscape of the business. If I can have electronic commerce and build relationships quickly, which I think are important, I could be a winner. The legacy you almost have to write off. That is a cost. Capitalise it. Forget it.
Vernon Southey: Bernard Levin wrote about the “altered stance” in The Times about 15 years back, when he said that the moment you change either yourself or something else, you are altering the stance and attitude you take towards it. That in itself creates a new perspective and a new dynamic for change. What we have at the moment in the reinsurance market is a very complex market in terms of its documentation, its relationships and such fundamental issues as solvency, financial ability, financial stability. All these are far from transparent, no matter how many financial figures get projected.There always has been a possibility of entry, but at a potentially very high cost. If I remember when the Japanese came to the London reinsurance market in droves a few years back, they went back very badly burned. I am not sure that e-commerce, per se, is going to make entry any more easy, but it is going to oblige people to re-engineer their processes. What is opaque and obscure will become more clear. I think we are going to be forced to use more standard forms of wording, more standard forms of doing business, simply because doing it electronically requires a discipline that you do not have. Once people start to standardise the way they do business, that creates an altered stance and there will a different dynamic, a different requirement for the type of reinsurance one needs. It is too simplistic to say it just depends on relationships. The reason you need relationships is partly because the thing is so damned complicated. If you do not get on together, you cannot have an operating business. If it becomes more transparent and more obvious, other practice will change out there. This will be inter-acting with ART, and if people can find the equivalent of a reinsurance solution through a relatively simplistic ART instrument, which does lend itself very readily to e-commerce transactions - Lehman Brothers are selling an earthquake derivative - it is going to change. It is going to change everything.
Ian Dilks: Two things. One, we are talking about a market and the efficiency of the market depends on the transparency of information. It seems to me one of the things that e-commerce does - even if only incrementally at the margins - is to make information much more readily available, and it can have quite a significant impact on the rest of the market. In the retail sector, for example, people may not be buying a lot online, but they can rapidly get price information on line, and that is having a significant impact on the price of the 95% of things still selling in the shops.I do not see why some of that cannot apply in this market. I know they are not bog standard, high volume products but, nevertheless, it does seem to me that greater transparency even at the margin has potentially a significant impact. Point two is the danger of getting too hung up on saying what is all of this going to do for our existing ways of working. What extent does this give us opportunities to change the business model? Do you have to have the same sort of provider? Do you have to have the same sort of intermediary relationship? We probably see this more in the US rather than here, but quite a good example is LendingTree which just alters the balance between the providers and the buyers of the loans. It has changed the dynamics of the loan market.I do not know whether it is going to happen in this market, but it would be a brave man to say that it definitely will not. If Lehman Brothers or another bank, for example, wants to offer some sort of syndicated look-alike catastrophe exposure for earthquakes, and you can buy into that on a real time basis from anywhere in the world, why would you need to place that in a traditional market in a physical location? Those sorts of things are going to be possible, and we know people are looking at them.
Doug Chisholm: What we are seeing in the US are quite a few of what I would call exchange type environments which are offering quotation and referral services. Most of them are finding out, however, that this does not put bread on the table. There are some real limitations on revenue generation which are driving those types of models further toward an agency or licence model. So we are seeing some interesting entry points and some shifts in the way some of these exchanges type environments are operating. Clearly, things in the consumer market like e-Bay represent a very interesting twist on what would amount to a reverse auction of commodity type insurance. Does that mean to say that can be applied in the global reinsurance market? No, not necessarily. But certainly there are concepts there which can be dragged across and applied in a rules based environment fairly readily. I think you are seeing entry points at different levels and you are seeing those entry models modified and morphing literally on a week to week, month to month basis.
Mark Birrell: Do you not think one of the problems for panel underwriters in the US is that they are just offering quotes which are then fed into traditional systems? Why are they not offering a broader service?
