After months of consultation, Lloyd’s launched its first blueprint document on 30 September to great fanfare, setting out six ideas of how the market needs to change in order to remain relevant in the future.
The so-called Blueprint One plan squares up to the challenges the market has faced for some time but has failed to address, and offers a detailed roadmap for how the changes will be delivered within an ambitious timeframe.
The initial response from the market was enthusiastic, albeit with a recognition that what lies ahead will not be an easy process. Having failed on execution in the past, there is also a realisation from the Corporation that it will be impossible to please all of the people all of the time, and that some elements of the market’s future-proofing may need to be mandated.
Two months on from the blueprint’s publication, Insider Quarterly tested the waters to see how the market now feels about the need for some quick wins on the technology front, the impact of a risk exchange on wholesale brokers and whether the models predicated in the syndicate in a box (SIAB) and lead/follow proposals are considered workable by managing agents.
Efficiency and cost
The high cost of operating within Lloyd’s has long been an issue for the market, and one that increasingly threatens its ability to compete on a global stage.
Lloyd’s five-year weighted average expense ratio is 7.7 points higher than that of the European “Big Four” reinsurers and 6.7 points higher than that of US and Bermudian reinsurers, according to figures from AM Best.
The rating agency cites inefficiencies, the length of the distribution chain and growing acquisition costs as key drivers of the market’s excessive expense.
At the heart of the ‘Future at Lloyd’s’ strategy is a bid to improve efficiency and bring down the cost of placing business in the market.
CEO John Neal has the ambitious target of reducing the market’s current expense ratio of 39.2% to 30% by 2025, bringing it into line with other leading global carriers.
By fully leveraging digitisation and automation while simplifying processes, he believes Lloyd’s could ultimately bring the expense ratio down even further, to 25%.
The market reaction to the efficiency drive laid out under the blueprint has been widely positive. The overhead of administering the whole process end to end needs to be addressed as a matter of urgency, according to Ian Fantozzi, chief operating officer at Beazley.
“The number of times an insured’s data is keyed, rekeyed, scanned and moved about the market creates inefficiencies that must be addressed,” he says.
“The simplification of how we settle premium and claims payments is where the most potential lies,” agrees Christopher Croft, chief executive of the London & International Insurance Brokers’ Association (Liiba).
“The current process relies on brokers doing far more on behalf of carriers than we do in any other market. It is a significant disincentive to bringing business here.”
For some, these measures cannot come quickly enough. In November, Hamilton, Pioneer and Vibe announced they were placing syndicates into run-off, three relatively new entrants to have made such a decision in recent months.
Syndicate 1980 was launched as recently as 1 January 2018, with Asta as its managing agent, and Vibe Syndicate began underwriting on 1 July 2014. Acappella started life as Special Purpose Syndicate 6110 in 2012.
All have cited high operating costs as reasons behind the exits, with Pioneer stating that the syndicate structure was no longer “economically efficient compared with its other capital arrangements”. Hamilton took on Acappella as part of its acquisition of Pembroke Managing Agency, with group CEO Pina Albo concluding that the syndicate was “unlikely to produce an adequate return on capital”.
Big box, little box
Through its SIAB framework, Blueprint One aims to tackle the prohibitive set-up and operating costs and encourage new, innovative business to come into the market. Munich Re was first to announce it would launch the first SIAB, called the Munich Re Innovation Syndicate, to underwrite a range of business including renewable energy and parametric weather risks.
As reported in sister publication Insurance Insider, Lloyd’s has since received around 40 other applications.
Asta chief operating officer Lorraine Harfitt welcomes the market’s efforts to make it less expensive for new entrants and identifies SIAB as one of the blueprint’s most critical strategies.
“The syndicate-in-a-box initiative has created unprecedented interest in Lloyd’s as an operating environment, and we’re already worked on bring some exciting new entrants to the market,” she says.
“Clearly, the lean cost model of SIAB makes [technology] a top priority if new entrants of smaller size and scale are not to be burdened by cost, but are instead to focus on maximising the qualities they bring to Lloyd’s.”
Harfitt acknowledges that, while painful, the market’s ongoing Decile 10 review, which is being led by Lloyd’s director of performance management Jon Hancock, has been necessary.
“As with the wider issues that the blueprint is seeking to address, habitual loss-making and poor underwriting performance had to be dealt with head-on,” she says. “The review sent a clear message to underwriters about what is expected of them and the steps they need to take – not just to improve, but to outperform their non-Lloyd’s peers for the long term.”
“Having taken ten syndicates through the process this year and last, our impression overall is that the review has had a positive impact on the market,” she continues.
