The London Market’s progress toward electronic reform can best be described as fragmented. But is this the year the London Market finally gets it all together, digitally, asks Lynley Oram.
Electronic trading in the global reinsurance market is here. Or it will be later this year.
Actually, it’s a few years off yet. And anyway, it simply won’t happen happen; the reinsurance market is too conservative and complex for its deals to be handled by software and the internet.
Ask any number of insurers their thoughts on the progress of electronic trading in insurance and reinsurance and you’ll get these conflicting answers.
To confuse the matter further each is, in its own way, correct.
E-trading platforms have been available for a couple of years, but data messaging hubs that can embrace a whole market are expected to reform the entire industry. Even the most enthusiastic, however, are unsure as to whether they will succeed straight away.
A desire to increase efficiency, lower costs, and trade internationally is at the heart of the current industry reform, led by organisations such as the Market Reform Group (MRG), and the International Underwriting Association (IUA). But their zeal is countered by a conservative 300-year-old industry – one still affected by the £75m failure of Lloyd’s Kinnect three years ago.
Jeff Ward, business development director at London Market reform technology specialist TriSystems, says other financial markets have made a much earlier move to e-trading because they are trading simpler commodities.
“International banking, for example, isn’t one tenth as complex as insurance risk,” he says.
“Renewing a risk is the simplest transaction [in this market]. But you still need a broker to sit down with the underwriter to explain what is going on.”
Ward believes electronic trading will eliminate the paperwork, but not the face-to-face element of transactions. “Underwriters will ‘click’, rather than stamp a bit of paper. Electronic trading will allow us to synchronise the systems of everyone in the market, something we’ve not done before.”
Alex Letts, CEO of RI3K, the paperless trading service for the (re)insurance industry, believes that “what happens in London will set the tone for the rest of the world”. Stewart McCulloch, head of insurance at Xchanging, the business processing company, agrees. “The hub infrastructure of London is relatively unique. E-trading still has a way to go but it is ahead of rest of world.”
McCulloch also sees the ”electronification” of the market as a huge advance in cost and risk management “Somebody handling a claim can publish it in the market place. [E-trading] creates more transparency.”
It also reduces transcribing errors. Mistakes can be made when information is manually typed in – which means underwriters don’t necessarily have the same electronic data as the brokers. Data that is immediately synchronised electronically eliminates the need for a conciliation process.
At present, the mass of data exchanged in reinsurance transactions – McCulloch estimates about 95% for accounting and settlement – is moved through email messages. E-trading platforms have been used more and more in the past few years. Described by Letts as a sort of “e-bay for reinsurance” these platforms are typically proprietary software hosted on the vendor’s own systems. Letts’s company, RI3K, as well as Trisystems and US company eReinsurance are among the players competing to provide Lloyd’s insurers and brokers with operating systems that will allow them to use the Lloyd’s Exchange.
The increased use of these platforms, and what amounts to sophisticated email, indicates a shift towards the acceptance of electronic processes.
A single “language” is key to the next step. The ACORD electronic messaging standards are seen as key to this; by adopting common standards, e-trading platforms and other systems can, in theory, talk to each other and exchange information. Ward says this would be a good thing. “What the market doesn’t want is one monopoly provider of services. The market likes choice.”
The Lloyd’s Exchange is a messaging hub that will, according to Lloyd’s “allow the electronic exchange of standardised information throughout the insurance process”. Messaging hubs provide a single transit point for data. Recently, IBM was appointed to deliver the Lloyd’s Exchange pilot, a system that will allow market participants to transfer risk information to each other using electronic messaging standards.
The Lloyd’s Exchange is made up of two components: first, a directory, or address book, for participating organisations; and second, there’s the “checking software”. This looks at a message and, if it conforms to the ACORD standard, sends it on. If it doesn’t, it is rejected.
According to Roy Laker, ACORD’s assistant vice-president, there is a clear advantage to hubs.
“They provide one connection.[Users] can place validation on there to make sure people adhere to the standard.”
Sue Langley, Lloyd’s director of market operations and North America, is responsible for the Lloyd’s
Exchange initiative. “Over the past few years a number of independent systems have sprung up.
Essentially what we’re going to do is bring everyone to the same table, talking the same language,” she says.
In practice, this should mean that companies can choose the system that best suits their business, whether it is an e-trading platform like RI3K’s or a hosted gateway such as Trisystems. They then plug into the messaging hub and, enabled by the ACORD standard, synchronise information regardless of the system or software they use.
Lloyd’s is starting with a pilot study, which will run this year for nine months. Depending on the outcome, the initiative will be fully launched in 2010.
Where the Lloyd’s Exchange focuses on placement, another hub is being developed by the Rüschlikon Initiative, a consortium led by Swiss Re, which focuses on accounting and settlement. Its pilot will run for a year, from this April.
The two hubs, the Lloyd’s Exchange and Rüschlikon, are not in competition. Indeed, both organisations are represented on each other’s steering group and it is possible that, eventually, both will merge. As Langley says: “At Lloyd’s we are focusing on the placement part; whereas money movement is their expertise. If both work, we will join the two – it will look like one hub.
No one is going to try to force a single, end-to-end system on the market again – Kinnect’s failure has shown how resistant it can be. An approach that takes the market forward a little at a time, and that encompasses a number of different systems and platforms, has the best chance of success. Ward believes many hubs and trading platforms will spring up around the world, all capable of talking to each other. “The next 12 months will be key in planning of our future for the London market,” he says. “Not whether the technology works, but whether people will be able to use the technology without it getting in the way of doing business. This is a keystone reform that will significantly change the way we run a business. It is the psychological barrier that needs to be overcome.”
Lynley Oram is a freelance journalist.