The sudden demise of several online trading platforms in recent months has significantly reduced the number of companies setting up to provide re/insurance capacity electronically.
Alex Letts talks to Global Reinsurance about operational consolidation and what separates the winners from the losers.
Q: Over the past 3 years there has been a flood of exchange initiatives, very few of which survive today. What happened?
Alex: When the exchange concept really kicked-off in 1999, there was a lot of enthusiasm from entrepreneurs about opportunities for making online trades in insurance or reinsurance. But in reality, the industry had no real appetite for online trading. By itself, the ability to send a risk electronically from buyer to seller was perceived to be useful but not earth-shattering in terms of value-add. And, of course, there was legitimate broker paranoia about disintermediation.
Q. When you say that "by itself" online trading has "added no value", are you implying that it can add value if it is part of a bigger equation?
Alex: When the world got the hots for e-commerce, it forgot about delivery. Hence all the `dogfood.com' initiatives that failed. It also forgot about consumer habits and lifestyles in which the high street and shopping mall have a significant role. It's no different in insurance and reinsurance. If it's not markedly easier or significantly cheaper, it won't happen. For online trading to meet these criteria and live up to these expectations, it needed something more than just the chance to deal on a PC instead of face-to-face.
Q: What examples can you give of this additional value-add?
Alex: For me a good example, in principle, is inreon. I think it's still in its adolescence in terms of delivery, but the vision seems valid. It allows you to trade online, but its goal is to add extra value by reducing the cost of trading for commoditisable risks. By focusing on the risks that could be commoditised, inreon could legitimately bring down the cost of trading. That has to be a worthwhile value-add.
Q. Do you think other online trading initiatives will successfully offer added value?
Alex: In terms of finding a niche where value can be added simply by electronic buying and selling, it looks tough for the few survivors out there. It is intriguing that Lloyds.com is currently being developed over here. I have no insight as to what it will be but I could imagine that opening Lloyd's capacity to overseas companies could be very interesting when directly allied to the Lloyd's brand power.
Q: Where does RI3K fit in to the future?
Alex: The first point to make is that we are not in the same space as trading marketplaces such as inreon, so I don't really include us in discussions about accessing capacity. RI3K is primarily a data and cash exchange, a hub or utility for the industry, rather than a trading marketplace. Our role is neutralising back-office costs and freeing up cash flows. Whilst it is possible to trade any type of risk on RI3K, our focus is on feeding online or offline trades electronically into our exchange. It adds value by taking away all that expensive manual back-office administration, managing amendments, claims or payments, electronically. That said, in Asia we have found that there is real perceived added value in trading via the internet for small insurance companies seeking capacity thousands of miles away, so we have to tailor our marketing message accordingly.
Q: So you are saying RI3K doesn't mind where the trade is done? Theoretically speaking it could even be done on inreon and electronically sent to your hub for the back-office clearing part?
Alex: Whilst technically your point is correct, inreon does actually have a third party relationship to manage that part of the process, via a traditional broker platform.
Q: But RI3K theoretically could integrate with any other electronic platform?
Alex: Not just theoretically, but actually. That's our business model; integration with each and every platform, whether it is web-based, broker-based, systems providers, or in-house.
Q: Does this mean you are looking to consolidate?
Alex: I think you can mark that scenario down as being less than likely because RI3K certainly isn't looking to make any acquisitions just yet.
Q: Can you see consolidation elsewhere in the industry?
Alex: I'm not sure really what's left to consolidate or who the buyer would be. The real consolidation is far more operational. It has to start with the invested systems at brokerages and reinsurers being interconnected through the RI3K hub. In that way a deal actually placed via a broker system will be able to be cleared into banks and reinsurers all over the globe. That's the type of consolidation I expect to see, not the rather artificial gluing together of very different businesses and business models.
Q: And where does ins-sure fit into this type of consolidation model?
Alex: Ins-sure has a marvellous customer-base in London, and an expertise and know-how that you couldn't reinvent. My hope is that data will at least be passed to ins-sure customers electronically, as opposed to the largely motorised delivery that currently happens.
Q: Finally Alex, how many operators do you think this industry can sustain?
Alex: The industry cannot possibly sustain a multiplicity of systems. Buyers and sellers need to look at one screen, possibly two, maybe three, but not 50. That rules out proprietary platforms, which I think will morph into plugs that will fit into the sockets of a core hub or utility. How many exchanges will there be? My bet would be that on capacity accessing and trading, Lloyds.com has a role to play, inreon too. On the utility, hub data and cash exchange front, there will be one exchange, RI3K - there is no other.
Alex Letts is chief executive of the RI3K exchange.