Dave Matcham

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.

Insurance Block Exemption – partial renewal

There were two important announcements yesterday. One saw the release of the draft Bill for the US Reinsurance Regulatory Framework (as predicted), the other was the European Commission’s decision on the Insurance Block Exemption (earlier than expected). The good news is that the Block Exemption will be partially renewed in respect of arrangements relating to joint calculations, tables and studies and the operation of coinsurance pools. This decision is welcome as the Commission has heeded market concerns that statistical studies would not be as complete or effective without some form of exemption. Pooling arrangements are also a specific feature of the EU insurance sector and rely on cooperation for them to be successful therefore the continued exemption is appropriate. The disappointing news is that the exemption looks likely not to be renewed for the development and distribution of non binding model policy conditions for direct insurance. IUA has always had concerns that losing the exemption might hamper the efficient mechanisms that exist in preparing model wordings which are cost effective for market participants and supported by risk managers within client organisations who argue that their function is pro competitive. Unfortunately the Commission is not persuaded that the exemption is required noting for example model wordings are prepared in the reinsurance market without any form of exemption. The next step is for yesterday’s report to be the subject of a public hearing on 2nd June where IUA, along with many other interested parties, will testify. A final decision will then be reached by the Commission, however, it will be a tough battle to obtain a full renewal of the Block Exemption.

NAIC progress but the real action is in Washington

Last weekend’s Spring NAIC meeting heard the first public progress report of the implementation of the US reinsurance regulatory framework. Whilst there were no papers available, they are promised within 10 days, Commissioner Goldman (NJ) detailed the “roadmap” for this year.

It appears that Congress is exerting pressure, meaning that the draft language to implement the framework via federal enabling legislation, has to be ready in a matter of weeks. This timetable gives industry very little time to comment and regulators little time to respond before the final language is delivered to Congress.

The roadmap confirmed that the vehicle in the House of Representatives will be the existing and resubmitted Surplus Lines Bill although the actual implementation will be first seen via a Senate Version of this Bill. This is a necessary process, indeed both House & Senate will confer down the line, but the Senate first needs to find a sponsor and introduce a Bill.

However, not surprisingly the priority of Congress is whether there will be a systemic risk regulator. Specific reinsurance reform is not on the radar and yet the opportunity to do both remains viable. As I sit writing this blog in an airport lounge the TV screens are dominated by commentary on how to respond to the financial crisis. Whilst this is mainly banking focused, insurance gets regular mentions normally with AIG in the same sentence.

In summary, there appears to be progress in drafting a Bill to implement the new reinsurance framework but this is only an introductory step with much work ahead of us. Congress is clearly interested in systematic risk but are they willing to enact other specific reform? I think this is less clear for 2009 at the moment.

Systemic Risk

After initial signs last month, there is a growing sense of urgency both within Europe and the US to structure regulatory reforms for the financial services industry, including insurance regulation. The term “systemic regulator” has been mentioned on both sides of the Atlantic.

Within Europe, a report was published last week which made a number of proposals for a new financial services regulatory framework. It proposes a European Systemic Risk Council but the detail still needs to be clarified as it could be too banking orientated. In addition, the report noted the current fragmented nature of EU regulation which did not effectively address the growing complexity of financial market organisations. For insurance, it recommends that Solvency II be adopted quickly and that it adequately addresses the cross-border regulation of insurance groups.

This endorsement of Solvency II is welcomed by the insurance industry and hopefully it will give a necessary boost to the current tri-lateral discussions taking place within the European Central Government.

Within the US, as extended bail-outs are announced, there is a growing call for regulatory modernisation at a national level. Proponents state that enormous companies such as AIG can’t be effectively regulated at a State level but need some form of higher level systemic oversight.

There have been studies before about the possibility of systemic failure within the insurance and reinsurance industry for example, by the Financial Stability Forum. They showed that the industry did not represent a systemic risk to the world economy. It seems that regulators and the industry are now experiencing a practical analysis of the issues on a real time basis.

IUA would still argue that a knee-jerk reaction should be avoided as the vast majority of non-life insurers and reinsurers have avoided the worst effects of the recent financial turmoil. Insurance is different to banking therefore regulatory change should take account of the differing risk transfer mechanisms in place.

The First Signs of US Regulatory Reform this Year

The first signs of Congressional activity affecting business in London appears to be the re-introduction of legislation which would standardise the regulation of surplus lines business and even reinsurance.

Given the speculation of what we might expect, this development, which emanates from the House Financial Services Committee, is welcome. Earlier versions of this Bill received broad support from both industry and Congress but failed to reach the President’s desk for signature for various reasons. Other Bills seeking to introduce Federal options to regulate insurance and, of course, overall financial turmoil, served to push the surplus lines bill onto the back-burner.

The London market writes substantial amounts of surplus lines business which by its very nature is often hard to place within the local US market. To write this business London insurers have to currently comply with individual regulatory requirements on a State by State basis. The new Bill would provide a uniform and consistent framework of surplus lines regulation at a State level. It could even, for example, create regulatory harmonisation which would allow 50-State surplus lines eligibility to be obtained by IUA member companies by merely being approved in a single State.

Interestingly, the Bill also has a reinsurance section. This does not on the face of it seem a natural fit and is currently drafted to introduce certain regulatory consistency for US reinsurers. This section however could provide a medium for the Reinsurance Task Force’s new reinsurance framework to be implemented. This would however require substantial re-drafting of the current re-introduced Bill’s language to cater for non-US reinsurers’ interests.

Many were predicting that this Bill would be re-introduced given its previous wide-spread support. It will be interesting to see how much reliance the NAIC will be placing on it at their forthcoming Spring meeting.

Market Reform - still our top priority

With so much focus on expected new regulation for the industry and continual press coverage on the banking crisis and recriminations, I thought it appropriate to remind everyone how much progress London has made in reforming its processes and the plans ahead. There is much to be positive about, because London is “streets ahead” of other markets in process change and use of technology. Some people dispute this – I disagree – as a market place comprised of at least 100 underwriting entities and the same number of brokers, London is the foremost insurance market, incredibly diverse, highly talented and with a blended culture of intense competition and community spirit. With all this in mind and admittedly after a slow start, we now have a culture which is very accepting of change and marching forward at a pace admired by other markets.

Concepts such as contract certainty, ACORD standards, electronic claims files which are readily accepted in London are all being considered by other markets.

So how does this progress translate into tangible numbers?

 Over 90% of new in-scope claims to the market are handled electronically for Lloyd’s, company market is approaching 60%.  Over 90% of premium accounting entries are delivered electronically over the market repository.  250 market firms have signed the IMR Agreement to use the repository.  Over 50% of all policies are now delivered to the client electronically.

Looking ahead, our targets focus on finishing what we’ve started. This means, for example, increasing the scope of ECF and achieving full usage and moves to full electronic accounting ie the exchange of structured data messages for settlement purposes. Achieving full usage of electronic means for all parts of the insurance process is the goal and we are well on the way to its achievement.