Alex Letts, CEO of the reinsurance services provider RI3K, told an audience of insurance professionals at the annual Insurance Institute Conference that, although recent advances in technology would indeed transform some aspects of the industry, it was not going to change its fundamental structure.
The “status quo won’t be changed by technology – technology is NOT, as advertised in the late 1990’s, disruptive,” said Letts. “For you, no amount of technology solutions will threaten to disrupt or change the centuries old processes that lie at the heart of the market in London.”
He went on to explain, however, that the “Bad News for the technophobes is that whilst the change needed by the industry won’t be driven by new technology, that change is now taking place. This change is not because of technology per se, but simply because of competitive forces! But, here’s the catch, those competitive forces will mostly be powered and enabled by the new Internet technologies.”
Letts stressed that the most appropriate use of technology is to lower the costs of doing business, principally by reducing the time and amount of back office processing that produces those costs. He reminded his audience that companies “From Bermuda to the US, from new companies to old, they are catalysing their change and moving ahead by adapting to what I call Post Dotcom Pragmatism”
“The message for London of course remains simple and clear,” said Letts, “Your market is under threat, not because you are less smart, but because you are less well equipped. It is London’s infrastructure that is hopelessly antiquated, not, as some would say, its people.”
“There has always been a view in London that the ability to place risks electronically was desirable as a part of the process of reducing the heavy wastage in an industry which understands that 30-40% frictional costs are simply too high,” he continued.
Letts directly addressed brokers concerns as well. Once upon a time said Letts some in the industry thought that trading on-line was “the solution,” not merely a small part of it. “Their attitude was: ‘So then, trade this stuff electronically and you will carve out the costs of brokerage AND save time and money at the underwriting end of the equation.'”
“They couldn’t have got it more wrong,” he continued, “and, as a result, the “Vision” of a purely electronically traded insurance market has fallen by the wayside. What was understood quite clearly within the industry, even 10 years ago, was that the cost in the industry which related to broker intermediation was and remains there for a reason. It’s not news to you that a big part of that cost is that the broker is processing a lot of paper and that takes time and money. ”
“Knocking out the broker from the equation wouldn’t solve anything because the processing requirements and related costs would simply therefore be reallocated to the buyers and sellers. The part that needed replacing was not the broker, but the part of the broker’s cost-base that related to administration and processing of mounds of paper, on behalf of customers that were either under-resourced, or, just unwilling to take on the burden themselves.”
For Letts the question is closed. “Broker disintermediation was never the key to cost reduction because a large part of broker costs reflect a payload of administration.”
The second focus of his remarks concerned the problems that have become evident in the use of electronic trading, which to his mind make it far from evident that it has much of a future. E-trading in itself, “as in the basic transaction of risks between buyer and seller, is not, by any stretch of the imagination, a shoe-in,” said Letts. “Either because placement is such a small part of the cost or because electronic rating was too complex and costly to do well, or because the standardisation of risks for most categories of business beyond simple retail products was impossible or impractible.”
Letts went on to give details of how electronic processing can go a long way to eliminate duplication in processing systems and speed up the time it now takes to finalize any insurance or reinsurance transaction. By accomplishing this, or at least by working on reducing those costs, everyone will eventually reap the benefits of new and more efficient ways to conduct business.
“A single wide-scale electronic marketplace is still a long way off into a future that’s too hard to call,” Letts said. For him the market is “about infrastructure.” It won’t have a great impact on the way business is done, “but will provide the pipes that will allow London to run its business more efficiently and to play on an even terrain with other world markets.”
“I can only urge you to connect to the new pipes today and to support their roll out to maintain London’s competitive position. The infrastructure rebuild has advanced further than you might have realised. It is no longer a wacky business plan but hard code and populated by users. Churchill once said: ‘Give us the Tools and we will finish the job.’ Ladies and Gentlemen, the Tools are at your disposal. Whether you choose to finish the job is very much your call,” he concluded.
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