Dave Matcham

E-Trading – A Good Walk Spoiled?

2010 looks set to be a year of significant growth in the use of ACORD data standards, and hence in the advance of electronic trading. At least that is what many market modernisation strategists would like to see. Could this growth of activity signal the end of the market’s traditional operation? I suspect not but there could well be a decrease in the exercise taken by brokers during the working day.

E-Trading as it is envisaged within the London Market Group is not a threat to the traditional face-to-face negotiations which are essential in the London subscription market. It should however assist these negotiations. The recent discussions on e-trading have found it hard to engender significant support for a full electronic solution for initial underwriting or renewal purposes. There is however a gathering momentum for subsequent risk changes to be dealt with electronically.

During 2010 there will be concerted efforts dedicated to the handling of endorsements electronically, and in an ACORD data standard format. The big brokers have already signalled a desire to do this either via the Lloyd’s Exchange or direct with insurers. Both IUA and LMA have begun seeking confirmation from their members that they will enter into reciprocal commitments. Ultimately, if the market pilot initiatives and bilateral arrangements prove to be successful, many brokers and insurers could be well placed to handle e-trading for endorsements and initial placements 12 months from now.

Aside from the growth in RI3K activity at recent renewal times, I foresee 2010 being the busiest year to date for the advancement of e-trading capability. Whilst this may reduce some of the shoe-leather wear and tear incurred by brokers, it is also likely to enhance the face-to-face placement process whilst also reducing the amount of paper carried during the broker’s walk to the underwriter.

Thoughts for 2010 (1) – Market Modernisation and Solvency II Symbiosis

Two of the market’s biggest current priorities, namely Solvency II and the continuing modernisation programme will continue to attract much attention in 2010. On the face of it they are separate initiatives ie. one is regulatory, the other technology and process change, however there is a high dependency between the two. I believe that they are not mutually exclusive.

At a recent technology forum it was estimated that up to 40% of Solvency II implementation costs were related to technology. This would include modelling software, data warehousing and consideration of data quality. It was commented at the forum that if one were to prioritise finite resources to the two initiatives, Solvency II would prevail. This after all is a fundamental change in regulatory infrastructure with a specific timeline leading to implementation in November 2012. Market modernisation however is more of a continuous improvement process as technology provides opportunities for further efficiencies.

One of the key 2010 modernisation projects is the wider implementation of ACORD data standards. This will be seen in the greater use of the Lloyd’s Exchange for endorsements and other peer to peer solutions between brokers and carriers. ACORD data standards enable validated data to be submitted and reused without re-keying. Interestingly, this initiative directly complements the need for high quality data to be available for analysis of risk and capital modelling for Solvency II. One could say that there is a regulatory imperative for insurers to be ACORD standard compatible as this would at least give greater assurance that data received and processed by insurers will be of high quality and give regulators greater comfort that their capital modelling is adequate. Without improvements in data quality, a company’s internal capital modelling might need greater margins of error for them to be acceptable.

The last time a market “reform” project had direct regulatory connections was the introduction of the contract certainty code of practice. Contract certainty is now very much business as usual in the market and part of the dialogue undertaken between regulated entities and the FSA.

Solvency II obviously has greater emotion attached to it and will be directly affected by many aspects of a company’s business. I believe that many companies are also seeing the direct connection between data standards and internal capital modelling, therefore directing enough resource to become ACORD compatible could well be a good investment decision for the future.

Reinsurance Regulatory Reform – All Roads Lead to US Congress

The future regulation of reinsurance in the USA has taken a significant step towards reform and modernisation. At this week’s NAIC meeting the final vote on a new framework was taken and unanimously passed. After many years of work by Regulators and industry proponents, this vote was both dramatic and emphatic.

As we have reported before, the plan is to implement the new framework by Federal enabling legislation. This is clearly the most efficient mechanism and supported by the NAIC but by no means certain in the short term. The state Regulators recognise the need for change and are keen to see their framework implemented in the midst of growing pressure or Federal oversight of reinsurance.

This week’s vote is the end of a very long campaign and we hope that progress through the US Congress is much quicker. The NAIC framework is not the perfect solution but incorporates a number of important concepts which were unimaginable five years ago.

The key for our members is to be able to operate in an efficient but robust regulatory environment. A single regulatory point of contact which is empowered to recognise non-US jurisdictions must be integral to the implementation of the new regime.

Entering the Renewal Season

It only seems like yesterday that the build up to the Monte Carlo Rendezvous was upon us – and here it is again. What will be the talk this year?

