Is the market suffering from a skills shortage?

Collateralised-RE

Is the market suffering from a skills shortage?

A recurring topic at the moment is the perceived skills shortage in the insurance and reinsurance market and understanding that this is an emotive subject for some, it is important to note that making broad generalised assumptions means that the following will not be true in every case, there will always be exceptions and there are a lot of very talented people working in our industry, but maybe there are just not enough of them to go around.

There are several factors at play with the pandemic is often identified as the main culprit. However, my belief is this is an issue that has been developing for quite some time and has been exacerbated by the pandemic, some of the factors include:

Increased Competition

Corporate and regulatory shifts in the Broking and Company sectors are a major contributor to talent demand:

  • Broker M & A has caused a shift of placing broking talent away from the Big 3 to smaller brokers, many launching new teams and product lines
  • Growth of Insurtech and MGAs lures underwriting talent away from insurers and reinsurers through greater alignment to results and performance
  • Emergence of the Cyber market that has seen unprecedented growth for a new business line attracting talent to meet a seismic shift in demand for expertise
  • Growth of legacy market has been successful recruiting experienced claims, reinsurance, and actuarial staff
  • Changing regulatory environment impacting, accounting, operational and compliance functions

Generally, the greater the number entities and increased number of front-line teams creates greater competition for the talent required to support them.  Especially if you consider some of the key areas where there are skills shortages – analysts, actuaries, technical contract wording and outwards reinsurance technicians, there doesn’t seem to be too many people bemoaning a lack of underwriting or broking talent.

Graduate Trainee Schemes

The growth and success of graduate training schemes in the past 15 years has proven to be an excellent tool for identifying, attracting and recruiting talent into junior Underwriting and Broking roles.  However, there is perhaps an unintended consequence of blocking the career paths for talent who may not have benefitted from a university education or graduate trainee scheme recruitment.

A key aspect necessary for talent retention is the creation of opportunity and progression hence it becomes difficult to retain talent in junior or technical roles when there are limited prospects to the more attractive transactional positions.

Another factor affecting the skills gap might be that successful graduates entering into Broking and Underwriting roles are missing out on vital technical experience gained from starting at the bottom that would ultimately benefit and augment their business skills and acumen.

Decline in “on-the-job” mentoring

The transfer of knowledge and benefit of experience between colleagues can happen on both a formal and informal basis and is an essential part of professional development that often occurs naturally by working alongside one another.  The pandemic accelerated changes in working practices where we can now work in a more flexible, tech enabled way.  Although, I suspect that often, Zoom or Teams was generally seen as a meeting or task replacement tool rather than an opportunity to focus and collaborate on a one-to-one basis. 

The opportunity to learn on-the-job while sitting alongside peers has diminished, losing some of the mentoring opportunities that are gained by being physically together as a team, now that we have returned to a new normal, where the market adapts to a flexible approach to working the challenge is to coordinate efforts to ensure that the mentoring aspect of career development returns – we cannot simply rely on professional qualifications study to develop staff.

The Big Resignation

The big resignation, a direct consequence of the pandemic, where people re-evaluated their work-life balance and decided to leave the market opting to take retirement or new alternative challenges closer to home.  

“A study by McKinsey found that 65% of those who resigned from a job in insurance or finance between April 2020 and April 2022 left the industry entirely. And the departures from insurance come as the industry is starting to experience a long-anticipated sort of Great Retirement, as an awful lot of talent is aging out of the work force.” (InsuranceThoughtLeadership.com, 2022)

The impact is the creation of a talent vacuum where talent is leaving the industry and is not being replaced.  The McKinsey report warns that:

 “there simply aren’t enough traditional employees to fill all the openings. Even when employers successfully woo these workers from rivals, they are just reshuffling talent and contributing to wage escalation while failing to solve the underlying structural imbalance. To close the gap, employers should try to win back non-traditional workers.”  

An example - Contract Wording Specialists

One of my areas of experise and a good example of the cause and effect of the staffing crisis is the current shortage of contract wording specialists.

