Target Operating Model BlueprintThu 28 Jul 2016
Speech by Shirine Khoury-Haq, Director of Operations at Lloyd’s and Sponsor of the Target Operating Model (TOM),at the London Market Group Forum
Speech by Shirine Khoury-Haq, Director of Operations at Lloyd’s and Sponsor of the Target Operating Model (TOM),at the London Market Group Forum
It is just over a year ago that we started talking in earnest about how we were going to make London an easier place to do business by building the Target Operating Model – our TOM.
And it has been a busy year!
But before I talk in detail about what we have achieved, I think it is helpful to remind ourselves why we are doing this work at all.
Our overriding mission is to make the market highly accessible, efficient and relevant to the needs of our customers. We want to deliver simplicity and reduce the cost of doing business here. But most of all we want to help your businesses to grow and thrive, and allow you to concentrate on using your expertise to deliver the value proposition that makes London so compelling.
Defending what we have is fine but the prize is to turn around a static market. And that is why it is great to be on the same agenda with the other LMG workstreams – workstreams that will deliver the other vital parts of the jigsaw.
And, if we thought the business environment was tough when we began talking about the TOM last summer, we can all be confident that things have become even more challenging.
The use of technology and big data is disrupting traditional distribution models. Regulation and protectionism are on the rise. Market conditions are increasingly putting pressure on pricing, which is in real danger of becoming unsustainable across the board. For the London market, this means increasing competition and pressure to deliver profitable growth. The reason we are spending so much time and effort on modernisation boils down to this - we all are working to safeguard our future.
Clearly, operational efficiency is only part of the equation, but we are making sure the market is able to respond to the challenges that are ahead, and we are delivering an environment that enables it to thrive – not just for the next five or ten years, but for generations to come.
What I want to do today is to give you clear, simple answers to the following questions:
So, what has the TOM done so far?
We have done a lot of thinking and a great deal of listening. That might not sound very exciting but getting the foundations right is critical to delivering the right solutions.
We cannot escape our past – even successes like the recent launch of our first electronic trading platform came with references to Kinnect and other previous market efforts to deliver process improvement.
And we know why they failed. In part it because each initiative was pursued in isolation. But more importantly, it was because the market never acted together before.
So success needs a comprehensive programme that pulls together the existing projects, addresses the remaining issues and creates a realistic solution for our market.
It needs to support multiple distribution channels and to focus on eliminating duplication, reducing turnaround times and avoiding unnecessary effort. It also needs to deliver better data to help the market make good decisions based on meaningful insights.
But most of all, the TOM needs all of you to get behind it – a real collaborative effort. And that is why we have spent a lot of time listening, working with your associations and getting feedback.
We know we ask a lot of you – and we are incredibly grateful for the time and energy that so many market practitioners give to so many boards, steering committees and project groups. But we can only deliver the programme if you believe in it and support us.
Building anything needs a blueprint and modernisation is no exception. One of our critical tasks in the last six months has been to create that blueprint for the TOM.
It had several objectives:
Its aim was to define for the overall programme the possible deliveries, their cost and benefits.
It has been an important piece of work and one that has benefited from reviews and inputs from all the associations’ key modernisation committees, as well as over 100 market participants working on solutions and reviewing outputs.
The Blueprint was reviewed by the London Market TOM Steering Board on the 11th of July. The results are detailed and comprehensive – and you will be delighted that I am not going to cover them now – but we will be publishing a set of outputs on the isupportTom website after this meeting so that your teams can have access to the information they need.
As well as being able to see the cost and benefit analysis for each solution individually, a calculator has been developed for carriers that will enable your business to see what the programme will deliver for your organisation and how much it will cost you to implement the solutions. This is not included in the overall TOM costs. The LMA and the IUA will be distributing the tool to you after this forum. Brokers should please contact LIIBA where they can obtain help with calculating their business cases.
We believe that you will find it helpful to look at the work that is proposed and I hope it will add granularity to your decision making.
We have also been busy on the four priority initiatives that were identified by the TOM Steering Board at the beginning of 2016. There are:
Each of these has seen significant deliveries in the last six months.
First, the electronic placing platform – PPL – which enables brokers and insurers to quote, negotiate and bind business digitally. On the 11th of July, under David Ledger’s leadership, the system went live for stand alone terrorism, with nine brokers and 42 carriers on the platform, and the first risk was bound between Marsh and Chaucer in the first hour of trading.
It is important to emphasise that PPL is not there to take away what makes our market great. It is not there to detract from the face-to-face negotiation or the way our market handles its core business. It exists to streamline the bits of our work that are inefficient, and help us make the market easier and more cost-effective to do business with.
So let’s talk about making the money flow more easily! CSRP is designed to enable brokers to submit premiums and claims electronically using the same data and process standards as outside the London market. It will greatly reduce the unique and very significant administrative burden of trading in London – particularly for brokers.
In April we successfully implemented the first phase of CSRP, which focussed on premiums, with Aon Benfield the front runner under Peter Mungeam’s leadership. I am pleased to say that as well as delivering a vast improvement in the speed with which payments are made, it has also significantly increased the accuracy of information going through the system.
The third priority confirmed by the TOM Steering Board was developing Delegated Authority services.
