Twenty-five years ago, the Lloyd’s of London marketplace was teetering on the brink of insolvency, reeling from billions of dollars of asbestos and pollution liabilities. Many of the best brains in the market worked day and night to find a solution that would pay these old-year claims. As a result of those efforts, the market ultimately created the so-called “Reconstruction and Renewal” project, which capped, mutualized and ring-fenced the old-year losses. An existential threat to the marketplace had been averted and it was able to move forward—and thrive.
A generation later, in the 21st century, a new threat has emerged—this time not from old-year liabilities but from an attachment to last century’s processes and culture. The effects are far-reaching. Today’s Lloyd’s is sometimes described as too slow, too inefficient, too difficult, too costly, too outdated, too sexist and too stodgy, as well as not as diverse or attractive to younger generations as it needs to be to compete in the global insurance world.
However, leaders at Lloyd’s believe they can make evolutionary rather than revolutionary changes to push and pull the market securely into the 21st century. And once again, Lloyd’s is turning to market participants for help—to get suggestions from the best brains in the insurance and reinsurance business. Ideas from customers and other stakeholders are welcome.
At the time of this printing, Lloyd’s was in the midst of a consultation process, detailed in a strategy document, a prospectus called “The Future at Lloyd’s,” which presents a view of how the market could get to where it needs to go.
“Our goal is for a nimbler, faster Lloyd’s that offers our customers outstanding products, services and insight, supported by technology, innovation and flexible, responsive capital,” said Chairman Bruce Carnegie-Brown, who spoke at a meeting in early May to provide details of “The Future at Lloyd’s” strategy.
If the market rises to these challenges, it will “secure the future at Lloyd’s for many years to come—and set the standard for the global insurance industry to follow,” said Carnegie-Brown.
At the same meeting, Lloyd’s Chief Executive Officer John Neal emphasized the significance of the challenge: “This is a once-in-a-generation opportunity for all of us to work together to build a future at Lloyd’s. By doing so, we will once again be playing a leading role in transforming our sector in response to the opportunities and the challenges we know we all face today.”
The aim is to “make it easier for new sources of capital to come into the market and to attach to risks much more efficiently than [is possible] today. We will simplify the process of accessing products and services at Lloyd’s. We will reduce the cost of doing business. We will ensure that buying insurance is a faster, simpler and better value experience. Our ambition is to cut the time it takes from request to bind and policy issuance from weeks to days, giving customers rapid access to Lloyd’s expertise for the complex risks that they face,” said Neal.
And, of course, data and technology are key to the many changes ahead for Lloyd’s.
Neal detailed some of the solutions the market has been collecting as part of “The Future at Lloyd’s” project. Some or all of these solutions could help transform the market if the decision is made to adopt them after the consultation period. Six new ideas outlined by Neal are:
- A platform for complex risks. This platform would make doing business easier and enable efficient digital placement of the most difficult-to-cover risks. “Imagine a world where the Lloyd’s market uses data and technology to enable customers to buy insurance quickly and easily for the most difficult-to-cover risks,” explained Neal. “This platform [would] enable brokers and their customers to easily match complex risks to underwriters with an automated policy process across quote, issue and bind in a single digital end-to-end workflow, together with a transparent claims process.”
- Lloyd’s Risk Exchange for less complex risks. With such an exchange, buying insurance from Lloyd’s would be automated, low cost and instant, providing more competitively priced policies and more choice for customers. “The online exchange would offer a convenient, low-cost way for Lloyd’s and its distribution network to carry out global risk procurement with the reassurance of the Lloyd’s brand and backed by the Lloyd’s central fund, strong financial ratings and robust regulatory oversight,” Neal said, explaining that policies bought through the exchange would be lower in cost because Lloyd’s would have pre-packaged the policies, removing the need in most instances for individual negotiation and tailored product design.
- Flexible capital. Under such a scenario, capital providers will be able to simply and effectively access a diverse set of insurance risks on the Lloyd’s platform. “We would allow investors to access new types of insurance risk as well as different options for attaching capital to risk and enabling investments with different risk return expectations and different investment time horizons,” Neal said. Investment appetites including return expectations, risk tolerance, carrier preference, risk type and territory could be defined on the digital platform.
- A Syndicate-in-a-Box. This model would provide a streamlined opportunity for innovators to bring new products and business into the market. “High-performing firms would have fast-track access to underwriting at Lloyd’s in a way that brings innovation to the whole market,” he said. “This could include remote syndicates that don’t need to set up an office in London and would place risks exclusively electronically. Syndicates can access all the data and services available in the Lloyd’s ecosystem. This model would fast-track the creation of more responsive products that deliver better choice and value for customers,” said Neal.