In February 2017 Lloyd’s held a Wordings Conference, “Better Wordings Matter” which highlighted some worrying trends:

  • Managing Agents had lost their focus on Contract Certainty
  • 33% of risks are not reviewed pre-bind by the leader and 66% by a following market
  • More than half of managing agents in a follow position do not carry pre-bind checks
  • More than 60% of managing agents employ less than five wordings experts

In a Lloyd’s poll at that time, the Talent Gap was highlighted as the most important challenge for wordings. (Lloyd’s, 2017)

While Lloyd’s will have been busy since 2017 strengthening the underwriting controls and reporting around the pre-bind review of contract wordings, it is unlikely that there will have been significant improvement in the talent gap given that the staffing issues will have been subsequently impacted by the pandemic and all the causes highlighted above.

In recent weeks I have seen a Recruitment Agency form a specific recruitment desk dedicated to wordings specialists advertising several vacancies with some very high salaries, an approach that I have never seen previously for this type of role.  Contract wordings specialists have long been an under-valued component of the market, it is a mundane but important role that requires diligence, attention to detail, deep technical understanding of insurance coverages, financial operations and knowledge of the legal structures surrounding the industry.  A good contract wording specialist is usually capable of far more than the role they are employed in and as I have found during my career, it is very difficult to develop a career path beyond this specialism.

Going back to the startling statistics revealed by Lloyd’s in 2017, a third of contracts being underwritten not being reviewed equates to £bn’s of coverage being bound without making the proper checks.  Little wonder then that the estimated leakage in disputes, legal costs and claims is estimated at £500m annually.  One of the contributing factors could be a more fundamental problem as the fact that there remain dedicated contract wordings roles harks back to before the 2007 contract certainty reforms, a time then there was separation from the underwriting process and contractual agreement as the contracts would often follow months or years after the binding of a risk. 

By accelerating the contractual agreement to pre-bind, the role has effectively changed and became a direct part of the underwriting process.  It is a positive development and ultimately an underwriting responsibility to check the contract in full before binding.  Increased use of technology, document comparison and checking tools aid and help to streamline the process but they will never be able to replace the understanding of coverages and the nuance of contractual language, especially in bespoke contract wordings.  Therefore, rather than bemoan a talent shortage, it is as much a failure of the market since 2007 to adapt and develop the required skillsets within underwriting teams as it is to attract new talent to a dedicated specialist role.

How can the market improve?

Unfortunately, there is no silver bullet to success, and it takes time, a lot of time.  The market could do significantly better to adapt to a changing working environment by adopting some of the following approaches:

  • Invest in Apprenticeships – to run alongside Graduate Training Schemes, providing greater opportunities for recruits who choose not to follow a path into university education
  • Defined career pathways – provide demonstrated and attractive career pathways for technical staff outside of broking and underwriting roles
  • Work harder at staff retention and leakage – for example, a lack of flexibility in working approaches has historically contributed to the loss of a huge talent pool where many women have faced time, commuting and childcare barriers preventing their return to the office after taking time away to start a family, while others have to make huge personal sacrifices in order to do so.  
  • Collaborative approach – use technology proactively to help team mentoring and improve on-the-job training and skills development
  • Develop future skills – help junior staff to develop the skills required tomorrow, in addition to those required today. As we adapt to become a more data led market, algorithmic underwriting, augmented underwriting, machine learning and technology led strategies are here to stay

 

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.

Follow Allemond on Linkedin to find out more learn more about our offering and progress. Allemond Ltd: Overview | LinkedIn

Can Treaty Reinsurance placements be digitised?

Can Treaty Reinsurance placements be digitised?

5 Minute Read

There has been a great deal of progress developing digitised placing platforms and the Lloyd’s market has been successful to date in achieving targets for the use of its preferred platform PPL, accomplished principally thorough the execution of high volume / low value Direct and Facultative business. 

However, the binding of Treaty Reinsurance and Retrocession business remains a manual process in London, Bermuda, and elsewhere.  In this blog we are going to take a brief look at some of the reasons why and the potential implications of not embracing technology. 

