The past year has seen a number of technology initiatives steam forward in the London market, according to Andrew Driver.
In the aftermath of the terrorist attacks in the US and the falls in world stock markets, it is estimated that the world's insurance industry has taken a $100bn hit from claims and equity losses since September 2001. Of this sum, only one third of this has so far been replaced. These figures are set against a backdrop of the lowest inflation and interest rates for decades and premium rates for some business lines at a 40-year high. In 2002, both catastrophe and attritional losses have proved low, and the majority of the 2000 and 2001 books of business are not showing further sharp deterioration. No one in the insurance or reinsurance business can remember anything like it, but everyone seems quietly confident. Everyone seems to have gone back to their knitting - including the major technology players - and all agree that there is plenty of knitting to do.
Most observers of and participants in the insurance IT scene agree that 2002 was a year of transition, decisions and hard work. The largest project is still, undoubtedly, London market reform within the London Market Principles (LMP) programme, to which is now being added requirements stemming from external regulation of the Lloyd's market by the Financial Services Authority (FSA) and the imminent arrival of further stringent internal reporting requirements under the aegis of the new Lloyd's Franchise Board. This will entail, inter alia, the time-honoured Lloyd's three-year account being replaced by a one-year accounting regime. The combined effect of these moves will be, according to one key player, to impose disciplines on the London market which other areas of financial services have taken for granted for years. No wonder, then, that so much effort has been expended in the year on developing systems to organise, code and store information relating to insurance transactions and to extract both regulatory and management data from them.
One result has been that document and data repositories are springing up around the market, usually as broker-led, commercial initiatives. The largest such project, however, comes from Xchanging Ins-sure Services as part of the LMP reform programme. The London Market Repository is an online database to give all subscribing bodies real-time access to all the risk information needed, on a 24/7 basis. It is not Ins-sure's intention, however, to supplant other, similar, commercial initiatives but it has made clear that there must be common standards across all repositories. To ensure this, the Repository Infrastructure Group, made up of all interested parties, was created earlier this year with the aim of delivering a common infrastructure to hasten and facilitate the use of repositories in the London market and beyond.
Another move by Xchanging Ins-sure Services in 2002, to ensure common market-wide standards, was to join ACORD - the global insurance standards body - so as to participate in defining e-commerce standards for the international insurance and reinsurance sector. As a member, its aim is to support ACORD's efforts to develop and deploy standards, using the computer language XML, within the global insurance and reinsurance industry. At the time of joining, Michael Taylor, vice chairman, Xchanging Ins-sure Services, said: "The benefits that `straight through processing' can bring to our industry are enormous, with the potential for huge gains in cost efficiency, quality and client service".
ACORD also gathered reinsurance trading platform Inreon into membership this year, the first body within the global reinsurance market to be certified by ACORD for implementing risk placement standards.
As a result, Inreon members can now automatically submit risks to reinsurers as soon as they have the relevant data available in ACORD-compliant placement XML structures. The importance of this move for Inreon members is demonstrated by Inreon's trading statistics for the 2002/3 renewal season which show that the volume of business conducted online is rising exponentially. Submissions made to reinsurers via the Inreon platform during the month of October were greater than the total for the entire first quarter of the year. October's aggregate was also equal to around 60% of that for the whole of the fourth quarter in 2001. The increase corresponds to the growing number of industry participants ready to trade online. In October 2001, 20 companies had signed membership agreements in order to transact business via Inreon. Twelve months later, as 2002/3 renewals got underway, that figure has risen to 106.
While the insurance industry is familiar with ACORD, there is another standards methodology which has been around for only four years but which will, once fully established, have an impact right across all financial services, not just insurance. This is Extensible Business Reporting Language (XBRL) and it has received widespread support in financial circles. The international XBRL project committee is made up of 100 representatives of the financial information supply chain, including financial institutions, technology enablers and, significantly, 13 accounting and allied trade organisations worldwide including the Institute of Chartered Accountants of England and Wales. ACORD and XBRL have not yet formalised a relationship but have talked about ACORD taking on the `insurance vertical' implementation of XBRL. The implications are medium to long-term but could be significant.
One of the effects of the focus in London on reforming the market has been fewer than usual major IT projects at company level. Which is not to say that IT providers have been idle. Richard West, sales and marketing director of Eurobase Systems characterised their activity as "building a pipeline of business, principally from Europe and the US" for the upturn he and others are confident will come in 2003. "This year (2002) was a year of consolidation as the London market prepared itself for its next move forwards. We have been working with existing clients to enhance and equip their systems for the new requirements coming through. Next year (2003) looks more buoyant." Eurobase's major new product during the year was PRISM, an information management and reporting tool which is platform independent and aimed at the burgeoning information requirements resulting from the London market and other reforms mentioned above.
