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Calling for a cultural revolution

Featuring Dermot O’Donohoe, CEO, Hamilton at Lloyd’s

Loyd’s of London remains a compelling market for companies looking to leverage its iconic brand and global licenses: however, it is an expensive proposition. For every £1 that insurers and reinsurers receive, 40p is spent on expenses and acquisition costs for brokers. The frictional costs of doing business at Lloyd’s are high, and it is clear that this model is neither efficient nor sustainable at a time when Lloyd’s faces competition from other hubs such as Bermuda and the United States.

In the wake of heavy losses which Lloyd’s experienced after hurricanes Harvey, Irma and Maria last year, there was a perhaps overly-optimistic expectation that catastrophe rates would harden. Rate improvements were slight, but the abundant availability of alternative capital through insurance-linked securities (ILS) has helped to keep cat pricing low.

On top of this, insurance and reinsurance companies face a plethora of compliance issues from Lloyd’s, the Prudential Regulation Authority (PRA), and the European Union’s Solvency II capital management regulations. That’s not to mention the ongoing uncertainty related to Brexit.

In the middle of these multiple challenges, it is clear that re/insurers have to focus on a lot more than just good underwriting. They need to tackle these issues already mentioned while at the same time running profitable portfolios based on prudent risk selection that will enable them to make a return to shareholders.

After the big bang in 1986 when the UK government deregulated the financial markets, fixed commission charges in the banking sector were abolished. Unlike the banks, the insurance and reinsurance industries haven’t really got to grips with stripping out unnecessary costs.

The Corporation of Lloyd’s is taking these matters seriously and has started to address these challenges. Since 2016, it has ushered in three vital and related initiatives that are designed to improve the efficiency of the market: PPL, the London market’s electronic placing platform; the Target Operating Model (TOM), which included costs that market players would incur to acquire the software to implement PPL; and Structured Data Capture (SDC).

SDC is a vital step towards enabling straight-through electronic processing. Prior to SDC, information on a Market Reform Contract (MRC) was repeatedly inputted by multiple parties to a risk, which was time-consuming and resulted in inconsistent or poor-quality policy data. Following the reforms, an online service converts contents of a MRC into a consistent electronic format that is compatible with ACORD standards. The MRC data is aligned with 120 master fields, including more than 275 data items, which dramatically reduces time and improves accuracy, freeing insurers and reinsurers to concentrate on the activities which add real value to their clients.

However, it is all very well the market conducting business more efficiently and with less frictional costs, but this must also translate into a reduction in the distribution costs we pay to brokers.

Many Lloyd’s syndicates and reinsurers generally have struggled with the electronic change agenda because they are shackled with legacy IT systems which make it difficult and/or expensive for them to align with reforms such as SDC.

Read the full CEO Risk Forum here.