Current trading conditions, current and future availability of capital, the “inactive” US windstorm season, are we in a hardening or soft market – these issues will all be to the fore.

The industry should not be scared to emphasise its financial strengths and robust position arising out of the global financial crisis. “Back to basics” seems to be a theme adopted by reinsurers to support business operations and maintain shareholder value.

Solvency II and other Governmental regulatory initiatives on systemic risk will also be part of the Rendezvous – perhaps not in actual renewal discussions but certainly taking the form of numerous informational brochures and business consultants visible in the halls and lobbies.

This year’s Rendezvous could have been held in the midst of far worse trading conditions eg an early devastating hurricane, but there should be no room for complacency, and I do not sense it now. In these times of compelling economic news, the maintenance of underwriting discipline, use of modelling tools and transparency of coverage will surely all be part of this year’s discussions.

Can insurance be regulated at State and Federal levels?

Firstly, we saw EU proposals for a systemic risk council, then a review of UK regulation by FSA, finally the Obama proposals for a systemic regulator.

In the US, the financial crisis seems to have been born out of a range of products which were clearly unsustainable. These products did not fall under state regulation of Insurance – they were banking orientated, regulated at the federal level. A clear systemic risk shone through but there was no functional regulator, hence these new proposals.

US insurance regulators are rigorously defending their track record of solvency regulation and do not want federal intervention, especially as part of a banking initiative. However, certain insurance groups called “Tier 1 financial holdings companies”, who offer a wide range of financial products (insurance, mortgages, securities etc), are perceived to be potential causes of systemic risk in the financial system. The systemic regulator would predict the shocks which could occur and act accordingly. Both states and federal governments seem to have an interest, therefore, they will need to work effectively together and cut through the politics for the sake of the overall economy.

Most recently the US Treasury mapped out its proposals for an Office of National Insurance as part of the Obama Administration’s proposal for financial reform. If adopted the ONI would monitor all aspects of the insurance industry, except for health, and represent the US in international insurance matters. This latter point is important to the ability for the US to engage authoritatively with EU regulators and fits neatly into the current work on reinsurance regulatory modernisation.

There seems to be a momentum for some form of federal involvement along with continual state regulation. Both sides need to work together, recognise their reciprocal merits and make it happen. If they manage this quickly it could be very influential in the changes expected within the EU and UK specifically.

A Market Event of our Own

Last night IUA formally celebrated its first 10 years of existence. We hosted a dinner for members and market guests at 2 Temple Place, once the city home of William Waldorf Astor. The evening went very well, the food and company were lovely and the air conditioning worked!

William Waldorf Astor came to the UK from America as probably one of, if not the, richest person in the world. The Bill Gates of his day. His love of London and branching out globally perfectly complements IUA’s international position. The majority of our members are foreign owned but all come to London to seize the immense business opportunities, talent and infrastructure on offer.

Our Chairman’s remarks after dinner also touched on the threat faced by our industry of another wave of insurance regulation. The London Insurance market has demonstrated tremendous resilience and strength in recent times but we fear we might become embroiled in wide-ranging financial services regulation when our business model is fundamentally different to banking. This message has been relayed to the FSA and European Commission and we hope that it is both understood and explicit in regulatory developments in the future.

London’s Technology Revolution Showing Results

I have been in many meetings recently to discuss the scope, timetable and cost of finishing existing market reform initiatives. These meetings make you realise how far we have come but also how much there is still to do.

Currently our process changes and increased use of technology / data standards are all well advanced and, given the complexities of our marketplace, ahead of anywhere else in the world – at least this is what I believe.

When one talks to senior executives who also manage non-London operations, this belief of mine seems justified, therefore it would be great to see more commentators refraining from beating London up but being positive about London’s use of technology. Of course, to do so, one needs some facts rather than anecdotal comments. Looking at premiums, the market’s repository utility (which has been operational for nearly a year), now receives 80% of all premium submissions electronically (approx 800,000 transactions). These premiums are now able to be processed quicker and prioritised by value meaning that cash flow has improved, credit risk reduced and working capital released. Last year 12% of premiums by value were processed within three days of receipt, now its 65% of value.

Policies checked by Xchanging are now electronically received and delivered back to brokers. Paper policies are now an exceptional special request.

Perhaps most encouraging is that there are signs that the new processes are enabling underwriters to receive more premium by the agreed payment date. Whilst more improvement is still necessary the statistics seem to be getting better as electronic submissions enable more timely, accurate and quicker processing.