- Next-generation claims service. With this model, a claim could be paid before the customer realizes a loss has been experienced. “We would automate many of the claims activities undertaken today, dramatically reducing the time it takes from making a claim to getting paid,” Neal said. “For smaller, straightforward claims, artificial intelligence solutions would mean unparalleled response times. For major events like hurricanes, rapid notification systems would automatically inform brokers and insurers which of their customers could be affected. If the event subsequently materializes, the syndicate’s claim process kicks in with the claim validated automatically and the payment made digitally direct from the insurer to the customer.”
- Ecosystem of services. A Lloyd’s ecosystem would “help all market participants develop new business and provide outstanding customer service.” In short, the Lloyd’s ecosystem would be a “collaborative expert community” with an “inclusive and innovative culture” that improves underwriting and “delivers consistently excellent products and services” to their customers. The “ecosystem” would include an expanded Lloyd’s Innovation Lab, which would act as a hub for the latest news on emerging risk and new services, and as a product development incubator. “A dataset of relevant information and a library of Lloyd’s research and data insights would help support their decisions,” Neal continued.
Neal emphasized that these six examples could form the blueprint for a new Lloyd’s—but they are just examples. Until market feedback and engagement are received, no decisions will be made. (Until the end of the consultation period in July, comments can be made via lloyds.com/thefutureatlloyds or through the market’s various trade associations such as the Lloyd’s Market Association and the London & International Insurance Brokers’ Association.) [Editor’s note: the Future at Lloyd’s consultation period ended on July 10].
“It’s really important to say that this is not a ‘Big Bang’ solution. We will deliver quick wins as soon as they’re available. Those that use existing off-the-shelf technology—and a lot of the technology that sits behind the ideas is available today—will be delivered earlier than those that require building from scratch,” Neal said. Work will begin on building and delivering prototypes in October 2019, with some operational in early 2020. [See related sidebar: Change Isn’t New for Lloyd’s]
Business as Usual Not an Option
Why is the market undertaking “The Future at Lloyd’s” project, and why now? According to Neal, it’s simple: Lloyd’s needs to change and to change quickly.
“As a sector, the issue is pretty clear: If we carry on with business as usual, we risk becoming irrelevant as customers see devaluation in the insurance products and services that we provide, or we change and realize the enormous opportunities that the new risk landscape has to offer,” Neal said.
He identified several reasons business-as-usual is not an option.
For example, despite the fact that customers are facing new and increasing threats to their businesses, insurance buying isn’t keeping pace, said Neal.
He said that less than half the world’s natural catastrophe exposure is covered by insurance (according to Aon Benfield in its 2018 “Weather, Climate & Catastrophe Insight” report). Also, over the past 14 years, commercial property/casualty insurance penetration, when expressed as a percentage of global GDP, has fallen from 1.3 percent to 1 percent, he said, citing statistics from Oxford Macroeconomics and Lloyd’s market analysis. While these percentages sound small, Neal said “the drop in real terms is huge,” which means that “insurance is simply becoming less relevant in the eyes of the customer.”
One reason people are not buying insurance is that the insurance industry hasn’t reacted quickly enough to the changing risk landscape. Customers face new threats because their assets, such as software and data, are now predominantly intangible as opposed to tangible risks such as property and equipment, Neal affirmed. Intangible assets are vulnerable to new risks, including cyber attacks and reputational risks. “Therefore, they require fundamentally different insurance products and, importantly, services that are aligned to those products,” he said.
Yet, the industry doesn’t offer these essential products, he noted. “In 2017, risk managers said that half of the top 10 risks that kept them awake at night were uninsurable,” he continued, quoting Aon Benfield’s “Global Risk Management Survey, 2017.” Neal said that “the bottom line is that our industry must offer products and services that are much more closely aligned with what our customers actually want.”
Another reason that change is needed for Lloyd’s and the industry is that new capital is increasingly attracted to the insurance market, drawn by the relatively high uncorrelated returns in a low-interest-rate environment, Neal said.
He said third-party capital now makes up 16 percent of all reinsurance capital (according to Aon Benfield statistics). “This new capital has increased rate competition over the past few years, forcing down prices, which is obviously a good outcome for customers and is also a great opportunity for insurers to better service their customers in the coverage they provide,” he added.
However, he said that a capital-dependent industry like insurance has got to make it easier for alternate forms of capital to attach to risk, thereby offering customers better value.
According to the Lloyd’s CEO, the cost of business acquisition and administration is too high—about 30 percent for the industry and 40 percent at Lloyd’s. The insurance industry must “reduce costs across the distribution chain by removing those components that just don’t add value.”