Similar sentiments about the state of the market come from Room Solutions' Marcus Broome, who characterised 2002 as "very much a transition year, with a huge push - and corresponding opportunities in IT - to increase and improve efficiencies across the board. The market-wide initiatives coming through over the next 18 months will impact us positively with our large customer base." Mr Broome, however, did make an additional point. "Everyone agrees that there has to be a high degree of centralised services to improve London's performance as an insurer. But I feel that some existing centralised services may be challenged in 2003. I just get the feeling that some processes currently handled from the centre may now be better dealt with on a peer-to-peer basis."
Overall, the raft of new reporting requirements coming soon to an insurer near you is creating some interesting niche IT opportunities. The need for annual accounting and timely reporting has led Sequel Business Solutions to add an annual accounting solution to its Eclipse stable of underwriting and broking software which, said sales and marketing director Troy O'Connor, can be parachuted in to work with any existing underwriting system. It can, he said, produce consistent, accurate GAAP data to support current and future reporting requirements, without the effort, risk or lack of transparency typically associated with spreadsheet models.
Mining and interpreting data from a different angle and for a different purpose did produce one new and fascinating concept this year, that of `client intimacy'. According to its originator, MMT Management Consultants, companies have come to realise that there is a tremendous opportunity to redefine relationships with large clients and to start moving towards closer and more collaborative ways of working. MMT is likewise convinced that new and innovative approaches to strategy are needed to drive the next level of business development and profitable growth. "Strategy projects have traditionally tended to focus on the `hard' aspects of commercial opportunity based on economic analysis rather than the `soft' side of how companies interact with their clients," said MMT's Cliff Chapman. MMT, he said, had worked with a range of broker departments to develop a consultative sales approach, which had helped them to build even closer and more profitable relationships with their large account clients.
One other `and finally' achievement this year came from service provider BIS. Lloyd's may have been the first and is certainly the most high profile insurance organisation to implement a voice over internet protocol (VOIP) service replacing traditional telephony within its business. Despite teething troubles, all seems to working well now with, according to BIS, savings and benefits accruing. A trial with Lloyd's connecting their internal VOIP service with the BIS service is believed to be planned for 2003. Should Lloyd's connect to the BIS service, this would lead to free calls to and from Lloyd's to any other organisations connected to the Lloyd's or the BIS systems. "Slowly and quietly, VOIP may actually be starting to happen," said BIS's George Tipper.
And what next? The answer is Blue Mountain. Project Blue Mountain, a Lloyd's-financed initiative, has been slowly taking shape on gallery three of the Lloyd's building for some time. According to Lloyd's spokesman Adrian Beeby, "it is an operating platform which sits behind any underwriting or broking system and acts as a universal translation system. It's aimed initially at the UK and US markets, and will allow any system to communicate with any other and the user to view the results in their own, rather than the sender's, file format. It could eventually become a global initiative." Roll-out is planned for the first quarter of 2003 as a commercial venture.
And finally. A lot of people gave their views on what they thought was coming next. Blue skies and optimism abounded, as one might expect when there's a rising market. But to end on a more serious note, George Tipper of BIS looked slightly askance at what was happening elsewhere in the world: "As a result of the UK's acceptance of the EU Mediation Directive, the FSA is burning the midnight oil creating proposals for new regulatory rules for the insurance business that are due to be enshrined in an Act of Parliament in 2003. The target for the UK to be compliant with the EU directive is October 2004, which is ambitious considering no one knows what the regulatory requirements are yet.
"The Treasury is defining who will be regulated for what and the FSA is defining how regulation will be affected. Both will publish consultation documents over the next few months.
"Among the many business issues that will undoubtedly arise, one aspect of new threshold conditions for achieving a regulatory kitemark that BIS believes may prove challenging for some business IT infrastructures is the likely requirement to be able to demonstrate business continuity capabilities. In the US, following September 11, the Securities and Exchange Commission has published proposals yet to be enshrined in law that require financial services firms to state that they are able to recover business-critical data and systems in the event of a business interruption however caused. The more critical the firm is to the functioning of the markets, the less time they have to recover their data and systems. Where the US SEC goes, the UK FSA is likely to follow and, while insurance may not be as immediately key to the functioning of the economy as financial services, it will be interesting to see whether business continuity features on the threshold conditions agenda when the consultative documents are published.
"IT departments, look out."
By Andrew Driver
Andrew Driver is a director of Impact Media.