London Presses On With Market Reforms

The challenge facing the London market is even more urgent now, as the insurance world moves into its latest round of upheaval and change in the aftermath of Sept. 11, 2001.

If it is not to fall even farther behind, London needs to take heed of the growing confidence of newer insurance markets around the world and consider the logic that has underpinned the flow of capital into other domiciles in recent years.

If the World Trade Center catastrophe and the subsequent hardening market had occurred 10 to 15 years ago, the odds are that much of the new capital would be coming to London. But today there are more attractive destinations.

Other locations have caught and surpassed London in terms of service. London retains its traditional advantages of first-class underwriting skills, entrepreneurial spirit and expertise; but these may no longer be enough in todays more competitive environment.

Other markets have matured and are certainly not short of underwriting talent. Bermuda holds an additional card with its tax efficient environment, while the continental European markets are recognized for superior levels of service.

A desire for self-preservation and an aversion to change are common components of the human psyche. When the LMP process first got under way, there was a perception that the reforms were part of a broker-sponsored plot to force underwriters into surrendering their leader-only status.

Brokers, for their part, were often cynical as to the chances of anything being achieved and were concerned that the implementation of the new online technology that underpins the reform process would lead down the road of disintermediation.

Both of these concerns, while understandable, may well be red herrings. The market now recognizes that to expect underwriters to sign away their pens is impractical and, ultimately, unworkable.

London market brokers, on the other hand, have nothing to fear from e-business, which is more likely to affect high-volume, low-premium personal and commercial lines business rather than the specialized high-value business placed within the London company market and Lloyds.

LMP reform is not about unraveling the subscription market. It is about helping London to retain the advantages of its unique structure and heritage while ironing out some of the more unproductive administrative and procedural wrinkles that are damaging its chances of success in the 21^st century.

One of LMPs main aims is to establish a greater degree of contractual certainty at the inception of a policy. Few could reasonably argue against this objective in the light of unedifying legal wrangles following Sept. 11 and the Silverstein claim.

It is of the utmost urgency that we replace a business culture that accepts policy issuance after 235 days with a faster, more open model. All stakeholders in the London market can benefit from the reform proposals. Clients unsure over their coverage, insurers frustrated at delays in premium payments, brokers concerned over potential E&O exposure: all will benefit from a more performance-orientated culture.

The key to attracting a greater flow of capital to London will surely lie in the markets overall success in achieving greater transparencya transparency that will allow its performance to be benchmarked meaningfully alongside other markets.

Some traditionalists might argue that this is precisely what the London market doesnt need, but we cannot afford to be afraid of comparison with our peers overseas. Lloyds has already taken the courageous step of reforming itself in order to retain the third-party corporate capital providers that now control the market. We must all venture further down this pathor risk dwindling into irrelevance.

Poor performance in recent years has forced Lloyds to reappraise its ability to continue with its current structure. The Chairmans Strategy Group was formed with the objective of replacing Lloyds existing regulatory and market boards and committees with a single franchise board.

The aim is to create a more transparent, high-performance organization. Lloyds will also seek to move from the current three-year accounting system to more efficient annual GAAP accounting procedures. Current accounting inefficiencies have played an important role in allowing other markets to surpass this venerable organization.

The landscape in the company market is fraught with even more potential complications and difficulties. Although the International Underwriting Association provides an umbrella for the mutual advantage of its member organizations, ultimately each company will pursue its own agenda. Finding a common purpose will demand a patient approach, sympathetic to organizations individual needs.

The subscription nature of the London market offers many advantages, but there are also inherent weaknesses in such a system. Of course, subscription enables risks to be syndicated and spread more widely, supporting the placement of larger risks. But a system that obliges all participants to move at the pace of its slowest is hardly geared towards maximum efficiency.

The Byzantine nature of the London market, where it is common for insurance transactions to form a chain including a client, an insurance broker, an insurance company, a reinsurance company, a reinsurance broker and a wholesale broker, is patently in need of streamlining.

Contrast this with the example of the U.S. market, where placements are achieved through a highly efficient model in which large lines are placed vertically. In this way, U.S. insurers are able to settle claims with far greater efficiency, reconcile accounting procedures more smoothly and pay invoices in a fraction of the time London takes.

As for premiums, major U.S. insurance players who come to London are perplexed to find that their premiums remain unpaid after six months, when in the States it typically takes 30 days.

It should be possible to maintain the benefits of a subscription market in London, but at the same time to speed up response times by introducing e-enabled document repositories.

One of the goals of LMP is to underpin the claims process with more efficient technology applications. New document repositories will enable companies to input claims information, which will then be distributed to all underwriters simultaneously.

Once the agreement process has been streamlined, issues such as leader-only settlements will assume less importance, as tighter service level agreements become standardized. London can continue to operate on a subscription basis, but underpinned by a common electronic platform that unifies the marketplace in the eyes of the external suppliers of capacity and of insurance buyers.

In the current hard market, clients, too, are increasingly keen to obtain better value for money. They may grudgingly be willing to accept that the laws of supply and demand are forcing up the cost of their premiums, but this surely imposes an additional responsibility on the London market to settle faster when a claim occurs.

London brokers are finding that clients are benchmarking more and more. Their needs and demands will typically focus on issues of security; but equally importantly they ask, "Will my claims be paid more quickly if I go here, or will the response times on my policy inquiry be faster if I go there?"

An additional danger is that the present hard market has tended to dull Londons appetite for reform. Now that they finally have a chance to recoup the serious losses of the previous seemingly interminable soft market, Londons underwriters are less inclined to focus on the issue of reform than they were in leaner times 18 months ago.

However, we should all bear in mind that falling rates could well be with us again before long; the issue of reform is one we cannot afford to ignorerain or shine.

There remains a wealth of underwriting talent in London, but as globalization continues, there is no fundamental reason why such skills cannot be transferred from one geographical location to another. One can fly in great comfort from London to New York or Bermuda in five hours, and online technology has made redundant many of the tasks that would previously have been carried out at a walking pace.

The romance of its 300-year history aside, there may be less than London cares to admit to recommend it over other hungrier competitors. It is high time London was roused from its slumber.

Nigel Roberts is managing director, specialty, for Aon Ltd. in London. He is also a member of the board of the London Market Brokers Committee.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.