Neal said the market aims to cut acquisition and administration costs for the most common risks from 30-40 percent today to 10-20 percent. He said these costs are reducing much more slowly in the insurance industry than in any other sector—notably the financial services sector. Neal blames the slow modernization of internal systems, legacy IT infrastructure and the lack of rationalization of administration costs for keeping costs high.
Large corporations are increasingly retaining their own risk because they don’t see the value in transferring risk from their balance sheet to an insurer’s balance sheet, especially when the corporation’s captive is likely to pay a claim more promptly than an insurer can, he said.
Shortage of Talent
Another concern for the industry is its looming talent shortage, particularly when it comes to young people who would drive progress for the future, Neal said.
“Research shows that only 4 percent of younger job seekers want to work in the insurance industry,” he said, citing a recent report from KPMG that revealed that 41 percent of people outside the insurance industry said the work “sounds boring.”
“That’s not the marketplace I work in or one that I recognize. The fact is, if we’re to attract the brightest minds in our sector, we need to do a much better job of selling ourselves, of communicating and demonstrating a much more appealing employee value proposition and in creating an inclusive culture in which everyone is respected and valued,” he said.
Neal pointed to a recent well-publicized Bloomberg article that described a culture of rampant sexual harassment within the Lloyd’s market. In the article, 18 women were interviewed who detailed “an atmosphere of near-persistent harassment,” ranging from “inappropriate remarks to unwanted touching.”
Neal said this article highlighted the urgent need for Lloyd’s to create an inclusive culture. It’s not only the right thing to do, he said, but “a successful future at Lloyd’s requires diverse thinking and a culture that actually reflects our customer base.”
Lloyd’s reacted to the Bloomberg article with a set of actions intended to increase reporting of harassment and impose strong sanctions on those found to be responsible for inappropriate behavior, including potential lifetime bans and public naming and shaming of the culprits. The market also has begun to restrict people who are drunk or under the influence of drugs from entering Lloyd’s premises because the market’s drinking culture within Lloyd’s and the London market is seen by many as driving some of the inappropriate behavior. The Corporation of Lloyd’s made a first move to curb drinking culture in February 2017 by prohibiting its employees from drinking alcohol during business hours.
To better understand the extent of the sexual harassment problem, Lloyd’s has conducted an independent culture survey, which was open to anyone with a pass to the Lloyd’s building. Its results were discussed by the board in June. In addition, to improve diversity within the market, Lloyd’s plans to appoint women to its all-male nominations and governance committee.
In June, another Bloomberg article revealed that two executives at TMK, the Lloyd’s platform of Tokio Marine Holdings Inc., were forced to resign following allegations of sexual harassment. “Following ongoing discussions with Tokio Marine Kiln, we are satisfied that they are taking these reports extremely seriously, and we will continue to liaise very closely with TMK as they conclude their investigations. At Lloyd’s we have been very clear on the standard of behaviors we expect and the actions we will take to ensure that our market, and all of those who work in it, operate to the highest standards,” said a statement issued by Lloyd’s.
It’s all about creating a safe environment for people to work, which is important when trying to attract young talent to the insurance industry, according to Neal at the meeting.
Among the goals included in “The Future at Lloyd’s” prospectus is the building of a “diverse, inclusive environment that reflects the global markets we work in and in which everyone is treated with dignity and respect.”
When Neal arrived at Lloyd’s in October 2018, he and his team carried out “an extensive listening tour” to hear views from Lloyd’s customers, intermediaries, insurers and capital providers—those operating in the market and others that do not operate inside the market.
These discussions, said Neal, revealed that Lloyd’s historic unique selling points are no longer critical for some market participants.
“You told us that we have to make it easier and less costly to do business at the Lloyd’s market and that we have to keep innovating to keep up with our competitors. You said you want us to work more closely with the end customer and other stakeholders and partner with you much more effectively in developing a diverse and inclusive culture at Lloyd’s.”
Neal said the consultation process for “The Future at Lloyd’s” initiative is just the first step on that journey.
Market Practitioners Comment
During the meeting in early May to launch the consultation process, other market leaders expressed opinions about what can be expected for the future, first in a video shown to the audience of market practitioners and later in a panel discussion. Some of their comments follow.
“We need to change because we’re under huge pressure to become more efficient and more disciplined in our underwriting structures. We’ve got to move forward as a marketplace to embrace efficiency and underwriting discipline,” said Sheila Cameron, chief executive of the Lloyd’s Market Association.
