In a troubled global economy, how are brokers and underwriters responding to the threats and opportunities in 2012?

On 22nd May 2012 senior executives from the likes of Novae, Axis, Chartis, Hiscox, Markel, Mitsui, Torus, Liberty, Marsh, Cooper Gay, and Allied World Insurance attended an Executive Briefing on the theme of ‘In a troubled global economy, how are brokers and underwriters responding to the threats and opportunities in 2012?’.

Feedback from attendees was very positive so I thought I’d summarise a few of the key points here.  If you want to read more about RiskWrite, Salmon’s multi channel insurance software here.

Peter Montanaro, Head of Delegated Authorities at Lloyd’s addressed the question of  ”The number of MGAs has grown rapidly in the last two years – is this the quickest route to leveraging global opportunities?”

Peter started by saying ‘No they haven’t and yes, so thank you very much’, proceeding to mock leave the podium. Luckily for us he was joking, and returned to go on ‘I don’t know maybe the number of MGAs have grown, but in Lloyd’s our numbers have stayed stable.’  Peter was challenging the common perception of rapid growth of MGAs and coverholders and shared the losses they’ve experienced as well as the growth; “Since 2007 the total number of coverholders has gone up by 275, but only by 31 in the last 2 years”. He acknowledged the growth and market presence of the ‘coverholder model’ but emphasised Lloyd’s growth rate is steady, with losses.

Peter then gave examples of what Lloyd’s reps thought when asked  whether coverholders are ‘the quickest route to leveraging global opportunities’ in their territories. The Italian rep said MGAs represent the best gateway to the market through technology, good market access and efficiency. By contrast, the German rep, thought it may be the quickest route but questioned the sustainability, profit long term and quality.

“I think at the moment automation is still a choice for each stakeholder but it will become a necessity’’

Peter recounted a scenario when an Hawaiian coverholder had been approved by Lloyd’s and told him they were going to have a party, a bemused Peter remarked on their excitability only to discover they had been ‘waiting’ a year and a half to be approved. The Lloyd’s Performance Management Directorate (PMD) is committed to the market as Lloyd’s turn approvals round in five weeks as long as they’ve received the necessary documents – it turned out the application had been sat with the broker all that time. Peter emphasised their punctuality and flexibility on a case by case basis; welcoming feedback on the compliance questions Lloyd’s ask on MGA/coverholder applications.

The role of technology as a competitive tool emerged as Peter emphasised the need for automation; how it is still a choice in the current market but soon will be a necessity as technology is becoming part of the decision making process when people select a broker, MGA or underwriter as a partner.

 

Simon Wilson, Director of International Development at Markel tackled ‘Distribution strategy for specialty insurers”

Simon marvelled at the unique nature of London market geography compared to its international counterparts. When working for Lloyd’s Asia he recalled his surprise when during a business trip he not only had to walk what he thought would be a ‘a couple of blocks’ to visit the Canadian coverholder; but travel 45 minutes. BY CAR.

Simon mapped the levels of risk complexity and premium size associated with different parts of the Insurance market (left hand slide). Simon noted that mass market retailers (low size and low complexity risks), motor, home owner and personal lines for example, are attempting to move into ever more complex lines.

He positions ‘classic London market play’ as high complexity and high size risks that are coming under pressure from two new groups – regional wholesale markets and specialist SME suppliers. Not only is the ‘classic London play’ coming under pressure from different types of insurance companies but international ‘regional hubs’ too are posing a threat, as they are underwriting more and more of the  large, complex risks in Singapore, Miami and Zurich.

Simon perceives segregating parts of your business into these four categories may, operationally, be more fruitful.  If you try to sell wholesale products through an international network of offices, for example, you may meet unnecessary internal discrepancies.

Simon emphasised this competitive landscape as ‘never still’ and questioned the avoidance of silos, where they are beneficial; however it seemed the stand out trend was a desire to increase the complexity of risks underwritten therefore increasing the mark up per policy.

