Paul Evans looks at recent proposals for changes in London market systems, and assesses how technology can aid run-off management.
The market has experienced many changes over the last few years. Most recently the creation of the London Market Principles (LMP), designed to improve business practices and streamline insurance industry operations. Currently the implementation of these proposals is taking a lot longer than expected. The industry, try as it might, has been slow to react to change and has always been looking to the `major' players to show it the way. This will undoubtedly be the case with LMP, but when these changes are fully implemented the market will be uniquely positioned to provide service and flexibility to rival any market in the world.
The main feature that will distinguish LMP from other insurance markets is its use of a common bureau to process its transactions. This provides a standardised checking and processing routine at a known cost for the handling of most financial transactions.
The greatest change planned for the London market, however, could turn out to be the formation of a joint service provider for the London Processing Centre (LPC) and the Lloyd's Policy Signing Office (LPSO). Until recently, the London market has operated with two service providers - the LPC serviced the company market whilst the Lloyd's market was serviced by the LPSO. The newly formed joint service provider, Ins-Sure, will develop the latest internet-based generation of business-to-business processing that will enable the insurance industry to rise to the technological challenges faced by the rapidly-changing market. With the market already evolving as a result of LMP, the introduction of the latest processing technology will help London to excel as a market leader.
To existing operations handling transactions within the London market, this is the news that they have waited many years to hear. For those companies that are already in run-off, this will not be such good news. Companies already in run-off need to reduce their operating overheads to an absolute minimum. Any market changes will have an unwelcome impact on this. Will the new service provider commit to maintaining the current messaging formats and content for every run-off company over the next ten years or so? It is extremely unlikely as supporting dual systems is very costly. The cost would have to be carried either by the companies in run-off themselves, adding to their baseline costs, or by the existing companies already paying for the new technology.
If Ins-Sure replaces the existing messaging system, the impact throughout the run-off industry would be dramatic. These organisations would be left with some difficult decisions to make. To develop these new interfaces into their current legacy systems would mean retaining the current accounting and reporting procedures, but these may already be in desperate need of revision. The skills required to develop the system may no longer be available, as the knowledge of out-dated programming or database languages becomes scarce. Where the current system has been built using in-house developers, these people and skills may no longer be available. Even if the skills are available, the legacy technology may not be able to support a modern messaging system.
The complexity involved in developing these systems from scratch is enough to put most companies off even contemplating this option. The current system supplier may offer an upgrade to a new version with support for these messages but this often involves replacing hardware and a migration of the data.
The existing system could be replaced by a new one, which has been designed for run-off and supports both new and existing messaging. Although this would require a migration of data, it would also provide the opportunity to cleanse the data and plug any gaps left by the old system. The quality of the existing data can be analysed and improved before it is placed into a new system and ensuring that the new solution will contain more accurate figures. Whilst the data is being migrated, additional information not previously available can also be introduced.
One of the most common requirements is principal-to-principal ledgers, which will enable payment due to a principal to be offset against money owed. The enhanced ledgers also facilitate direct dealing with a principal, thereby bypassing the broker. The ability to effectively commute also becomes available as any such deal requires accurate figures to be produced and reconciled for each principal.
A modern system provides long-term cost savings as the processing overheads are reduced. This is because fewer technicians, the number of which can sometimes be reduced by half, are required to manage the account. The reason for this is that a new system must contain time-saving processing techniques along with the ability to automate many tasks that were previously handled manually. A new system uses the latest technology so that it requires the minimum level of system administration and provides maximum reliability. Any replacement system also provides the infrastructure necessary to use reporting analysis tools such as Online Analytical Processing data warehousing. This technology allows for better decision-making through the ability to compare trends and analyse `what if?' scenarios. The level of information can be customised for each user to adapt to specific needs and is instantly available.
Alternatively all transactions, can be manually processed without using the bureau systems. This provides greater control over the companies' cash flow as all payments can be negotiated and agreed individually. Within the Lloyd's market, most syndicates rely completely on bureau systems to handle all their payments to such an extent that many do not even operate an inward ledger account. This total reliance also stems from the major structural difference between the insurance company market and Lloyd's.
Each company outside Lloyd's has to apply for licences to write insurance business in a number of foreign countries but within Lloyd's these licences are granted to the entire market for use by any of its members. The guarantees that Lloyd's gives requires them to provide the necessary regulatory reporting to each respective country on behalf of all its members as well as to maintain the necessary central funds. This is the main reason why all syndicates have to use the bureau systems as they enable the timely production of underwriting results and manage accounting transactions. If these requirements could be satisfied without using the bureau systems then we would see many run-off syndicates operating outside the bureau.
Checking technical items in terms of amounts processed and their validity has to be performed using the original documents. This requires experienced technicians who can interpret the accounts, understand the contract conditions and quickly identify any discrepancies. A new system would also be needed to perform this function as processing the information manually in a legacy system would be unmanageable. This is due to the extra technicians required to manage the account, the additional space they would occupy and the systems capacity required.
With this in mind, a new system must be designed to include time-saving manual functionality. Without using the bureau systems, information is not captured as quickly and the consistency is dependent upon the quality of the manual input. This has an impact upon the effectiveness of decision-making, as the company requires an accurate assessment of its current liabilities before any commutation can take place. The accuracy and reliability of this information will also affect the calculations used to determine the future liabilities of claims incurred but not reported (IBNR). The ability to easily provide these commutation reports and efficiently handle the resulting payments is very important to help to crystallise an account. Efficient cash management is required to keep a handle upon all manual agreements and payments.
A principal-to-principal accounting system must be in place as the brokers become reluctant to provide information to companies dealing outside the bureau.
The run-off industry needs to prepare itself for these changes as time must be devoted to identifying the best solution. Each company needs to take action now by assigning the responsibility to a project manager or an external consultancy who can begin the planning process. This will ensure that adequate time is allocated to investigation, selection and finally implementation of the desired solution.
Michaelhouse provides such solutions to the run-off market using its SLIP insurance solution. The company's clients, include Cavell Management Services and Omni-Whittington Group.
By Paul Evans
Paul Evans is insurance systems manager at IT consultancy Michaelhouse. For more information, contact him on 020 7256 9256,
or take a look at www.michaelhouse.com