Is the Insurance Market fully embracing changing technologies?

4 Minute Read

Market Transformation Overview

Over the past 20 Years the digital revolution has transformed the way that we buy and consume products and services, giant companies have been born and become monoliths that permeate almost every aspect of our daily lives. In the Insurance world, Insurtech funding reached $15.4Bn in 2021 spread across 566 deals (CB Insights 2022) and while the pace has slowed due to the wider post-pandemic financial and economic environment in 2022, the overall trend suggests that investment in the space will continue.

The development and increasing sophistication of distributed leger technologies, blockchains, use of smart contracts and APIs are transforming the way that insurance products are brought to market and sold, facilitating the emergence and rapid growth of Insurtech MGA’s worldwide. In the US alone MGA premiums are estimated to have increased 150% in the period 2015 to 2020 to $62.5Bn (Aon 2022).

While the traditional distribution landscape remains intact, largely due to brand marketing and distribution constraints for new MGA entrants, the potential exists in the form of technological and engagement enhancements to disrupt the existing model and bring new, differentiated products to market. Insurtech’s have the capability to efficiently access business by circumventing the traditional risk transfer distribution model and in the process cut acquisition costs, make data and process improvements and improve risk carriers understanding of the original risk.

Many Insurers, Reinsurers and Brokers are reacting proactively to these developments, shifting away from catastrophe focussed reinsurance portfolios and into Insurtech/MGA led strategies, providing expertise, capacity, investment and fronting capability directly to Insurtech MGA’s and their Investors.

There is a tangible benefit for risk carriers and investors where delegated risk portfolios can be measured and understood in real time. Detailed data capture enables catastrophe and accumulation exposures to be identified which improves portfolio modelling and analysis and loss reserving practices.

Policy issuance is automatic, premiums paid instantly, and the claims process is streamlined with valid claims paid within a matter of hours instead of months, greatly improving the customer experience.

In time, it is probable that in order to effectively compete for business and capacity, existing traditional MGA’s will have to effectively turn themselves into Insurtech’s through the adoption of technologies providing the enhanced reporting and information led strategies of the Insurtechs.

Investors and risk-carriers are generally attracted to low-cost market disruptors who offer a compelling USP, transparency and granularity of data and information that is captured at the very start of the risk transfer chain. Customers appreciate ease of use products that are accessible, competitive and where their claims are paid quickly and efficiently, it is a win-win scenario for all parties.

The shift in business practice and technological changes are here to stay, while there are some Insurtech’s that will inevitably fail in the coming years, the technology and route to market is proven, meaning that the better platforms will be either acquired or become unicorn companies trading as insurance entities in their own right.

The Future at Lloyd’s

How is Lloyd’s adapting to the changing business environment? Being a Market with a 330-year history, Lloyd’s is no stranger to change and development with such a long history adapting to an evolving landscape.

The announcement of Blueprint One shared a vision for the Future of Lloyd’s, followed by Blueprint Two which sets out a series of ambitious transformation and modernisation initiatives for the market and the implementation of changes that will positively impact the way business enters the market.

The launch of Lloyd’s Labs, partnership with Schroders to launch a market investment platform and allocation of an innovation budget to Syndicate business plans will further assist Lloyd’s to become an important partner, investor, and capacity provider by leveraging their global insurance licences, underwriting and business expertise.

Central to Lloyd’s data first strategy is the creation of the Core Data Record (CDR) which is built and integrated into the placement process in addition to the development of the iMRC that will replace the current market reform contract and will integrate data directly from the contract document via an approved placing platform.

However, are the reforms ambitious enough?

The focus of the Future at Lloyd’s reforms at the present time, appear almost entirely focussed on cost and efficiency gains. It is an essential focus that will ensure the future profitability and sustainability of the Market, especially given that in GBP terms Lloyd’s “other” expenses have increased 139% in the period 2016 to 2021 (Gallagher Re 2022). While this is sustainable in a rising market, increased expense costs that are not linked to revenue will bite when the market eventually turns again.

The blockchain technologies adopted by the Insurtech world appear to be perfectly suited to insurance portfolio management and a data first strategy. I sense that there are real gains by Lloyd’s from improving underwriting performance through embracing and integrating the potential of technologies and techniques being developed in the Insurtech world, improving data quality and consistency, provide real time analysis, increased understanding of portfolio composition, improved modelling data and outputs and enhanced risk accumulation and aggregation techniques that facilitate a more informed decision making, strategy, capital allocation and loss reserving process.

Perhaps the difficulty for Lloyd’s is that being a marketplace, it is comprised of a variety of individual participants and stakeholders which makes the implementation of large scale changes of this nature a real and unwieldly challenge. Nonetheless, the CDR and iMRC are a big step forwards on the path towards full digital trading and by predicating the population of the CDR from the iMRC at the beginning of the placement process, it should ensure that data is captured, and contractual documentation is in place prior to the point of binding, further improving placement and contract certainty standards.

With that being said, the fact that the iMRC will be a word document formatted to contain machine readable fields, does seem to suggest that the use of paper documentation and wet stamps will continue.

If full digital placement and execution is to be achieved, and ESG / net zero goals met then surely the use of paper contracts and wet stamps will need be phased out?

The remarkable resilience of the Lloyd’s Market during the pandemic demonstrated the potential to trade electronically, while at the same time preserving the face-to-face placement and negotiation process central to the Lloyd’s market, even if this was by Teams or Zoom.

No digital platform can replace the Broker/Underwriter relationship or the ability to sell and negotiate terms. So, while the slipcase can easily be replaced by a tablet, the unique nature of the Lloyd’s market can and will endure.

Allemond Ltd

Allemond Ltd is an independent Reinsurance Consultant offering a range of specialist reinsurance services and expertise, providing support to start-ups, MGAs, Insurtechs, Brokers, ILS Funds and Reinsurers.