There have been previous attempts to introduce digital placing platforms to Treaty placements, notably with Ri3K in the 2000s, but this did not achieve any real lasting success, take up rates were proportionately very low and it is fair to say that not every Treaty Underwriter was a willing participant at that time. 

This might suggest that the Treaty market is a poor adopter of technology and adverse to change, however I believe that at the current time the appetite and motivation exists in the market to evolve and embrace digitisation and the tools to achieve this have improved considerably.

In its Blueprint Two manifesto, Lloyd’s highlighted its intention to work with reinsurance brokers and markets to determine a way forward to support this business through consultation and experimentation.  It is the right approach but is the full digitisation of Treaty Reinsurance placements achievable?

Inhibiting factors towards digitisation

The path to full digital placement does not appear to be an easy one, and there are several inhibiting factors that may might hinder global progress:

  • Global spread of the reinsurance market
    The circa $235Bn GWP Non-Life Reinsurance Market (A.M. Best, 2022) is globally diverse with concentrated underwriting hubs in London, Bermuda, USA, Europe and Asia servicing a customer base located in almost every corner of the world.
  • Lack of leadership
    When it comes to placing business, Treaty Reinsurance is a tripartite process with the Buyer having a far more “hands-on” role in the placement than seen for Direct & Facultative placements.  The question of who drives the digitisation process is intriguing:
    • Sitting in the middle of the transaction and controlling the distribution of reinsurance placements, the Broker clearly has the greatest influence over how the business is placed and administered but will always be dictated by their Client’s (the Buyer) instruction.
    • The Buyer is at the start of the value chain and ultimately is the key decision maker however, with a diverse range of entities it is difficult to see if and how a consensus or joined-up approach to digitisation could be achieved.
    • Similarly, Underwriters sit at the opposite end of the value chain, but even where they command a sizable market share it would be a very brave move for a Reinsurer to mandate placements on a particular platform without a consensus approach
  • Lack of regulated influence
    While the Lloyd’s Market remains the largest Insurance marketplace in the world, its share of the global Non-Life Reinsurance Market is waning and equates to approximately 8%, some of which will be self-generated. There is a lack of regulated influence focussed on Reinsurance elsewhere in the world and Lloyd’s competitive market position will inhibit its ability to implement wider change to Treaty placements through a regulated mandate.
  • Multiple Solutions
    From having had only one or two viable options available for the past 18 Years, there are now several placing solutions at the disposal of the market.  Unfortunately, there doesn’t appear to be an iPhone equivalent in the Reinsurance world, each appears to have its own merits and often takes a siloed approach to isolate different aspects of the placing function to integrate with other broking and underwriting accounting systems through APIs.  The main concern is that underwriters will be turned-off digitisation if there are numerous platforms, portals, protocols and logins to remember for different clients, brokers or classes of business.
  • B3i Insolvency
    The B3i platform looked to have some great ideas and was probably the only platform seeking to offer a complete and fully integrated solution to the market utilising blockchain technology.  It appears that an unfortunate combination of timing and market conditions prevented them from securing the seed capital required to progress with their plans.  Nevertheless, this will have spooked many who will be very careful who they engage, you wouldn’t want to spend time and money integrating a platform only for it to go into insolvency.

But why does Treaty Reinsurance need to be digitised, it has operated well up until now hasn’t it?

  1. Treaty Reinsurance has never achieved Contract Certainty!

The manual placement of Treaty Reinsurance contracts is an inefficient process, mainly because there remains a discrepancy in the Contract Certainty guidance that has not fully removed execution risk from the placement process.

The introduction of the Contract Certainty guidelines in 2007 marked a paradigm shift for the London Insurance Market and beyond, to a large extent ending the culture of “deal now, detail later” where only the high-level terms were agreed before entering into the contract and the full wording finally agreed months or in some cases years after the inception. 

