Gary Watts assesses the benefits technology can bring to London market operations.
What benefits can new IT investment bring in the current climate? The focus in London today, in spite of hardening rates and a return to profit at Lloyd's, is very much on improving financial results even further in an increasingly transparent regulatory regime. IT investment in this climate will ideally deliver a 'quick win', but where possible should also contribute to a long-term structural improvement.
Some commentators have suggested that the real opportunity for short-term gain lies in the area of improved underwriting performance. Coverage exclusions are being extended and contract language is under scrutiny everywhere. Placing more sophisticated risk modeling tools on the underwriter's desktop remains a priority for many organisations.
One recently published survey suggests that London market organisations perceive the most benefit for IT spend in 2003 will come in the areas of meeting regulatory challenges and improving service levels to customers.
It is very clear that in the current climate there is almost no interest in speculative solutions, unknown vendors or financially unstable vendors. This year, London market IT spend will certainly be directed partly to decision support/MIS to assist in underwriting quality. There is also a number of IT projects under way or planned for back-office systems consolidation as a result of M&A activity and internal operation or branch streamlining.
These are the most obvious areas for using traditional IT to get a quick win, not least because these types of projects are fairly well understood and use relatively mature technologies, which makes the project less risky and more comfortable. But are there less traditional types of IT project that might provide as much benefit, or perhaps much more benefit, than yet another catastrophe modeling tool or database system?
Beyond the traditional focus
Practitioners are watching the unfolding story of new technology applied to the London trading space in various forms such as Project Blue Mountain (now rebadged Kinnect), the ongoing LMP roll-out, the bedding down of ins-sure, and so forth. Critically, much of the capital for these ventures has come from outside the market, but some of the bigger players including Lloyd's have also put significant resources into a new technological model that goes beyond the traditional focus of IT investment.
There is certainly enough momentum and enough cash in play to show how far the market can really go in the direction of electronic trading, exchanges, market repositories and all the rest. Should individual organisations be doing something in addition to these collective efforts? It would seem likely. Certainly, even smaller organisations should make the effort to understand the risk of being left behind.
Key areas that organisations should explore include streamlining of intermediary channels, developing direct channels with cedants, and making the effort to understand how to use the new b2b and exchange technologies to best effect. The contribution of Business Process Management technology must also be considered as working collaborative commerce models start to become very solid realities.
For example, Kinnect will offer a flexible way of connecting, using your own systems or simply using an internet browser. With long memories in London of expensive in-house interfacing misfortunes such as trying to link to EPS (Electronic Placing System), there will be much sentiment for taking the low-impact option of letting others - whether exchange vendors, systems vendors or trading partners - make the investment in electronic trading technology. But it is likely that the larger practitioners will opt, as usual, to invest significantly in a more bespoke approach, learning how to use the new technology to gain a competitive advantage throughout the channel. Small to medium players should learn more about the true costs of taking the same approach - and should assess the true risks of playing a waiting game.
Will London e-trade?
As the shared e-trading platforms become more dominant, the case for private e-trading capability will simply grow stronger. Already in the US, many of the larger personal and commercial lines carriers insist that brokers take an 'electronic feed' for many kinds of products, effectively requiring the broker to provide an internet hub connecting the underwriter to the policyholder. As carriers and brokers learn to operate like this, they are able to reduce costs and streamline organisations. The range of products handled this way continues to expand in the direction of more complex coverages that were once thought to be too complicated for automation. Is tooling up for this trading model needed in London? Certainly not for all classes of business, but how far will this trend go into the traditional London market space?
Even in markets for which this is not a grimly urgent survival issue, the ability to work comfortably in the new electronic trading space can lay the groundwork for significant process improvement. This is increasingly important, as the issues of service levels, faster turnaround time and accountability gain more prominence.
A related, vital area in which applying a traditional style of IT solution may not have much impact is Business Process Management (BPM). Business models for improved placement, claims and settlement processes have already been developed collectively by the market. These form part of the underlying structure of LMP (London Market Principles) and are widely available for study and discovery. Similar, proprietary process models have been developed by a variety of practitioners to describe internal and collaborative improvements that should, in principle, make a huge impact on costs, service levels and ultimately profitability.
Some of this work has led to improved manual processes. Some of it has been used to populate image/workflow systems to reduce the problem of paper. However, the traditional database systems have remained largely untouched and are still used mainly for recording the results of manual processes - or even, as Lloyd's Chairman Lord Levene complained in April to the Daily Telegraph, for recording the results of processes recorded on disconnected systems: "Down on the trading floor they have all got screens on their desks. What do they do with the screens? They get stuff, they print it out and then they re-key into other things. It's unbelievable."
IT tools are now available to control, monitor and measure the end-to-end progress of a case such as a claim as it passes through various hands and decision points, in a manner integrated directly with the back office data, and also integrated with the new electronic trading technologies and exchanges. Process control can be extended to include a variety of trading partners.
With smart BPM in place, combined with the new internet-based trading models, a well-controlled collaborative commerce business model is possible. For any operation which currently tracks processes manually, BPM can make a tremendous difference for the bulk of treaty business and some facultative business as well, particularly in placement and claims management. How much of this capability is likely to be offered by shared bureaux? In a sophisticated deployment, BPM-driven collaborative commerce offers a huge potential for competitive advantage, and is therefore unlikely to be a shared facility except in the most rudimentary flavour.
The capability speaks directly to the service level improvements that have proven so elusive but that are increasingly demanded not just by the likes of the IUA and Lloyd's but also by providers of capital and the holders of risk. The ability to actively control and manage business processes may also be a key internal management tool in a time of increasing emphasis on putting mechanisms in place to enforce corporate underwriting standards and capacity controls.
The largest firms are already integrating BPM and collaborative commerce technology into their internal operations, for obvious reasons. Smaller organisations owe it to themselves to discover whether they can afford the expense and organisational turbulence of starting down this kind of a path, or the risk of not doing so.
It runs against the mood of the market to look seriously at what many see as cutting edge technology. One piece of good news is that these technology options need not be sourced from ephemeral dot.bomb companies with scarlet balance sheets. Established, solvent IT vendors are able to offer advice and products in these areas.
An interesting remark from Rolf Tolle, new franchise director at Lloyd's, focused on the need to move away from "the virus of top line gross", and to start to think seriously instead about bottom line profits. This is also a mood in the market that must be taken into account.
IT investment will certainly continue to be applied to decision support for underwriters and back office databases - business as usual for the IT manager. But the long-term winners must do more than business as usual, and IT has a real role to play in helping individual organisations make the transition to the new, low-cost, high-service and more transparent marketplace.
By Gary Watts
Gary Watts is Director of Solutions Strategy for Non-Life at Sherwood International.