Doug Chisholm: Part of the fascination with e-commerce initially is really how to sell and distribute. The real issues, when you get beyond that initial distribution, are service oriented. The global reinsurance market is the first element of the insurance industry that is truly global. Right there, you have got some advantages in being able to employ an e-commerce strategy that you do not necessarily have in some of the non-global aspects of insurance. But at the end of the day, service is where there will be, in the e-commerce model, some silver bullets where you can really improve service and reduce cost at the same time. A lot of what is happening with these new business models that we have seen emerge over the last three or four years in the US has been a kind of search for identity and then a move toward models that are ultimately going to provide the service and the value-added, because at the end of the day if you are not adding value, you will not be there in two, three years.
Pat Newberry: I think there is a risk in trying to apply a “one model fits all” approach. The whole point about the new technology is that it allows you to have much greater diversity. I could see happen here at least one division of this market of commodity business- quite straightforward reinsurance covers that could just go through a standardised mechanism and it is hard to see how anybody adds much value in that - versus the much more complicated covers which would be ...
Ian Bullen: Coming from the position of someone who tries to build solutions for this market, we find it ultimately a very complex process. Building the best mousetrap in the world is not easy, because it changes; it gets changed by regulation, by business behaviour. That is a transition process. People have got to prove it will work.
Jonathan Ludbrook: You have complexity and if you look at technology, wherever it has been applied, it gives diversity. Think of buying a car now. Initially, it was one colour, one model. Now you can have your car built in how many permutations? So there will be many different models. Technology will support the different models, different solutions. Another point - Vernon's point - there will be transparency and together with competition, that will drive the best routes to ultimate customer value. If there is inefficiency in the models, they will be driven out. I just wonder about the value of relationships when you are faced with speed, 24/7 service and low cost. You start from there and put in the relationships. I worry if we think we can maintain our businesses by our relationships without a lot of else.
Ian Bullen: You cannot say: We are here today; therefore, we are comfortable and we are going to carry on being comfortable. In any business, you cannot do that. In some ways the paradigm shift created by Peter Wood that got Direct Line going changed the nature of the industry.
Paul Chadburn: When this industry tried to implement electronic placing, we tried to do one size fits all. It completely failed. What e-commerce now provides is the flexibility for individual companies to bring niche products to the market, to the public, to the client, so much more easily. If we want to put a particular med-mal product out there, we could have a web site that has just got that product on it. If it fits the client and you get your marketing to that client and say: come and look at my web site, you have got your captive audience.
Ian Dilks: We are beginning to talk about a kind of customer relationship management. It is getting to understand your customer so far as getting under their skin.
Paul Chadburn: Of course, now you do not just have the London market. You have the world.
Vernon Southey: I never suggested that standardisation would simply be the development of a single solution for multiple problems. On the contrary. What I was trying to say was that this process will eliminate diversification which is unnecessary and wasteful, because the process is designed for efficiency. Any diversification which serves no useful purpose will go. The diversification which will emerge out of that will be the focused diversification, the pinpoint diversification, all on a common base.
At the moment, one of your great problems doing reinsurance business is that there are a lot of different ways of doing things which serve no useful purpose other than you have always done it that way. That, I think, is the bit that is going to go. Once you get a common base, it is going to be so much easier for the customer to be able to identify that this is a product which is, indeed, right for his needs. That is the other problem with reinsurance. When the customer buys it, he is not absolutely certain whether it is what he wants.
Paul Chadburn: Your customer can be your ultimate client or, obviously, the broker as we are in a broking market. Gradually, you are assisting the broker because he does not have to traipse around with the risk. He can go around the web site and say: CNA Re can offer my client this type of reinsurance.
Monique Hessing: That means the broker will become more of an aggregator than a transactor of business, because the insurer can go direct. It will change the broker to more of a risk management solutions provider and, presumably, they will charge a fee for putting a portfolio together.