The Contract Certainty guidance definition is as follows (LMG, 2018):

“Contract Certainty is achieved by the complete and final agreement of all terms between the insured and insurer by the time that they enter into the contract, with contract documentation provided promptly thereafter”

“Promptly thereafter” is further defined as being 7 days following inception for consumer facing contracts and 30 Days for all other contracts, i.e., Treaty Reinsurance.

The intention of this definition was to allow a period of grace for contracting parties as a buffer to clear up the administrative documentation details in busy renewal periods. However, it remains the case for many placements that only the basic terms are agreed in advance of the inception date and the final contractual documentation is not agreed or released until well after the inception date in some cases. 

Effectively in these cases the benefit of the big change in 2007 was to bring full contract execution forward from months/years to 30 days, a huge improvement but by no means perfect.  If you are a Treaty Reinsurance or Retro Underwriter, how many times have you been faced with unexpected changes in conditions or negotiations after the inception date?  What would happen if there was a major loss to the contract in this period?

As the market hardens, contractual terms and conditions will inevitably tighten, therefore, it is not necessarily the case that an expiring contract can be relied upon as the basis of coverage for a renewal, if that ever was the case!

Digitisation of the placement process is the solution that should enable full contractual execution at the inception date of the contract, eliminating execution risk created by the inefficient manual process.

  1. Beware the funding gap

Insurtech led technologies are improving product efficiency at the front end of the risk transfer chain, providing customers with instant contracts and accelerated claims payments, often within days for short tail risks.

Cumbersome accounting systems and inefficiencies in the delegated underwriting process means that there is the possibility of a funding gap where there is heavy loss experience early in the contract period and the Treaty Placements have yet to be finalised.  Particularly where an Insurtech is backed utilising capacity via quota share reinsurance.

In addition, the existing funding arrangements within Treaty Reinsurance arrangements might prove too time consuming to establish, cumbersome to administer and provide insufficient performance to meet the commitments made to the original customer, especially where there is a large cat loss or heavy loss experience that exceeds any funds withheld provision.

So, what is the potential solution?

Digital placement is achievable, the appetite and the technology is improving all the time however, without regulatory impetus or a coordinated community approach I am sceptical that there will be a meaningful market take up of digitised placements in the near future without a crisis event that forces regulatory intervention or change.

This perhaps suggests that there will be a piecemeal approach over time where some pioneering entities lead the way, buying in to new placing formats, while the rest of the market follows a proven path of success at a later date when the winners have been decided.

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.

Follow Allemond on Linkedin to find out more learn more about our offering and progress. Allemond Ltd: Overview | LinkedIn

Bibliography

A.M. Best. (2022). World’s 50 Largest Reinsurers. A.M. Best.

Lloyd’s. (2022). Bluepring Two.

LMG. (2018). Contract Certainty Principles and Guidelines.

LMG. (2020). London Matters 2020.re

Can Collateralised Re win back investors?

Can Collateralised Re win back investors?

6 Minute Read

My goal in approaching blog writing has been to focus on areas of the industry that could perhaps be improved, I also find it fascinating to follow market trends and developments and it was good to see some of my thoughts on the current reinsurance market conditions re-affirmed by speakers at the Artemis London Conference last week, my thanks to them for some of the points detailed in this post.

Having spent a lot of time in my career working in the Property Reinsurance and Retro markets, I have been lucky enough to have worked for and with some good people who were always ready to experiment and try new ideas and approaches, this enabled me to gain experience and exposure working with new products – ILW’s and CBOT in the 1990’s, Collateralised Re and Cat Bonds in 2000’s and some of the Pillared Cat products in the 2010’s.

Innovation and new product design is usually a necessity driven reaction to counterbalance supply and demand dynamics when the market becomes constrained or distressed.  About a once in a decade occurrence during my career, most notably following the major loss events of Hurricane Andrew, 1992, World Trade Centre, 2001 and Hurricane Katrina in 2005.

Current Market Conditions

It is not difficult to see that buyers of catastrophe exposed reinsurance products are currently going through a tough time, capacity is constrained, and the pivotal Florida Property Cat renewal season displayed plenty of signs of distress that will likely be a bellwether of what is to come in 2023. 

