Valerie Denney rounds up some technology experts to discuss what is going on in the London market.
It is generally accepted that the (re)insurance market will never lose its face to face contact, however much the role of technology increases. Nonetheless, those who fail to keep up with the latest IT developments do so at their peril. Asked how sophisticated (re)insurers are in this respect, Marcus Broome remarks that, "customers and prospective customers are now buying from a position of greater knowledge, and indeed greater expectations. There is a move away from using technology for essentially accounting functions to risk and exposure profiling, business planning, marketing and distribution."
"Insurance executives are now becoming more IT aware if only from trying to understand what is in their large IT budgets," contends Andrew Driver. "As one would expect, they are still very reliant on their IT staff for information. Often these staff are fire-fighting - struggling to deliver existing services, upgrading the desktop, assessing year 2000 issues or still keeping their old back office system running while trying to get the new package running. Keeping up with new technologies in this environment is very difficult. I would like to see management assessing these new technologies, discussing them with clients, brokers and staff to assess costs and benefits to this business partnership."
Ross Gow adds that Lloyd's has lagged behind the company market in terms of the application of IT for a number of years. "Lloyd's administration has until recently been cumbersome and expensive, but the Lloyd's Business Plan reveals that savings of £20 million per annum have been made through electronic processing initiatives. Many of our clients access LIMNET's LORS (Lloyd's Outward Reinsurance System) and their outward reinsurance processes are streamlined by allowing large volumes of transactions to be processed electronically. Additionally, practitioners hope that CASS will allow claims support to be simplified."
Mr Gow's company Sherwood regularly hosts briefings and workshops and acknowledges the need to provide systems which are market led, not product led. Remarks Mr Gow: "Our clients are becoming increasingly informed about the benefits of IT but are keen that software suppliers look beyond the provision of 'back-end' record keeping automation. The new global insurance arena requires extended underwriting reach allied to local servicing, together with an analysis of business and financial information from a wide variety of sources, delivered speedily and cheaply to the underwriter's desktop.
"The Lloyd's Commercial Services Centre is promoting electronic commerce through the use of the web and LIN (Lloyd's Information Network), which will contain a market data repository allowing parties to analyse risks more readily, and a standard market wordings data store for more speedy policy creation. Lloyd's also has taken the initiative with WIRE (World-wide Intellectual Resource Exchange) in creating RSX, the Risk Services Exchange - effectively an information hub. Frequently, business-critical information is stored in a multitude of locations, on incompatible systems and RSX claims to have the world's first insurance specific software agent (Athena), which offers archiving and document summarisation. Lloyd's has championed a web-enabled Underwriter Workbench which is intended to provide electronic capture of underwriting business rules."
Mr Gow goes on to explain that: "The internet is being used increasingly to move information to underwriters who together with their IT departments are aware of the benefits of synergy between e-commerce and internet/intranet communication, particularly in the areas of point-of-sales capability, data-warehouse integration and document imaging. As PCs become cheaper, LANs become more reliable and PC software becomes ever more powerful, clients perceive the need for an integrated desktop."
As he points out, besides the standard e-mail and office tools, requirements for the desktop of tomorrow include: web access/intelligent agents; WIN (World Insurance Network)/CATEX (Catastrophe Risk Exchange) access; on line analytical processing; risk assessment support; underwriting decision support; marketing support; and imaging.
Turning to the subject of electronic placing, why has this failed to take off in London?
According to Mr Broome, there are a number of possible reasons. "Leaving aside all the detailed technical and design reasons for this failure, I believe there is a more fundamental mismatch between the trading partners' requirements and expectations of technology. For brokers electronic placement (EPS) offers the possibility of savings, particularly where non-complex risks and endorsements can be placed and agreed in a less labour intensive environment.
"I think that electronic commerce rather than EPS is what fires the underwriter's imagination. EPS merely uses technology to reinvent the existing processes. The area I see most interest in is marketing and distribution, using technology to win more business and distribute insurance products."
Mr Driver comes up with a couple of reasons. "Electronic placing does not fit easily with the traditional methods of placing business in the London market. Typical business coming into London is often complex, of high value and often difficult to place, having been rejected in local markets. It often requires the flexible negotiation and presentation skills of the broker. This is a differentiator between the very good, average and poor brokers. Supporting information can be considerable and of an unstructured nature. The business also has many different aspects - direct and reinsurance, proportional and XL and non-marine, marine and aviation.
"Secondly, the technology was too restrictive to cope with the vagaries of the business described above. I believe we went from 140 down to 40 key fields for the common core record. EDI (electronic data interchange) is fine for fast moving transaction based business such as banking but not information intensive business like insurance and reinsurance. The advent of more recent desktop and network technologies will change this. The ability of browser technology to handle data from different sources and in an unstructured manner will aid the placing process. Whether this will replace face to face is debatable. The movement of business information will become easier. Underwriters will be able to work traditionally, through initiatives such as WIN, and with discreet business partners through deployment of extranets."
Mr Gow contends that since Lloyd's is a broker-driven subscription market, working on a face to face basis, the first electronic trading initiative (EPS) was doomed to failure. "Additionally, lack of user involvement and technical shortcomings led to suspicion about its fragility, together with a perceived loss of interaction between broker and underwriter.