Paul Chadburn: If all these insurance and reinsurance companies have all got their web sites and they are all offering different products on it, you are going to find that there is too much choice. How do I know which site to go to? Therefore, I think brokers will act as a facilitator and say: Well, I know the sites to go to.
Jonathan Ludbrook: I think you just build another site to navigate around the other sites.
Ross Gow: I do not think the broker can charge 10% for doing that.
Lee Coppack: How will greater transparency and greater standardisation affect underwriting? Presumably, at the moment a lot of pricing is done with incomplete information.
Jonathan Ludbrook: We have spoken about the front office. There are lots of opportunities at the back office and if we have better back office, I think we could underwrite better. We would know more about the risk. We would have better prices. So there are two opportunities.
Mark Birrell: Using the front end, you are getting immediate information coming in, and you can actually react immediately to it. You do not actually need your back end to look at that, since you have got the information there. You can do what you want with it.
Vernon Southey: What the system gives you is that it traps the information.
Mark Birrell: That is what the system gives you. You have not got third parties bringing it and taking six months. You are seeing it immediately.
Jonathan Ludbrook: Provided you assemble the data and you are analysing it properly, which is no small feat.
Pat Newberry: Isn't the likely technical model that you will have your own analytical engine, system or whatever but the data sits out there in a common repository, so that if I am offering a risk in the market, I stick it up there. The data is available to all. The point of advantage to one insurer against another or one reinsurer against another is the way the they analyse that information. At a stroke, you have got - if not perfect information - at least vastly improved quality of information.
Paul Chadburn: You can have improved systems that allow the underwriter to take all this information which allows him to get improved rating using actuarial projections and so forth, but the client does not deliver the information. Maybe it is in a whacking great file that the broker brings round to the underwriter and says: what do you want to know and I can tell you. If we are saying now we can transact through e-commerce, then the original client has actually got to get himself in gear to make sure all that information is available electronically.
Ian Bullen: That is really one of the crux issues. How do you turn this thing into what I call a self-service environment? How do you say to the individual: Please be more disciplined about how you get the information to me, because that is going to enable me to remove some of my cost.
Vernon Southey: The other beauty is look at the way you can package things electronically. Once he has given you that information, he has given it. He need never repeat it.
Ian Bullen: Provided you have the systems that back up and support. Vernon Southey: You have to get your systems right. They are going to be many turns. Many things are going to go wrong, and many things will not work, but the underlying trend will be the development of a system whereby, pretty soon, the direct insurer will be taking information in a way which is programmed to enable him to pass that information on to his reinsurers in the way that they want it, without the need for a complete army of people intervening and recreating the data.
Jonathan Ludbrook: Interestingly, we have taken a different position. We have been collecting data electronically for well over five years. We take what there is, which is usually adequate but in 57 varieties, and then we build a funnel to make it into the data set that we require. It is incredibly effective in terms of cost. We have enormous amounts of data, but when you come to understand the risk, the question is: What would you like to do? It is a question of simply writing the programmes and understanding the data sets.
That really changes the game. There is an example in our company. If we had had a better back office, we would not have lost so much money, for example, on disability business. We would have known what was happening. We would have predicted better. It was simply that we were looking backwards and could not identify trends. It was an expensive lesson. It is cheaper to build the system.
Doug Chisholm: If you simply look at the major facets of the insurance industry and compare them to the major facets of banking, and you look at the software complexity that is required, the insurance industry is three to five times as complex as the banking industry, even though the banking industry has a dynamic which is best described as: If I want my money now, that means right now. In insurance, it is: Would it be all right if I pay your claim next Monday? Answer: Yes, that will be fine.
Paul Chadburn: Shouldn't we as the London market be proactive and say to a body: Why not create a piece of freeware, Adobe viewer or a London market Adobe or something that does actually give the flexibility for standardised data for every particular type of risk. It might need with the flexibility to attach five, six, seven, eight different formats, but at least then you are working with eight, rather than 57. Therefore, we would be able to create efficiencies through the back office because you could take that data and update your systems automatically. You do not want to rekey it. You go down the EDIFACT, the messages route. It is such an unwieldy beast that it takes so long to implement, that by the time you have got there, the whole market has changed anyway.
