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Role-playing: traditional boundaries blurring at Lloyd's

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AM Best’s latest market report, an examination of the London insurance market, has uncovered a “blurring” of the once-rigid divisions between the roles of brokers, insurers and reinsurers.

The global ratings agency says unsustainable costs and the rise of technology are forcing London market insurers to adapt their operating models to remain relevant.

While the report looks at many facets of the London market’s challenges, its conclusions about the way technology is being used to break down the barriers between traditional roles parallel emerging traits in the Australian insurance market.

Lloyd’s is unique, of course, but the local market nevertheless faces similar pressures and challenges – most notably cost containment, technology-driven strategies to bring the customer closer, and regulatory impacts.

AM Best says “radical action” at Lloyd’s to make it competitive with its competitors in the US and Bermuda in particular is upending the market’s long-held functional boundaries.

The London market focuses on specialty business, which requires high levels of underwriting expertise and relies on distribution through brokers.

But AM Best says “the roles of intermediaries, insurers and reinsurers are blurring, driven by merger and acquisition activity and resulting consolidation, the accelerating use of technology and analytics, as well as a more flexible approach to the support and utilisation of capital”.

In Australia, as in London, there are plenty of examples emerging of the lines between insurer and intermediary becoming less obvious. Everyone is seeking to demonstrate the value they offer customers while also lowering the costs of acquiring them.

In the past few years underwriting agencies have become more important to the Lloyd’s market, and now distribute about 30% of its business. AM Best says the agencies add to an already long distribution chain, which has pushed up the market’s acquisition costs even as administration costs have moved down.

“This is an issue the corporation is now seeking to address with the Lloyd’s Risk Exchange, which will…increase the efficiency of placement of relatively simple risks, improving the speed of placement and customer experience, and ultimately reducing operating costs.”

This will be followed by a platform able to handle the complex risks on which the market was built. AM Best notes that the use of technology is the key to cutting operating costs at Lloyd’s, “but progress to date has been slow and London market insurers are generally considered to be behind their global peers in their adoption of technology”.

The report says participants in the competitive global insurance market “that quickly adapt to new technology and have a progressive culture” will be best placed to increase revenue and lower costs.

London market risk carriers and brokers are now scrambling to master data capture and sharing to make the best use of the future Complex Risk Exchange.

Analytics is suddenly a very important word, with the report saying the risk carriers will take insights gained through risk data and combine it “with human judgement and commercial considerations to support decisions in respect of individual risks, portfolio steering and capital allocation”.

Meanwhile, Lloyd’s brokers are already using data and analytics to better understand their clients and add value to offerings. “Increasingly, brokers are also looking at how they can use analytics to match capital to the risks they are seeking to place.”

That brings the focus back to the need to get administrative and acquisition costs down, a task that is complicated by Lloyd’s lengthy distribution chain, from insured to retrocessionaire, “which has implications for costs as each party is compensated for their contribution to the process”.

“The need for all parties in the value chain to demonstrate the benefits they provide…has driven a widespread blurring of roles across the London insurance market.”

Brokers, for example, are increasingly assuming tasks traditionally performed by underwriters, such as the provision of advisory services and the pricing of risks. At the same time, insurers and reinsurers “are increasing the contact that they have with their insureds and performing some of the services historically provided by brokers”.

“Although carriers are not looking to disintermediate the broker, they are trying to get closer to their clients to understand better their risks and insurance requirements.”

AM Best expects the traditional role of the London broker to come under more pressure and predicts the commissions they charge for placing low risk/low value business to reduce.

And it warns that as technology opens access to the market in the longer term, “there is the potential for intermediaries to fall out of the distribution chain if they fail to provide additional value to clients”.

The ratings agency predicts technology will accelerate the evolution of the broker away from the pure placement of risk towards consulting and advisory services such as risk management and actuarial advice, the provision of data and analytics and the management of captives.

And it sees the use of facilities – where major brokers place blocks of business into the market in one bundle – as an example of intermediaries using their data and analytics in a way that closely resembles an underwriter.

“They do not provide the capital to support the risk, but they play a material role in the analysis of the overall risk profile of the facility, which informs pricing,” AM Best says.

For the future, the ratings agency sees the larger brokers like Aon, Marsh and Willis Towers Watson being better positioned to operate in the Lloyd’s market and to withstand the threat of disintermediation.

But it does see a role for smaller intermediaries, too, saying that while the larger players have the resources to invest in technology and analytics and keep pace with regulatory demands, smaller brokers can remain competitive “if they are innovative and flexible, and provide bespoke solutions to the market”.