“That said, care should be taken to avoid a blanket approach, and successful remediation must be recognised, to ensure syndicates aren’t unfairly disadvantaged, or innovation stifled, and business lost to other markets.”
Technology and automation
Key to achieving efficiency in the market is the need to embrace digitisation and automation.
The blueprint sets out a number of projects aimed at achieving this aim, including a risk exchange, for streamlining the placement of high-volume, low-premium risks, and a complex risk platform for open-market and reinsurance business.
“The creation of a complex risk platform leveraging data and technology, plus the fast-track SIAB for the outperformers, will help catapult Lloyd’s back to where it belongs – a home for the best talent at the forefront of risk transfer,” says Jennette Newman, partner at Clyde & Co and vice president of the UK Forum of Insurance Lawyers (Foil).
“Combining this with an automated low-complexity exchange will help address the cost issues which have seen more commoditised risk classes fail to meet the new performance standards.”
“The speed of adoption of PPL [Placing Platform Limited] demonstrates the market is capable of rising to the challenge, on a technology level at least, despite all the naysayers,” she continues. “We need to travel a middle path – no-one is going to sign up for a Big Bang transformation but we do have to make steady progress at a reasonable pace in order to remain competitive on the world stage.”
On the claims side, the market’s electronic claims file will be phased out and replaced by a multi-channel claims solution, with the straight-through processing of non-complex claims.
“We need to be able to give our customers a market-leading claims service,” says Fantozzi. “What’s important is that the overall Future at Lloyd’s package makes the market a better place to do business and gives the customer a better overall experience.”
AM Best notes that Lloyd’s is still behind its peers in technology adoption, despite initiatives such as the London market target operating model, which is being wound down to make way for solutions outlined within the Future of Lloyd’s blueprint.
While there is potential to create “meaningful cost efficiencies” and improve the overall process of placing business in the market, there is “a high degree of execution risk due to the level of investment and cultural change required,” according to the rating agency.
For his part, Lloyd’s chief executive John Neal argues that there has never been a better time for an ambitious roll-out of technology solutions.
The development of cloud technology and the market’s ability to interact with and interrogate legacy data means that conditions for change are more positive now than they were five or ten years ago.
As Neal told the audience at AM Best’s 2019 Market Briefing in London: “Then we were all doing big-data management programmes to try and deal with the transition from legacy to new. We don’t need to do that anymore.”
While the market needs some quick wins, this should not be at the expense of getting it right, thinks Dominic Kirby, managing director, ArgoGlobal.
“The technological drive that will change how the marketplace functions is critical,” he says. “The connectivity of the market needs to improve significantly to enable all the proposed initiatives to succeed, given the scale and quality of data that is required.
“This doesn’t simply apply to the risk exchange and complex risk platform, but also the claims service and other proposals. A tech revolution across the board is absolutely fundamental.”
“The blueprint proposals and timetable have ambitious reach,” he continues. “Some may stretch the boundaries of possibility.
“In its efforts to revolutionise the market – and to win over the naysayers – it would undeniably be helpful for Lloyd’s to demonstrate some quick, effective change.
However, given the scale of change needed, it is imperative to get these changes right and to ensure they are future-proofed. Acting hastily to achieve quick wins could be counter-productive in the long term.”
The overwhelming feeling is that Lloyd’s has a one-time opportunity to deliver technology solutions that take the market to where it needs to be.
Central to the risk exchange and other initiatives is ensuring market participants can plug and play and that standards are consistent across the market.
Beazley’s Fantozzi thinks Lloyd’s should be wary of quick technology wins that are difficult to scale-up or which don’t effectively replace legacy platforms.
“It’s not necessarily technology that can provide the biggest bang for our buck,” Fantozzi explains.
“Agreeing data and processing standards for APIs in the market would make a significant difference – then market participants and technology vendors can be free to innovate with technology solutions safe in the knowledge that they are able to integrate and transact business against the same standards.”
“Our future is API-shaped,” he continues. “I could see all risks being placed via APIs within the next 10 years.
“I don’t think Lloyd’s has much choice but to develop some kind of exchange that enables its market participants to connect via APIs. The key is to focus on building against data standards that lead to consistency and quality of information flow, via a highly resilient infrastructure.”
“You have to set out a credible plan for dealing with the legacy of the existing infrastructure and process, otherwise people will keep using the old processes and infrastructure,” he adds. “We shouldn’t have to use mandates to get people using new platforms; we should set deadlines for the decommissioning of the old process and then support market participants in their plans to meet those deadlines.”