Ian Bullen: How many EDI initiatives have there been in the London market over the last 15 years? Which one of them is now the standard? If you look at the banking sector, to come back to Doug's point, who disputes that Swift is clearly the standard for payments at international level? The insurance industry has not embraced those things.
Jonathan Ludbrook: What in your view, Doug, is the reason why banking is relatively simple versus insurance?
Doug Chisholm: I do not want to exaggerate and say it is simple. It is less complex. There are basically two different kinds of banking: commercial and retail. You have that within insurance but at the same time, you have many different segments within the industry with all very different servicing and distribution requirements. So you look at general insurance, property/casualty, and life and pensions in a slightly different way. The processing requirements are different for each.
Vernon Southey: Do you think it inherently more complex or a cultural thing? It is quite interesting to look at the banking world. They are used to creating syndicated loans and all that sort of thing, which require people to behave in a pre-agreed way, to accept a set of rules. The insurance market does not. The SWOP dealers created the ISDA form. It is a terrible form; nonetheless, it is a standard form. All derivatives are basically traded on the strength of the ISDA form. You could not get the insurance industry to do that.
Lee Coppack: Why have we not seen insurance risk trading really taking off?
Mark Birrell: A lot of that is of it down to the insurance industry having been very slow to use the internet as a means of e-commerce.
Monique Hessing: They are not willing to attack the traditional ways of doing business. Perhaps also it is not having enough senior support in the companies to drive something like this forward. Maybe the clients are not ready yet, but what happens if they are and we cannot deliver, regardless of the legacy systems?
Mark Birrell: It is noticeable how much trading on the internet is beginning to move, certainly in the UK. I know the US is probably two years ahead of us, but in the last six months, especially with Freeserve and all that sort of thing, you have seen a lot of excitement about the internet and buying goods generally. I think insurance will be right at the back of that. You will see it becoming much more of the norm.
Jonathan Ludbrook: You can now trade weather derivatives on the internet but not many people are. One reason is price. It is still cheaper to buy reinsurance cover. But is there more to it than that?
Mark Birrell: A lot of people are frightened as well of buying over the internet.
Vernon Southey: It might be something to do with the important position of the broker in the insurance world, because there is nothing particularly to attract the broker to try to persuade his client to go and buy direct on the internet.
Mark Birrell: But there is still a role for him. The brokers actually use a lot of what is out there on the positive side. They can actually run their business much more profitably because the claims functions and back office functions can be taken out of their control. They just put it on the net and their profit margins increase substantially.
Vernon Southey: Logically, yes. But it is the individual whose job is threatened by the change. There is a role for a broker but not a role for him. He will resist it.
Lee Coppack: But should you be looking at insurance or should you be looking at risk?
Monique Hessing: Could you supply insurance as capital market products and move into that whole area? Why not?
Pat Newberry: If you look at the banking parallel, again in the US, I think the banks have moved into procurement as well as financing and are looking to create these vertical communities. They provide the financing; they provide the procurement capability; they effectively move into the supply chain and seek that way to lock out anybody else from dealing with that defined group of customers. I cannot quite think of the immediate parallel with this industry, but I am sure somebody out there is thinking about it and if we thought about it, we would probably come up with some sort of way to do it.
Mark Birrell: With the internet you have the ability to create entry points with a huge range of products being offered. You only have to look at Freeserve in this country.
Ian Bullen: Some of the big manufacturers, for example companies like Ford, could shift the nature of the relationship with their counter-parties, their suppliers or whatever, by having not one system which may or may not speak to another, but integrating things so that the supplier knows or is expected to know exactly when something has run down and adjust his production schedules accordingly. At the moment, people in the market say: We take some information, we add it up quarterly and it is in a non-standard format. Why quarterly? For a larger company which has placed a particular cover, why would it not be possible every time a risk was covered by a fac or went onto a treaty, for it just go to straight through, because you are talking about common systems.