One last set of statistics; the repository is receiving over 45,000 messages a week (premiums and claims) from 5,800 registered users. There were close to 6 million documents stored and over 37 million web page hits in the first quarter of 2009. If anyone can show me comparable statistics for a marketplace of 250 organisations handling every type of insurance or reinsurance, I would love to see them.

We must not get complacent, there is still much to do on claims functionality and adoption of international data standards although recent technological changes in these areas are happening but not mentioned here (ie. ECF). Perhaps an appropriate form of beating for London should be a gentle pat on its back. Mr Grace would have said “you’re all doing very well” and our clients are being served better.

Taking Stock of Recent Developments

Taking Stock of Recent Developments

After a break of a few weeks, it’s time to rejuvenate the blog. A touch of writers’ block, some holiday and busy work periods curtailed the entries.

So it may be best to take stock of the events of the last few weeks. The Insurance Day Summit was good this year, sometimes controversial but a worthwhile exercise to reflect on the big issues in the market. As always regulation and technology reform were at the forefront of discussion, both of which are relevant to IUA’s agenda.

A big cause for excitement for us was a second new member who joined on 1 May. Having secured Catlin in April, Axis Specialty has also joined. These two companies were the two biggest non-members and their joining is a massive endorsement of IUA’s work for member companies.

There was also much furore over the Swine Flu outbreak and consequent business continuity or insurance implications. Doesn’t seem to have come to much though – thankfully. The build up to the final of Britain’s Got Talent seems to have assumed all the national headlines.

The European Commission has pronounced on systemic regulation for the future. A stronger system of financial supervision at the EU level will result through a new European Systemic Risk Council and System of Financial Supervisors. The European Insurance Industry strongly supports the proposals adding that it is vital that separate European authorities are maintained for insurance, banking and securities supervision.

Finally, perhaps one of the most influential regulators, the New York Superintendent of Insurance has resigned, leaving a significant vacancy in these times of regulatory reform.

Looking ahead we have our AGM this month with the publication of our new annual report and our 10th Anniversary Dinner on 1 July 2009. Let’s not forget the dawning of another hurricane season. It starts again today and the names of Anna, Bill and Claudette are already available for use but hopefully will never be mentioned. A “near normal” season is predicted but that still means four to seven likely hurricanes. Many underwriters will have the national hurricane website minimised on their screens over the summer.

Solvency II – Good but not perfectly formed

At last, we have political approval within the intended timescale to a new risk-based regulatory framework for insurance regulation in the EU – Solvency II. After much negotiation between the European Parliament, Commission & Council a compromise was reached which broadly speaking is positive and at least gives certainty. However, it is not, unfortunately, optimal because group support, an important element advocated by the industry, has been omitted for what look like political reasons. The key to group support is that it would have allowed large companies to achieve better capital efficiency; consequently some may now be less engaged in the process. This opportunity has now been missed as capital requirements will be set at a local level and not by a lead supervisor. Insurance and reinsurance is a cross-border industry but will not be fully regulated accordingly. There are however many wins in this agreement not least a new framework which underpins the industry for years to come and which may, at least in substantial part, become a global standard. Many believe that the agreement on Solvency II has come at an ideal time and demonstrates a belief that economic, risk-based, transparent approaches are right for the current climate. Regulated firms will have much to do now to ensure they are ready for Solvency II D-Day, sometime in 2012 (or perhaps 2013).

Working with AIRMIC

We regard it as important to have a constructive relationship with client facing organisations. AIRMIC is one of the most relevant as it represents risk managers of large UK commercial clients of the insurance industry.

We were pleased therefore to host our latest Market Briefing this week which was given by John Hurrell, AIRMIC’s CEO entitled “A Buyers Perspective”.

John explained AIRMIC’s key priorities, many of which align with IUA’s current objectives; indeed, we have worked with AIRMIC on certain lobbying issues in the past.

AIRMIC have recently surveyed their members to identify issues which “keep their members awake at night”. Given the current financial crisis, not surprisingly, the most important issue is one of market security. In particular, risk managers are looking for better information about their insurer partners as the work of rating agencies continue to be challenged.

The second most important issue, which would normally be top of the list, is claims performance. AIRMIC has been working with many insurers to prepare a guide on claims best practice and other initiatives such as reservation of rights and speed of settlement. Our well attended member audience took note as claims performance is the key product being sold by our market.

AIRMIC clearly value the subscription market and the market reform initiatives to improve efficiency in contract certainty. They also noted that commission disclosure is not now a major issue, however, concern still exists over potential conflicts of interest within the broker business model.

This briefing was another in our successful programme which we run for members and the market as a whole. We look forward to continuing to work with AIRMIC on important market issues.