LONDON--Traditional insurers might quickly be replaced bycapital market players if carriers don't work together to drivecosts and inefficiencies from their business processes by adoptingstandards and going electronic, one leading broker warned.

"Challenges don't always come from within, but from without withthe capital markets and insurance markets rapidly converging," saidDennis Mahoney, chairman and chief executive officer at Aon Global,based in Bermuda.

"We've got to become more efficient and remove frictionalcosts," he added during a panel on the industry's challenges andopportunities here at the ACORD London Forum.

A big part of the problem is a lack of cooperation amonginsurance companies and their brokers in terms of standardizingdata exchange so they can process more transactions electronically,he said.

"We need to put aside our competitive differences and realizethere is a much greater threat out there--the potential for moreefficient players to take over our business," he said the daybefore the ACORD panel, during his keynote address.

"If we don't act collectively, our product is going to bereplaced," he added.

Noting that capital market players trading catastrophe bonds andother insurance-like derivatives are totally electronic, comparedto a traditional insurance market that still relies too heavily onpaper-based transactions, Mr. Mahoney said that in a short periodof time, e-traders could "force we, the inefficient players, out ofour own markets."

Traditional carriers and brokers don't have a lot of time todawdle, he warned during his keynote speech. "The convergence ofthe insurance and capital markets is happening far faster thananyone realizes," he added--noting that in the United Kingdom,securitization is not limited to catastrophe exposures, but isbeing expanded to trade in "high-frequency, low-severity risks likemotor coverage."

During the panel discussion, he said that insurers "can't affordto operate under the delusion that we can change at whatever pacewe choose. In fact, we must change to meet the demands of ourcustomers and trading partners, as well as to meet the pace beingset by our new competitors in the capital markets."

Making the transition to electronic transactions, based onindustrywide data standards negotiated via ACORD committees, iscritical if traditional carriers are to compete in the long termwith the capital markets--where virtual trading has long been therule rather than the exception, as it remains with insurance, hesaid.

"We must move quickly to an electronic marketplace to drive outcurrent market inefficiencies before those inefficiencies drive usout of the market entirely," he added, lamenting that the Londonmarket in particular still has a long way to go to break itspaper-dependency and go completely digital.

Indeed, on Oct. 17, the day of his keynote speech, the LondonMarket Reform Group announced that 45 percent of the market's totalvolume of claims is now being handled electronically via theInsurers' Market Repository--up five percentage points from thestart of 2007 but well below the target of 60 percent set for theend of the third quarter.

"If you think we're making progress, go outside and stand on thecorner here and watch all the brokers running around with theirarms full of paper," said Mr. Mahoney. "I'm always tempted to juststand by the door and stop anyone carrying piles of papers anddemand to know where they think they are going and why they needall of that baggage to do business."

Replacing bits of paper with bytes of data will not only cutexpenses but will also allow the market to grow considerably, hepredicted in his keynote speech.

"Whenever markets go electronic, volume always increasesexponentially, but margins compress dramatically," he said.

To accomplish this goal, however, setting and implementing datastandards are both crucial tasks, he added.

"We need more standardization of products to have an efficientelectronic market, and that should not be a problem since so muchis identical in every transaction," he observed. "We too often usecustomization as an excuse to avoid cooperation on standards, whenwhat we should be asking ourselves is what makes us truly unique inthis market."

(For more on this topic, as well as further coverage andcommentary on the ACORD London Conference, see the Oct. 29 editionof National Underwriter, as well as Sam Friedman's blog atwww.property-casualty.com.