"Fundamentally, the failure of EPS can be attributed to a lack of understanding of the business practices within the London market. EPS floundered because it did not take account of the infinite variety of risks and wordings in London; there was little attempt to alter business practice to dovetail into the new system; the system required too much front-end data input by brokers too early in the business cycle; and many practitioners found the system overly complex and time-consuming.
"EPS Support, Lloyd's second attempt at EDI, has had more success recently and together with WIN and GBS (Global Broking Systems), it is possible that some of Lloyd's more arcane business processes may be eliminated, allowing the application of a new wave of technology that accommodates the changing distribution channels and takes full advantage of the increasing power of desktop PCs in support of business decisions and operational requirements."
Looking to the wider picture, will the combination of electronic commerce and globalisation mean the end of geographic markets and the growth of a virtual community? If so, how will such a market be regulated?
Mr Broome believes that in the short and medium term, current markets and practices will remain relatively unchanged. "They have proved remarkably resilient to technology-driven change when compared to other financial markets. However, it is certainly true that a virtual market is growing, particularly in the personal lines area where the complexities of a subscription market do not exist. The experience of Direct Line using telephone technology led to many organisations having to form competing businesses. Looking at the possibilities provided by the internet, I would be amazed if the virtual market does not grow. I am certain that this will reduce the amount of business placed in the traditional markets, but I cannot see technology replacing the more complex risks placed in the subscription market. Not yet, anyway."
"There is the potential for this to occur," admits Mr Driver. "However, it is likely that specialist centres will continue, for example, energy. On the regulation front, this will be difficult although brokers and clients will look for triple A security wherever it is located. The alternative is a global or virtual DTI."
Mr Gow has the following to say: "London's strengths of flexibility and niche skills will probably remain but will need IT applications to disseminate information globally. London is a natural home for marine and aviation with the infrastructure to support these disciplines. In a global soft market many practitioners are keen to return to their core skills and capitalise on strong brand images and divest themselves of non-strategic activity. This has led to a general trend in outsourcing and the growth of virtual insurance companies. People are increasingly using the internet for banking, online investment analysis and shopping to avoid the queues normally associated with these transactions. Virtual insurance companies such as Kwik-Fit in Glasgow and General Life in the US rely on technology to outsource many of their functions, including marketing, underwriting, issuing and administrating policies. Many financial companies complete transactions in seconds, while insurance companies frequently take weeks to process and issue policies. Virtual insurance companies use the internet to administer and distribute policies in addition to subcontracting work to TPAs as and when necessary. The goal of virtual insurance companies is to harness the power of the internet to provide automated resource at low cost and make it easier and therefore more attractive for people to do business with them.
"A visit to General Life's website suggests that beneficiary changes, premium payment method changes and early annuity withdrawals can all be undertaken over the internet, with a minimum of paper and a modest staff. As virtual insurance companies grow the owners can begin to create a broad portfolio of the financial activities of the clients, which can then be aggregated across various activity/needs bands, allowing the network-based aggregator to identify consumers with marketing programmes particularly tailored to their requirements."
What of the future in terms of winners and losers? Will technology resources replace insurance expertise as the basis for commercial success?
IT suppliers and insurers will both benefit, contends Mr Broome. "Technology will never replace insurance expertise, but it will, for the foreseeable future, be a very rapidly increasing factor in insurers' commercial success. I believe the process involved will include the continuing reduction of clerical work, in what was a very clerical industry, coupled with far more powerful tools for business planning, analysis and forecasting."
Mr Driver points out that: "In the short to medium term the winners will be those who retain and capture the best business whether they be broker or underwriter. They will have the best products and service the clients are looking for. This will require a flexible approach to business. This is where technology's role lies. Technology wise the winners will be those with the flexibility to process traditionally placed business and have the flexibility to cater for global initiatives. They should also take advantage of technology to create business environments conducive to individual client or client group requirements such as deploying extranets for discreet trading groups."
Mr Gow adds that: "The winners will be those organisations who deliver and embrace technology that aids and assists the speedy and cheap delivery of quality data to the underwriter desktop. Those who succeed will have identified their future customers and their own position in the supply chain; winners will accept that the science of risk evaluation has moved on and that the accepted methodologies may now be redundant. For example, catastrophe modelling is increasingly used by the XL writers and risk profiling is now frequently viewed within a financial, legal and environmental framework. To remain ahead of the competition, practitioners should use the skills of communication and flexibility learned over 300 years in the coffee house and combine them with technological advances such as voice and videostream over the net, in order to achieve global reach at electronic speed.
"Among these conditions of rapid change and intensified competition, the successful underwriting organisations of the future will require increasingly broader sources of information and increasingly sophisticated ways of understanding this information. They will need data interface and extraction tools that merge information from legacy systems and external data feeds. Additionally, these organisations will require data warehouse databases that store this information in a format suitable for decision support, together with intelligent agents and data mining tools and templates that support sophisticated analysis of the warehouse and on-line information sources. In order to improve operating costs, organisations are likely to utilise workflow engines that automate and track the flow of cases through the company. However, energising an underwriting operation with a new generation of analytical tools is a complex operation and effort needs to be expended on a coherent end-to-end architecture."