Greg Case, CEO of Aon, said the industry is falling short in meeting customer needs. “The insurance industry offers solutions for only a handful of the top risks that clients face,” he said. “We must do better. We must be more innovative. We must be more nimble. We must be more efficient. Our clients demand it.” He said later that by working together the “industry will adapt and remain relevant to our clients, today and for years to come.”
John Doyle, president and CEO of Marsh, stressed that the world is changing quickly. “Data has exploded and technology is advancing rapidly, creating new opportunities and new risks,” he said. “Lloyd’s is also facing increasing competition for local solutions that are closer to the client. It’s no longer a given that specialized risks will go to London.”
Rob Childs, chairman of Hiscox, said Lloyd’s doesn’t have a choice; it must change. “Lloyd’s is expensive to operate in and it’s inefficient,” he said, adding that he predicts a bright future for Lloyd’s as long as it delivers on the promises in “The Future at Lloyd’s” prospectus. “I look forward for our business to be insuring the first driverless, the first skipperless tanker going into Hong Kong harbor. So, we’re supporting the new, innovative approach to widening coverages in the Lloyd’s market.” (Childs is a former active underwriter of Hiscox Lloyd’s Syndicate 33 and the group’s former chief underwriting officer.)
Andrew Horton, CEO, Beazley, sees people with different skillsets at Lloyd’s. “We’re going to attract people with different skills—rather than having pure underwriting skills or pure technology skills, we’re going to have hybrid roles where people can be multi-skilled.”
Graham Clarke, non-executive chairman of Miller, said the future of Lloyd’s is going to be “very technology-driven,” adding that he expects there will be fewer people “wandering around Lloyd’s with a question mark as to whether that’s the best use of their time rather than spending time actually working with their clients and truly adding value to them.”
During the panel discussion, Andrew Brooks, group CEO of Ascot, said “Lloyd’s is best when it comes together as a single market and drives change.” He pointed to the Reconstruction and Renewal project in the 1990s, which “was a great example of the market coming together and driving change.”
“And this is an opportunity for the market to come together again and drive a profound change in our business,” said Brooks. “We simply have to.”
Brooks cited the examples of past catastrophes that profoundly changed the market, such as Hurricane Andrew in 1992 and the Sept. 11 terrorist attacks. These events created capital events that caused the insurance market to go through a global rate hardening, which hasn’t happened with any loss since 2001, Brooks said, noting that “those cycles have gone” because capital now re-enters the market so quickly.
He pointed to the “timid and lackluster response” from the insurance sector after $140 billion of natural catastrophe losses in 2017, which he said demonstrates the industry can no longer count on rate peaks after such events for pay-back after soft market pricing.
“This is the first time I’ve seen the market come together and realize it needs to change its business model—to get the expenses out of the business, to make Lloyd’s a robust market…to actually compete with our peers,” said Brooks. “We have to come together and drive this change. We can’t afford to kick the can down the road anymore.”
Fiona Luck, non-executive director at Lloyd’s, commented on inclusivity. “Why do we need to be inclusive? It’s sad that in 2019 we’re still talking about it. The fact of the matter is we need to reflect the world we operate in. And that means diversity and inclusivity in its broader sense.”
She said studies show that a diverse workplace yields faster decisions, more innovation and more creativity. “Certainly, we’re going to need to show a workplace that is attractive to this younger generation,” she said.
Luck, who has been on the Lloyd’s Franchise Board for about a year, said she has seen inclusivity improve. “But the fact of the matter is, we saw the press [Bloomberg] commentary…and clearly we’ve got some work to do. We’ve got to set the standards high, and we’ve got to adhere to them,” Luck said.
“My own experience has been that what gets in the way of really creating a diverse workplace is that we do lots of activities, but we actually don’t measure outcomes.”
Successful diversity and inclusion programs require leadership from the top, which she said is apparent with the commitment from Neal and Carnegie-Brown at Lloyd’s.
Vicky Carter, chairman, Global Capital Solutions, International, Guy Carpenter, also expressed concernabout diversity and inclusion and the industry’s problem attracting young people. She cited the aforementioned KPMG study, which revealed 41 percent of people outside the insurance sector think the work “sounds boring.”
She called this a sad reflection of financial services. “All of us here, I think, would agree that this is a fascinating and exciting business to be in. And we’re extremely poor at promoting it as an industry. We’ve got to get a lot better at really getting that message out about what an exciting place and an innovative place it is to be,” Carter continued.
“I think we have to be much better at engaging with the younger generation. They’re the people who are going to shape this industry. They’re going to be the ones who will bring product innovation and ideas to this industry,” she said.
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