The future of Lloyd’s depends on the skill with which it deploys technology. Stephen Breen reports from the Xchanging conference in Brighton, UK.

As the reinsurance industry fights to understand how it will be affected by the global financial crisis, Lloyd’s has been challenged to start from scratch and rethink its business model so that it can cope with the rapidly changing financial landscape of the future.

Sue Langley, Lloyd’s director of market operations and North America, threw down a challenge to the market at the Xchanging conference in Brighton, UK, at the beginning of November. She said that while Lloyd’s had made “fantastic progress” in the past year in moving away from paper towards electronic claims files, there was no room for complacency, and London had to take a fundamental look at how it was structured if it was to maintain its market share and attract new business.

The Xchanging electronic market platform initiative was formed jointly by Lloyd’s, the international IT and outsourcing service, Xchanging, and the International Underwriting Association (IUA) in 2001. It is split into two co-owned companies – Xchanging Ins-Sure Services and the Xchanging Claims Service – which are responsible for lead adjusting, claims management, claims review, recoveries, broker services, claims processing, outsourcing, business process services and IT infrastructure.

As befits a conference dedicated to internet-based business, there were no paper handouts, notebooks or pens at the Xchanging conference. Delegates were given electronic pads at their tables which allowed them to post questions to speakers, and the Xchanging team were also able to poll the audience to gauge the mood of the industry.

Over two days at Brighton’s Grand Hotel, a number of key themes emerged: there has been good progress in the past 12 months towards electronic claims, but there is still a hardcore minority in the market resistant to change; outsourcing will become increasing popular as the credit crunch bites deeper; Lloyd’s is well-positioned to win new business because subscription markets are looking popular in times of global market uncertainty; pressure from regulators for insurers and reinsurers to diversify is driving business to Lloyd’s; underwriting profitability will be key in the years ahead; and a belief that reinsurance markets will harden in January.

Langley said that electronic claims at Lloyd’s had soared from 14.4% in April last year to 90% in November this year, representing 14,000 transactions per month. “If you would have told me (last year) we would be hitting some of these figures, I would not have believed you,” she said.

A poll among delegates found 75% thought the market would look different next year, but only 5% thought it would be fully electronic. When asked if the market really is committed to change, 66% said yes, but, significantly, 34% said no. In addition, only 40% of the audience said it thought Lloyd’s was doing enough to drive market reform.

Xchanging chief executive David Andrews noted: “It marks a hard road. Last year 50% [thought the market was committed to reform]. That represents a lot more hard work. I would have expected well over 80% to be committed to change in the broadest sense. There is quite a lot more to do.”

Some 95% of Lloyd’s business comes through brokers, but Langley warned that this cost base and commission model is coming under increased regulatory scrutiny in the post-Spitzer environment. On the heels of the Aon-Benfield merger, there would be further consolidation, she predicted, and a trend towards an incentivisation model for global brokers because of the need to bring costs down.

Stressing the importance of a fundamental reform of Lloyd’s to meet future needs, she said: “We have made great progress and we can continue to do that, or we can take a step forward and reinvent it. If we wait until a crisis, it is too late. We have got to start to position now to change the model.

“The world is changing and we can’t afford to be complacent. We have to take a risk. We need to take a step back and think about it and get emotional buy-in from everyone.” While electronic claims filing had been success and Lloyd’s had changed, “we’re not thinking about tomorrow and five years from now. If we were to start the industry from scratch, how would we do it?”

In his keynote speech reviewing change in Lloyd’s, David Andrews claimed “without a shadow of a doubt, the London insurance market has moved from laggard to leader with its enviable standard electronic platform available to the whole insurance market”.

The London market electronic central repository – using ACORD global electronic interface standards – was adding 20,000 documents daily, had more than 5,000 repository users and more than 100 million hits.

Failed attempts by market forces to reform Lloyd’s are nothing new, he said. “Leaving it to market forces and competition has increased counter-party risk and hence contributed to the crisis faced today. In an electronic world with many participants, the key lesson to be learned is that you need a standard shared infrastructure that is efficiently managed,” he added.

He said the London solution – a partnership combining Xchanging’s technological expertise with strategic control from Lloyd’s, buy-in from the IUA and active participation from all the market players from brokers through to underwriters and loss adjusters – was “a model for future market infrastructures. This hard-won success gives London the lead in the rapidly changing financial world of increased transparency, co-operation and reliable market-wide consolidated infrastructures”.

Taking an overview of the global financial crisis and how it would affect insurance and reinsurance, Sir Maurie Magnus, the non-executive chair of Xchanging Ins-Sure and vice chair of Lexicon Partners, said there had been a “mind-boggling” loss of share value in companies worldwide – $1.4 trillion in the UK alone.

He said the demise of AIG, the pound’s fall in value, and Hiscox increasing its capacity at its Lloyd’s syndicate “has to be good news, so rates will go up”. In the next five years, he predicts a blurring of the demarcation lines of distribution as brokers try to become service providers rather than intermediaries, and he believes there will be mergers between Lloyd’s brokers and underwriters. As reinsurance becomes increasingly global, he believes there is scope for mergers to achieve savings.

Henry Keeling, the former executive vice-president of XL Capital, said the insurance industry was still over-capitalised – to the tune of $50 billion according to one estimate – and underwriting results were at historic good levels.

But he warned: “Underwriting profitability will increasingly have to be king. With investment income unreliable and under pressure, management, boards of directors and the ratings agencies will be very, very focussed on that, so I think there will be even less appetite, less elasticity for under-priced risk than people had earlier in the year.” Although it had proved to be a sound a reliable capital tool, reinsurance had been in relative decline for the past 15 years. Increasing consolidation was reducing reinsurers’ flexibility, and clients were getting better at knowing and assessing their own risk, forcing some insurers to increase their share in the primary markets. He predicts Bermuda will not be the “immediate natural home” for new reinsurers when the next round of capital-raising begins because of increased competition. London, Lloyd’s in particular, had confounded many people’s expectations by becoming a more robust and vibrant market.

“There are many factors that London needs to improve, but it has become an attractive venue for new business or existing businesses that want to diversify their product base and distribution,” he concluded.

Stephen Breen is a freelance journalist.