At that stage, there are all sorts of implications for the role of the intermediary. Also, as you say, the lock out. Once you have formed that sort of relationship, if it is working, there is a cost to move to somebody else. You have to work on the presumption that somebody is going to find not just a way of improving the way we do things now but just doing it very differently.
Monique Hessing: You see from the front page of the Financial Times today that Unilever is redefining its whole supply chain management, closing down hundreds of factories. Look at what they are doing. If they can do it, why do we sit around a table saying: Well, you know, it may be difficult. We may move slowly. The truth and reality is we had better move with it.
Ian Bullen: I think that is actually quite harsh. Look at the emergence into the insurance space in the last four or five years: the Marks & Spencers, Virgins, Quickfits. These companies have broken into brand new markets. JC Penney did it in the US, built up a customer base of 11 million customers in the space of two years. There has been a dramatic change in terms of the way this market has addressed particularly the consumer end. The business-to-business environment, the wholesale market, has not embraced it in totality. I think it is still finding the way in which it needs to do it. The challenges facing the wholesale market are different. They cannot find a magic formula which says: I really do not need bricks and mortar. I can set up a virtual insurance company in five minutes.
Vernon Southey: I am not sure the FSA will give you a licence but you can do it somewhere else.
Pat Newberry: The examples you cited were not insurance companies.Jonathan Ludbrook: Prudential is maybe the exception with Egg.
Ian Bullen: You could go to Zurich, for example, in the US. They have set up a hurricane insurance business in a joint venture with other companies. I think you will find that many of these initiatives come out of insurance companies. They have not been as blinkered as that. Maybe it is a lot easier if you come along as a new entrant so you do not have to say: I have 50,000 people working for me. I am going to agency network.
Vernon Southey: The chap with the clean sheet has a distinct advantage.
Ian Bullen: Absolutely, because capital is available.
Lee Coppack: Doug, how do these developments fit in with the regulatory picture in the US where insurance regulation is more structured than it is here?
Doug Chisholm: The adoption rate of the internet technology is running ahead of just about any technology that we have seen over the last 30 years. Probably the last really big one was work flow and image processing. It took 10-11 years for that area of technology to become commonly accepted in the industry. The internet adoption rate is probably three times that speed.
The speed of adoption is going to push the regulatory side, along with at least two other factors, one being the number of insurance companies that are getting into banking. At least 25 companies I know of in the US have banking or thrift licences already granted, and there are two more pages of companies that have licences in application phase. Most of them are looking at the banking side of financial services as a way of deepening the relationships with existing customers, not as a vehicle to expand the number of customers.
That process is going to test another area of the regulatory side, because you really have now an insurance company offering a virtual bank, and these are not small companies doing this. These are the major players. You have already seen Citicorp and Travelers merge into Citigroup. The legislative issues have been fairly well tidied up on that in the last few months. Indications are we could see one or two more of those in the next year or so. So I think the electronification of a market in a broad sense is much faster than previous technology adoption curves, and secondly because of that, it is pushing the regulatory envelope and a number of the other business model envelopes.
The third factor is that the insurance industry today, if you compare it to banking and brokerage, has the highest transaction costs of any industry. They are not one or two times higher but like complexity, they are four, five or even ten times higher in some cases. So what you are likely to see over the next five to seven years is a compression in this great spread of pricing due to the internet comparative shopping. I think it will take longer to get there, but ultimately it will impact the wholesale market as well.