Brokers on board
Lloyd’s has had a mixed history delivering on technology initiatives. From Kinnect through to Project Darwin, a common thread uniting the failure of previous attempts to automate market processes is a lack of buy-in from brokers and other key stakeholders, such as the London company market.
The challenge of managing the needs and expectations of so many difficult stakeholders across the Lloyd’s market has always challenged past initiatives, according to Asta’s Harfitt.
“Engaging with the market early and getting buy-in is critical,” she explains.
Without that, conflicts can arise, and unnecessary delays in decision-making can hamper efforts to implement change.
This is perhaps why the competitive threat from those markets and players unencumbered by legacy problems has become more apparent.”
A risk exchange will require buy-in from the broking community. There are rumblings in the market that wholesale brokers are concerned about the potential for disintermediation the exchange poses and are also unhappy with the push to reduce the market’s expense ratio, which they believe can only be achieved through significant cuts to acquisition costs.
Neal is adamant that the role of the broker is intrinsic to Lloyd’s future, but acknowledges that not every element of the strategy as set out under Blueprint One is going to be welcomed by all stakeholders.
“Each of the solutions that we put forward is mildly offensive to one of our constituents,” he said at the recent AM Best briefing. “When you put the risk exchange forward, the wholesale broking market says, ‘You’re completely undermining our future’. When you put forward SIAB, the existing capital would say, ‘Why on earth would we let anybody else in?’”
Liiba has cautioned that any changes to the marketplace should not be used to undermine the role of the broker in the insurance distribution chain.
“London is an almost wholly intermediated market,” says Croft. “That is because our sophisticated customers recognise the enormous value and expertise brokers deliver in getting them the outcomes they need. That is not an offering easily sidelined by anything.
“History has made many sceptical that Lloyd’s will be able to deliver on its plans,” he acknowledges. “Early delivery of new capability will help dispel this fear. But it needs to be something genuine – a comprehensive new service that firms can actually adopt.”
Croft welcomes the creation of a risk exchange but adds that broker adoption of new services is essential in determining their future success.
“It is vital that broker input is sought and heeded in the design
and delivery of the services,” he warns. “Take PPL as an example. It has worked because the entire broking community has got behind it and driven use. That is the key feature that Lloyd’s needs to ensure in all its initiatives.”
Follow the leader
On the underwriting side, the proposed lead-follow model is likely to force the most change upon syndicates, although it is not yet completely clear how this would work in practice.
At a high level the intention is for flexible structures to be developed that will allow capital to follow expertise, with significant cost benefits for the market as a whole.
Leaders will be remunerated for the expertise and services they provide to following markets, while followers will focus on portfolio underwriting and enjoy lower operating cost structures. Beazley’s tracker syndicate is one example of how this type of concept could be employed.
However, a greater distinction between leaders and followers could leave some syndicates struggling for relevance as the market bifurcates. AM Best notes there is some concern in the market that a lead/follow model will diminish “the important contribution that an influential and informed follower can make in the analysis and pricing of the risk”.
“You cannot underestimate the amount of change management effort required when delivering large initiatives to the market,” says Beazley’s Fantozzi.
“What’s important is to have a vision that recognises there isn’t just one defence against disruption – there will need to be several, and these will need to evolve as time goes on. It is encouraging to see that the Future at Lloyd’s is taking this approach.”
There is a recognition that the Corporation must win hearts and minds and bring the market with it as it embarks on the most critical Future at Lloyd’s projects. The fact that Lloyd’s chief executive Neal is a well-respected veteran with strong industry credentials has struck the right tone with many market traditionalists, resulting in an “outstanding level of support” during the blueprint consultation.
Whether this support can be sustained as the Corporation moves from the idea stage towards implementation is another thing. Effective change management will be required at every step, according to Harfitt.
“Long-lasting change must be led from the top, and we’re pleased to see the Corporation taking more control over future direction,” she says. “However, change is also about behaviours and mindsets rather than just simply transforming systems and processes. This will be critical if the blueprint is to succeed.”
The Corporation does not need full buy-in to push through change, having shown it has the power to enforce change even when faced with resistance, including its tough stance on underperforming business and mandates previously issued on PPL, silent-cyber wordings and participation in the market culture survey. But clearly support from the market’s main stakeholders will make the journey a much smoother one.
“The Lloyd’s of the future needs to be bold in its vision and nimble in its execution if it is going to be able to compete with many low-cost competitors in other territories,” says Foil’s Newman.
“History shows us that Lloyd’s does not have a strong track record in terms of implementing change, so how the Corporation manages that process will be critical for the market’s future.”
This article was first published in the Winter 2019 issue of Insider Quarterly.