To recap some of the key outcomes:

  • Citizens (Reinsurer of last resort) was only able to secure $2.5Bn of the $4.7Bn of the coverage sought
  • Florida Office of Insurance Regulation entering into a temporary reinsurance arrangement with Citizens to protect policyholders and keep additional policies out of Citizens
  • Insurers were unable to complete their orders, especially at the lower end of the risk tower
  • Rating firm Demotech issued downgrade notices to 17 companies, later downgrading 2 following widespread pressure

(Insurance Insider, 2022)

Difficult Florida renewal seasons are not a new phenomenon, it is an insurance market with huge catastrophe exposures and a relatively fragile capital base, there is a heavy reliance by Insurers on reinsurance protection to meet solvency requirements.  Therefore, it is not unusual for this particular segment of the market to go through a distressed period, except perhaps on this occasion there has not been a major loss event for 4 years.

It is a playbook that is being repeated in other cat exposed regions in the USA and in all corners of the world where buyers have faced difficulty securing capacity for low level layers at any price, even in markets where results have been good, and capacity is has been previously supplied in abundance. 

Prior Decade Development

The following exhibits, while subjective, tell a typical story of how ILS capital inflows have impacted the market during the period 2011 to 2018, we have seen dramatic growth in the supply (from $28 to $97Bn) complimented by a fall in price as demonstrated in the Guy Carpenter ROL Index below.

(Aon Securities LLC, 2022)

Cat Bond issuance has increased steadily YoY during this period as have ILWs, with the steeper gains made in the Collateralised Re and Sidecar areas.

The period from 2018 to 2021, also saw a string of losses impact the Collateralised Re sector, Hurricane Irma, US wildfire and tornado events, European Floods, Winter Storm Uri and Covid-19 fuelled by a combination of climate change and increasing social inflation.  Even where these events did not directly cause losses, they served to trap collateral needed to support renewals and reinvestment, which is an inefficient use of capital from an investment perspective.

Cat Bonds on the other hand largely escaped any impact from the smaller loss events, hence their development has continued unabated during the loss impacted period while Collateralised Re and Sidecars have contracted, generating a price recovery to 2013 levels in the ROL index.

Impact of Weakening Conditions

2011 to 2018 was without doubt a buyers’ market, what the graphs cannot show is the slippage in terms and conditions experienced in Collateralised Re products, neither do they show the impact on the Retrocession market; a much smaller but important market given that many Reinsurers rely on the Retrocession programmes to help shape their underwriting strategy. 

The Retro market is an area with opaque data and greater volatility, where capacity changes (as well as losses) are amplified in comparison to the Reinsurance space. So, while it generates superior returns, the volatility and data constraints mean that it tends to be approached with caution by ILS investors.

The proliferation of Pillared and Aggregate Products in the Collateralised Re sector during this period served to lower retentions and changed the purchasing motivation of buyers from one of capital preservation to results protection, or perhaps more cynically, bonus protection.

Lowering attachments and the spread of loss coverages in combination with increased frequency of loss events and social inflation has exposed ILS Investors to unexpected losses – Investors were sold on hurricanes and earthquakes and have been delivered wildfires and pandemics.

Flight to Quality

The consequence of a loss of confidence in Collateralised Re products has led to a flight to quality across the different market sectors. 

While the amount of capacity dedicated to ILS has remained static in recent years, this has been underpinned by the growth of the Cat Bond sector while Collateralised Re has retracted.

Investors have a far greater understanding of the insurance space than they did 15 years ago, experience has replaced naivety and dedicated insurance investment professionals have spent their whole career working in the sector.  Insurance as an asset class is attractive to investors.  It is an uncorrelated investment in comparison to other asset classes, remains largely unaffected by movements in the wider equity markets and economy, representing a very low systemic risk.