If you are looking at all those factors, then you have to get to the end of it, which says: To really be a viable player across the range of financial services, the insurance industry has to take cost out of that transaction equation, improve its back office, improve what is called straight through processing or EDI which has been coming to insurance for 30 years. I can look back at 1969 when it was: EDI is coming! We are into our fourth decade later and we are still not there. Out of all those things you are going to see faster adoption, the customers driving the industry and the industry pushing the regulatory side, particularly in the US where we have 50 state insurance commissioners functioning almost like separate countries. The functions there are going to be consolidated, and the internet is going to be a vehicle because of its rapid and widespread acceptance.
Five years from now in the consumer insurance area, even in commercial insurance, stopping one step short of the wholesale market, you are going to see price become a relatively small issue, I think. The far greater issue will be: How do you deliver service? Is your service world class? That will become the differentiator that really speaks to the client, whether it is the consumer or another business. Everybody has focused or almost fixated on how to sell stuff on the net. We are still at the beginning stage of the service side. That will drive a lot of those other pieces.
Monique Hessing: It changes the whole branding discussion. If you are a new player and you can deliver, that is all it takes.
Pat Newberry: If you look at other industrial models, service will become academic as well and then brand will be the final point of competition. We will go through pricing, then everyone will compete on service which will reach the same level and finally brand will be the determining factor.
Mark Birrell: I agree with Doug on the service issue. When I first got involved, I got very excited seeing premiums coming out at the press of a button. Now, it is what you can bring to the table on claims side which I think is much more important. Going back to the beginning looking at US personal lines trading systems, the problem there is that they have not got the service. They are just the placing bit, and that is why they are finding life quite tough at the moment.
Jonathan Ludbrook: As you move into the softer factors, you must remember that all the harder factors have to be right. You are never going to win on a nice brand if the price is too high. I think what the internet has is not so much price but availability. It has availability; it has lousy quality, and the price is probably okay. You need to get those other two pieces but anybody who does will be the winner.
Paul Chadburn: If we are looking at the London market and asking what the London market can provide, wouldn't it be great if a client anywhere in the world who has given business to the London market could go into a London market site, find his risk and say: Where are all my claims? Who is currently holding up paying those claims?. When I come to renew, I will use this information to determine who I actually give my business to. The other thing is: What is the state of my account? Has that broker really held onto all that money for so long?
You are offering a service to that person, saying if he comes to the London market, he can see what is going on with his claim at any point in time. Has the broker passed it on or is it sitting with ABC insurance or reinsurance company? Those are the service issues that the London market should be looking at.
Lee Coppack: May I conclude by going around the table again. I was going to ask what you thought things will look like in two to three years. Is someone going to start Reinsurance.com? Paul?
Paul Chadburn: I think it is down to information. What is coming out in the industry particularly now is the greater use of actuaries in creating the correct rate for the business and the risk that is being offered. For that, reinsurers are asking for more information; that has to come from the cedants and the originating clients. Reinsurance.com may be able to write certain classes of facultative business, for instance, because if you are insuring an aircraft or a factory, there are certain rates that apply to that. But if you are looking at complicated products, then I think you need the information.
Jonathan Ludbrook: The answer is.. it depends. It depends on the level of transparency and of competition. Those are the two big variables and if we had the rest of the afternoon, we could take those apart. I think there will be many solutions, many failures. We said that already. I do not really see e-commerce having a very big impact in two years but it will be there and it will be growing.
Mark Birrell: Three years time? Reinsurance.com is probably a bit broad, but from what we have seen probably 70% of classes in commercial insurance business can be traded with niche web sites. I see no reason for them not to be traded in that format which gives better distribution. Underwriters get real time information, and the customer and/or broker using the system receives a quality service.
Ross Gow: The pressure is really on to have access to quality data, readily available to allow underwriters, particularly, to transact business more effectively. With brokers, I see the problem being the value-added. Where do they add value with the competition coming from people like CATEX, the Chicago Board of Trade (CBOT)? In two or three years time, e-commerce will play an important role, but certainly in the London market, for the really complex risks, the catastrophe risks, the hundreds of millions of dollar risks, there will still need to be a relationship between a broker and an underwriter. But service, claims management, the endorsement activities, that has to go electronic.