Mr Gow goes on to explain that: "Insurance executives now understand that some software suppliers actually comprehend the business drivers. This knowledge combined with the strategic application of technology will remain one of the significant factors in achieving sustainable growth. Industry leaders must embrace technology if they wish to succeed in the global marketplace."
Insurance consolidation has been the order of the day, of course. However, as technology prices fall could this mean the advent of more specialist, niche players?
"Twelve months ago I would have answered yes to this," comments Mr Broome, "but I no longer believe technology prices to be falling. Certainly hardware and packaged office software are getting cheaper, but year 2000 and EMU projects (particularly within the banking sector) are driving up the price of labour. An organisation replacing mainframe technology with a modern network will still be pleasantly surprised when they look at hardware costs, but will find labour costs have never been higher. Niche players started up in the eighties and early nineties. I think the labour market will preclude many new start-ups until the dust has settled early in the next century."
Mr Driver reiterates his point that those that meet client requirements will be successful. "This always creates opportunities for niche players. By definition they need to be lean and fitter and will therefore need to embrace technology. They will be aided by cheaper, more flexible technology. Office software now has connectivity functions such as e-mail and browser bundled in. Cheaper desktop software will allow niche players to move quickly and develop administration systems to support new business. Report engines work more readily and involve less cost in the development of interfaces with the latest desktop databases. Allied to cost effective communications costs, niche players can be well placed to continue successfully."
Mr Gow remarks that: "Lloyd's is traditionally an accumulation of specialist services with strong expertise in particular classes of business. The recent rash of merger activity has disenfranchised some of the independent specialist niche brokers and underwriters but the skills still remain. Niche players will survive as long as they continue to add customer value through expertise and a tailored response, together with an innovative approach to designing new products. Technological advances in communications can allow smaller units to improve their expense ratios and diversify their approach to the market with direct dealing and more rapid market penetration. Although specialisation does not necessarily mean small, stand-alone niche players can, however, experience underfunding and limited capital resource as well as being financially vulnerable to competition or the misreading of markets."
One last question. What value do upcoming seminars such as "The Technology Event for the Markets" offer?
Mr Broome believes that it provides "an excellent forum for viewing all the major suppliers' products in the course of a day. Clearly it will never be enough to make any decisions, but it does allow a rapid first level appraisal of suppliers and their products."
"An event on an annual basis is a good forum for technology and the market to come together," states Mr Driver. "The onus lies with the software and technology suppliers to show the business what new technologies are available which will allow the business to take advantage of opportunities or reduce costs. I also think for such an event to be successful it needs a strong seminar programme. The advent of globalisation also creates an opportunity to globalise the event. It should become an event along the lines of Monte Carlo where technology and business meet to discuss opportunity."
Mr Gow is firmly convinced of the value of marketwide shows such as this event. "It is a valuable stage upon which London market suppliers may promote their products to both business and IT professionals, while providing an opportunity to discuss business drivers and concerns with existing and potential customers."
Valerie Denney is co-editor of this publication.
Marcus Broome is chairman of Room Underwriting Systems Ltd (ROOM). He established the company after working in a Lloyd's syndicate from 1985 till 1991, during which time he developed and used software for claims management and collection of reinsurance claims, as well as risk recording and aggregation.
Mr Broome developed a strong belief that the computing problems in the market were better solved by insurance practitioners taking a direct interest in software solutions.
ROOM has established an excellent track record for delivery of software on time and to budget. The company currently offers a variety of products to the market: The SUBSCRIBE/2000 product set (including packages such as ERAS/2000, ATLAS/2000 and TERROR.MAP) provides a range of effective tools for business planning, underwriting, claims and reinsurance management, risk aggregation and catastrophe modelling.
Andrew Driver is md and business development director of Impact Media Limited. Previously, he worked on the business side and IT with Lloyd's broker, Edward Lumley & Sons Ltd, and on the underwriting side and IT with a number of companies including the English & American Group. More recently, he has worked with software houses Sherwood International plc and Tower Hill Services Limited.
Impact is a broad based PR and marketing company servicing insurers and brokers and service providers into the insurance markets such as IT companies, run off managers and lawyers. Clients include: Box Information Technology Limited, Midas IT Services Limited, NetSoft Solutions Limited, Adamjee Insurance Company (UK) Limited, and solicitors, Hobson Audley Hopkins & Wood.
Ross Gow is wholesale marketing manager for Sherwood International plc, which has been at the forefront of insurance software delivery for over 28 years in both the wholesale and retail markets. He read commercial law before joining the North American reinsurance division of Carpenter Bowring in 1986.
Among Sherwood's products are SENATOR, the latest generation of the company's underwriting management systems for the wholesale insurance market which provides an infrastructure for business solutions and for protecting investment in IT. Built as a series of integrated business modules surrounding a central core, SENATOR affords the flexibility to incorporate changes in a single business area, without affecting the other modules.
SCEPTRE is Sherwood's 4GL product for the Lloyd's underwriting market.