The reaction of Investors to the current market conditions appears to be a realignment of interests into investments that provide greater clarity of coverage, certainty in outcomes and remoteness of risk.  Features that are generally held by the Cat Bond product:

  • Tend to sit at the top of the risk tower and is less susceptible to smaller cat losses
  • More commoditised than Collateralised Re with defined perils and coverage
  • High level of data granularity and clarity of information and portfolio exposure
  • Independent verification of modelled losses and claims
  • Most Cat Bonds are tradable on the secondary market, providing some element of liquidity

Therefore, it appears that in terms of ILS investment, Cat Bonds are in-vogue and are stealing market share from Collateralised Re, although the actual situation is more nuanced.  This is because Cat Bonds and Collateralised Re are complementary products rather than competing, buyers cannot necessarily utilise a Cat Bond purchase to make a straight replacement for deficiencies from Collateralised Re products in their traditional reinsurance programme because:

  • Cat Bonds can be time consuming and costly to arrange
  • Cat Bond issuance requires underlying portfolios of size and scale
  • A high level of data granularity and clarity is required, often not attainable for Retrocessionaires or Reinsurers with a high level of delegated interests
  • Replacing low level protection with higher attachment changes the retained risk profile and financial mechanics

Additionally, there are other factors at play that are impacting the capacity crunch.  Equity markets have responded by withdrawing credit (in terms of price valuation multiple) to companies that hold material exposure to excess property, i.e. catastrophe exposed insurance and reinsurance businesses. 

Consequently, several large, high-profile reinsurers have shifted underwriting strategies away from cat exposed reinsurance business and creating the largest retraction in reinsurance capacity seen in years, estimated at 11.2% in 2022 by Gallagher Re below, (although in fairness about half of this amount is attributable to investment losses):

Impact of Weakening Conditions

A scarcity of Retro Capacity and increasing retentions for Reinsurers will generally force changes in underwriting strategy for buyers, usually by reducing participations to more risk exposed layers and exiting poorly performing business or by exiting the business line altogether.

The knock-on effects will spell trouble for Insurers, particularly in some territories where regulators insist on capital levels which mean that they are reliant on their reinsurance programme to secure an “A” range rating but are also constrained by the regulator (as in the USA) from readily passing on increased protection costs to consumers.

Ultimately the underlying cause of the issues for the Collateralised Re product are related to structure and coverage, the solutions for Insurers and Reinsurers could be a combination of the following:

  • Price increases will greatly benefit those who can stand firm and continue to service clients however, these alone are unlikely to retain or win back investors and will probably be short-lived. At the current time, price increases appear to have only returned to 2013 levels and clearly do not consider the changing underlying risk (climate and demographic changes), economic inflation and the loss amplification factors of social inflation and supply chain issues of recent years
  • Narrow coverage terms by limiting coverage to named covered perils and specific territories or regions
  • Increasing retentions moving Reinsurers and Retro carriers away from the loss
  • Seek out alternatives such as ILW purchases, innovate new Treaty product design or buy more facultative cover to remove peak exposures
  • Adjust the capital structure reconfiguring balance sheets and refinancing to enable greater retention of risk
  • M & A combining resources to create larger entities able to absorb losses and reduce reliance on reinsurance coverage

It is clear that in order to attract capacity back to the Collateralised Re sector, there will need to be a product evolution that meets the desired investment criteria, creating a commoditised and tradable solution that provides investors clarity of coverage and greater liquidity in their investment, without the prospect of trapped collateral.

Without product innovation it is likely that capital will continue to seep away and capacity in the Collateralised Re sector will reduce further, increasing prices and changing the financial dynamics of Insurers, the cost of which will ultimately be passed to consumers.

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.

Follow Allemond on Linkedin to find out more learn more about our offering and progress. Allemond Ltd: Overview | LinkedIn

Is the Insurance Market fully embracing changing technologies?

Insurance-Markets

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.

Follow Allemond on Linkedin and find out about our offering and progress.

 Allemond Ltd: Overview | LinkedIn

Bibliography

Aon. 2022. “MGA’s A Market on the Move.”

CB Insights. 2022. “FinTech Report 2021.”

Gallagher Re. 2022. “Lloyd’s of London Market Report July 2022.”