Ian Dilks: One of the things likely to happen is that the nature of the relationships between the trading parties will change, and new trading parties will come into the equation. At the very simplest level, if you are writing disability business, part of the problem is that you get told long after the event. In future, why not have the information direct from the company? As the problem arises, you have that real time information. It seems to me that there is a degree of disintermediation possible or else the nature of the relationship will change.
As far as the new parties are concerned, the whole financial services industry globally is hopelessly over-capitalised. It is out of favour. Something has to come and make that capital work, and I cannot believe, just take an example, that the investment banks are not going to push further into trying to find a way of analysing, identifying and transporting risk in a different way than we do at the moment. Technology provides them with an opportunity to do that and historically, they have been a bit constrained by the need to tie up with a reinsurer or go through a broker or whatever. It seems to me that there is now an opportunity both to identify price and transport risk rather more effectively between different parties compared to what we have seen in the past.
Ian Bullen: Clearly, it will have an impact. It is already having an impact by the fact we have sessions like this to talk about it. The thing we should not underestimate is that companies are doing it. Maybe it is not branded e-commerce, but they are doing these sort of activities about improving customer relations, improving self-service. It will not happen as a market wide event. It will happen because some organisation is brave enough to take us through to the next plateau and try things in a very different way. It is happening now really, but there is not going to be one single event that makes it occur.
Pat Newberry: Within two to three years, technology will change the way we do what we do today. That is the most likely outcome, but I would not under-estimate how fundamental that could be. The point that was made about disclosure could radically shake out this market. What will happen in three to five years, which is when I think you will see these other providers of capital come in, is a fascinating prospect. If we dream a little and say that insurance is capital to cover somebody's risk, I do not think it will be just the big investment banks, but it will also be the major multi-national corporations who have surplus capital and who are bigger than most of their insurers anyway. They may well say: Why don't we form some sort of internet based mutual between ourselves?
Lee Coppack: They could start trading risk.
Pat Newberry: ...and start trading risk.
Doug Chisholm: I think in terms of the securitisation of insurance risks, packaging, bundling and selling them in secondary markets, the internet is going to allow that to happen. It will almost circularly suggest that as an outcome within a five year period. Look at how trade unions in the US today are approaching labour contracts in which they say: For each of our members, we would like to see management provide a pc for their own use. That is an indicator of just how basic that whole process is going to get. If we extend that one step at a time, it is not too hard to carry it into the securitisation of risk, be it reinsurance or possibly even other unique risks not necessarily of a reinsurance nature.
The fact that you are talking about business-to-business as opposed to business to consumer does not alter the issues of change one iota. It will simply be a question of who builds the better mouse trap sooner as to which model is dominant. That will apply to the wholesale market just as much as it will to any of the other markets. The supply chain has already been radically changed in the manufacturing area. As those changes sweep through, they will push on into the areas we are talking about today. I do not think it is a question of if; it is only a question of when and I will be bold and say within three years, we will definitely see the seeds of that growing. Within five years, we will see probably several successful models competing around that area of business.
Monique Hessing: I think it will change much faster than we think, because we are an industry at risk. We have such enormous inefficiencies in the process that we currently have with a lot of paperwork coming to our company and that paperwork changing hands several times. Lots of extra copies are made. By the time it reaches claims or technical accounts departments, from the reinsurance perspective, it has gone very slowly. It is inefficient, so that whole process can be easily be attacked. Combine that with the greater transparency of the market when people will come with standardised e-commerce products. Customers can see the price. Customers can see how long the broker is sitting on the money before it actually reaches its target. That will be the other push for us to change. If anybody new coming in sees an industry that is not changing its inefficiencies and the processes that it uses today, it puts our industry at great risk.
Lee Coppack is the editor of Global Reinsurance. E-mail: firstname.lastname@example.org.