While some LMP reform could have been achieved with only a quill pen and reams of paper, it will be electronic data transfer that provides the competitive edge

London Market leaders are finally agreeing on something – that the quill pen will not do as the competitive weapon of choice in the global insurance market of the 21st century, says Tim Carroll*, European non-life business leader, GE Insurance Solutions.

Getting market consensus was never going to be easy in London. Without a statutory or regulatory “stick”, history shows that it is difficult to get the myriad of competing entities in the London Market to voluntarily agree to anything collectively, let alone major structural changes. Therefore, a reform programme such as the London Market Principles (LMP) was always going to face an uphill battle.

When the LMP initiative was launched in February 2000, it was hoped that the “carrot” approach would be sufficient – the perceived urgency of the change had created the necessary “burning platform” for market practitioners to drive the LMP reforms ahead voluntarily. After all, it was obvious that the inefficiencies of the London Market were making it less competitive in the international re/insurance marketplace. With this strong economic motivation, it was thought that the initiative would move forward – if not quickly, then steadily.

The aim of the LMP reforms was to improve the Market’s practices by: achieving greater contract certainty at the time of policy inception; ensuring that premiums and claims were paid in a timely fashion; creating a standardised LMP slip and developing efficient claims processing.

Within several years of the initial rollout of the LMP reforms, some progress had been made. The back-office bureaux were merged in 2001 to create Ins-sure, a single processing centre for the market. Further, the LMP slip was created in 2002 and its use was slowly growing. But in 2004 – four years after the rollout of the LMP programme – the lack of IT consistency across the market was hampering progress. Paper-based transactions were the rule, rather than the exception. And, of course, the “deal now, details later” culture still reigned.

Beating the regulatory stick

The LMP reforms had stalled. It finally took the threat of a regulatory stick that created the momentum for reform. In December 2004, John Tiner, chief executive officer of the Financial Services Authority (FSA), challenged the London Market to find a market-driven solution to the issue of contract certainty by the end of 2006, or have regulation imposed on it. Regulations could have imposed capital allocation penalties for non-compliance as well as actions against approved persons. And, of course, there also would have been associated reputation and brand damage for companies that violated the rules.

The collective minds of London Market practitioners were suddenly focused and great progress has been made over the past year and a half – especially encouraging for a market that can rarely find its way toward consensus.

Tiner acknowledged in a March 2006 speech that the UK insurance market has made significant progress toward contract certainty, and, as a result, regulatory intervention was being put on the “back-burner.” However, he cautioned against complacency. “The market must continue to stretch itself to guarantee that the challenge is met by the end of the year…,” he continued.

There is good reason to be optimistic to believe that Tiner has knocked over the first domino in a virtuous circle – breathing new life into the LMP reforms.

Historical business realities

Long before the LMP project was launched in 2000, it was clear that long-standing industry practices needed challenging. Premium and claims payments in the London Market were notoriously slow. Customers frequently complained about receiving policy wordings late, often after policy expiration. LMP was intended to challenge and change some long-standing industry practices, which were hurting the market’s reputation and had the power to damage a company’s bottom line.

For example, contract “uncertainty” opens the door to expensive and lengthy arguments in the courtroom and errors and omissions exposure to brokers and underwriters. With the complexity and volatility of modern insurance risks, it is a disservice to clients and shareholders to continue a “deal now, details later” culture. Clients want certainty that the policies they’ve purchased will cover their risks when the worst happens. Further, without contract certainty, it is difficult for an underwriter to adequately price a policy – especially if arguments over wordings ultimately increase claims beyond expected levels for probable maximum losses.

Another business reality in 2000 was the existence of a soft market cycle – the effect of which was exacerbated by a period of lower investment income. London Market leaders at the time realised that market processes can become a deal maker, or breaker, when rates are low and clients have their pick of capacity. In such a climate, customers may opt for the market that actually provides documentation in a timely manner and quickly pays claims. London was losing its competitive edge.

London Market leaders and practitioners also were highly aware that the inefficiencies of the market were squeezing margins for insurers and reinsurers and adding to their expense ratios, which is especially important in a soft market cycle when competition for global business is fierce.

With these business realities, it was no wonder that the LMP project was developed and endorsed by the International Underwriting Association, Lloyd’s of London and the Lloyd’s Insurance Brokers’ Committee (now called London Market Insurance Brokers’ Committee). Progress was slowly being made until the September 11th 2001 terrorist attacks derailed market attention from the development of the LMP slip, which was finally introduced in 2002. Thereafter, use of the slip was slowly increasing.

Of course, in 2001, the market again hardened. The motivation for radical process changes had diminished. The LMP programme appeared to be stalled. When customers are desperately seeking capacity and willing to pay higher prices, there often is little management motivation to spend money on back-office processes.

As hard market cycles never last for very long, such shortsightedness will hurt the London Market in the long-term. Efficient back-office processing and timely claims payments are competitive advantages in a soft market.

Is change here to stay?

While the history of the London Market is littered with failed initiatives, there are strong signs that forward momentum is here to stay; many market leaders appear to have a strong commitment for change and have finally found a way to achieve it…

For example, Doctor Richard Ward, the new Lloyd’s Chief Executive, in a recent market letter, noted that good progress has been made towards achieving contract certainty, with the average managing agent reporting an 80 percent success rate in April. Pointedly, Dr Ward said he has been considering “how best to drive reform of the placing process harder, in support of both the contract certainty target and wider process efficiency.”

Another Lloyd’s initiative was rolled out in April when a group of six Lloyd’s managing agencies (known collectively as G6) moved to develop a process that uses ACORD data standards, which ultimately will allow the electronic transfer of data and documents for everyone in the market who wants to participate. From contract certainty at policy inception to ultimate claims settlement, such a process would take a giant step toward realising the LMP reforms.

While some LMP reform could have been achieved with only a quill pen and reams of paper, it will be electronic data transfer that provides the competitive edge. IT has a substantial role in achieving radical reform.

When the original LMP reforms were rolled out in 2000, a report describing the principles said: “Previous initiatives have foundered because the technology did not exist to support them adequately. These [LMP] proposals are not technologydemanding, although their implementation will benefit from the application of readily available technology solutions.”

It is ironic that the importance of technology to the reforms was recognised in 2000 but that it took the FSA’s threatened regulatory stick to provide the tipping point for significant change. At least London Market leaders can finally agree on something – that the quill pen won’t do as the competitive weapon of choice in the global insurance market of the 21st century.

*At the time of the introduction of the original London Market Principles 2001, in addition to his position at GE, Tim Carroll was chairman of the International Underwriting Association.

This Special item appeared in issue 106 of JTW News - June 2006

Author: Tim Carroll - GE Insurance Solutions