 

 

Simon shared his experience of financing small MGAs and coverholders with niche propositions, particular products to particular markets, and that their fixed cost base is usually a minimum of two million dollars.  When operating these global entity MGAs and coverholders in a different territory he suggested that they need to write to a 35% loss ratio just to break even.

Simon drew similarities between supermarket retailers and underwriters in making a profit; considering overheads and getting the most out of suppliers.

For me, these were the key points from the event:

  • MGAs are the quickest route to market if effective systems and processes are in place
  • Speed should not be the only focus for coverholders; quality and sustainability should also be considered
  • The BRICS countries present huge growth and penetration opportunities in life, car and home insurance
  • Companies that have invested in developing in house systems can be opposed to new technologies and change
  • The traditional method of spreadsheets doesn’t do it anymore; systems are needed to cope with the demands of modern regulation

A Changed World – 6 Key Issues for insurers to consider

Manifesto

The world has changed.  The second half of 2008 saw events that previously would not have entered our wildest dreams. Who would have thought that one of the UK’s largest banks would pass into state ownership? Who would have thought that one of the longest periods of uninterrupted economic growth would stop dead in its tracks?

With this in mind, employees at Salmon recently put their heads together to author a manifesto (in 6 parts)  for Directors and Managers of Insurance companies, who have a responsibility for eCommerce and eBusiness.   Part 1 is available now as a downloadable .pdf, and considers “Will your Customers Change?”

It is our belief that at least six key issues need to be considered by insurers right now.  We will explore each in full in due course so register here to get each part of the manifesto emailed to you.

Here are the issues as we see them.  What do you think?

  • Issue #1:  Will your Customers Change? Even counter-cyclical industries, like general insurance, need to carefully consider this question.  After all, any business is only as stable as its customer base.  As we shall see, answering this question is not straightforward.  There are indications that we will have to think about meeting at least three shifts in customer demand and buying behaviour.
  • Issue #2:  Flexing our Cost Base Reducing operational costs has been a major component of most organisations’ plans over the last decade but there are new challenges.  Firstly, living through an economic downturn means that we have to rethink the minimum critical size of our operations.  Secondly, economic, political and social pressures may mean that we have to revisit past strategies based on outsourcing and offshoring.  These now established recipes might not serve us too well in the coming years.
  • Issue #3:  New Channel Relationships Emerging evidence points us to the fact that customers’ buying criteria – how they make purchasing decisions – may be changing both in commercial and consumer markets.  This means that current web based distribution will have to change if it is to deliver real value for both customers and suppliers.
  • Issue #4:  How to Unlock Markets Extending the reach of offerings into new markets is a commonly cited piece of advice for organisations facing an economic downturn.  A better and more astute move is to unlock markets that traditionally minded competitors think are either unprofitable or can only be served in one time established way.  To keep ahead of the game we have to consider how technology can act as a key to redefining markets that others pass by.
  • Issue #5:  Regulation – The Tool of Change:   There is no doubt that the current downturn will produce a globally co-ordinated push for new regulatory approaches to prevent another financial crisis.  November 2008’s first meeting of the G20 – the countries that will reshape the business world – put regulation right at the top of its global action plan.  All we know now is that the regulatory demands on organisations – especially in the financial services sector – will change.  The impact could range from more disclosure regarding investments, through to increased customer education and new roles for directors.  The demand for information will increase and new co-ordination and control systems will be needed.
  • Issue #6:  Information for Tough Times:  Research tells us that organisations that survived the last real downturn – in the early 1990s – managed their businesses in a totally different way to those that failed and disappeared.  Those that succeeded were closer to their customers and used a far broader range of management information than did the failures.  These winners were better at getting and using customer and market information.  So, systems for decision making have to go way beyond traditional financially based approaches if our businesses are to survive and grow in the current environment.

There is no doubt, rather than entrenchment, this is a time for innovation in how business processes and systems really deliver value. I hope you like the manifestos.  Please feel free to share and re-use.