We are focusing on this because delegated underwriting plays a key role in the London insurance market. Lloyd’s alone receives around 30% of its premium income through firms that hold underwriting authority on behalf of syndicates – and it is a growing area of business for the companies’ market as well.
And this trend is set to continue. We know that many of you are looking to grow your businesses by branching out to new territories and new classes of business through third-party partnerships.
Delegated authority business has spent the past 50 years being something of an after-thought and we know it is an area where many businesses have long established, but not very efficient, ways of dealing with their coverholders.
So we want to put it right up front and help make that business more effective for you by agreeing common processes and standards.
Last year we piloted Project Tomorrow – where risks quoted and bound in Australia were transferred straight into the processing bureau in London using global standard messaging. This model shows us that we can reduce the possibility of human error, data loss and data corruption by removing the need for rekeying and manual manipulation of data.
Information that used to take 60 days to arrive in London is now available in a week. In addition, whereas the coverholder used to spend 9 days a month creating spreadsheet bordereau for each contract; this workload has gone down to zero, which makes London much more attractive and easier to do business with.
The next step is centralised coverholder audit and compliance services. The objective is for coverholders to have a single audit, that compliance processes are consistent and that data is collected once and shared with the relevant stakeholders.
In an environment of increased regulatory oversight, achieving this vision will be an important step forward to helping you to mitigate and manage both the workload and regulatory requirements.
We have chosen a supplier to help us design and build a permanent solution for centralised audits. The pilot programme undertook 1,250 co-ordinated audits covering 5,160 relationships. And so far, this exercise has reduced the number of audits by nearly 2,000.
This initiative will dramatically simplify the need for your organisations to conduct individual audits, and will mean that coverholders will not need to respond to multiple audit requests every year.
The TOM Board also approved an overarching work stream focused on data management. We all know that we have to move away from paper, and that we have to extract data from documents in a way that makes it universally accessible. We all recognise that data is the life blood of our industry but the market had not been able to establish global data standards with our colleagues around the world, or implement governance for common data across the market.
But we are going to make that change, which means we need rules for a digital market so that we all speak the same language, and we need the ability to convert information so that it can seamlessly move between systems with no re-keying.
The first step is Structured Data Capture, which builds a service that converts information held in a variety of formats, into structured data using a combination of software tools and manual processes. For this we have a pilot project in place, which we are fast tracking to deliver in the next few weeks.
The next stage is the Global Placement Message so that this data can move between systems and organisations, and I am pleased to say that we have launched this with ACORD and Ruschlikon so that we can we sure it is globally compatible and we are not introducing any new “Londonisms” into our new processes.
In May, we delivered a pilot project to unlock Lloyd's reference data and make it easily available across the market. Currency codes, risk codes, broker numbers and other information from the Lloyd’s market directory were delivered through a web service to Beazley so that it could be fed into their system with no rekeying.
The next step will be to make this service available to any market participant and to extend the scope to provide a one-stop shop for good quality, validated, reference data for the whole London Market.
We are also alive to the fact that, while we are working on today’s solutions – we cannot ignore developments that might affect how we work in the future.
So we have created an innovation initiative, led by Justin Emrich, to provide a mechanism for identifying ideas and continual improvement opportunities. We hope to engender an “innovation culture” by encouraging the market to share ideas and by creating tools and processes for collaborative innovation. The idea is to triage, prioritise and explore new ideas in low risk, flexible way.
The Under 35 community, an energetic, vibrant and passionate group of people, with arguably the biggest vested interest in making the TOM a success are actively engaged in the innovation work as well as the other initiatives in the TOM.
So, what are we going to do next?
On the principle of doing a few things well, we will continue to drive these four initiatives for the next six months. Some highlights to expect in measuring our progress will be:
And in 2017 we will plan to deliver the following:
When the market is ready, the next phase of work will focus on Claims and insurance tax calculations.
The market will then be able to make choices about what they would like to address in subsequent phases.
And all of this brings me to my final topic – costs and benefits
The Blueprint contains costs and benefits for each different solution – and I would encourage every business to look at the detail, which will be on the web site. These costs have benefitted from a much greater level of detail than before, and from what we have learned to date on the initiatives that we have delivered.
The Blueprint has been developed so that the solutions are modular. The market will realise significant benefits even if it only implements the four priority initiatives. If the market decides to proceed, it can select which solutions are most relevant at that time.
If, in a spare moment, you add all the solutions up, you will see that the central cost would be higher than the £250 million than we talked about a year ago – it is £270 million. The increase is driven by including the full costs of the software for PPL, which were budgeted outside the TOM when we first developed our estimates in 2015. If you remove that PPL element, the total cost is below the original £250m.
On the other side of the equation, we have a much better understanding of the benefits. Once all initiatives are fully adopted, a saving of £223 million a year will be delivered, and that is for the carrier market alone. So, after implementation, the payback for the TOM will be over three years of full savings. You will note that I have not given you a total benefit number as this will depend on the number of years the market chooses to implement the TOM; however, the overall solution benefits are higher than those originally calculated.
The market may decide to implement all or some of the proposed solutions, and it will also have choices about whether it implements certain optional architectural enhancements such as a market portal for new systems and processes, or a single sign-on for market users. There are additional costs for these, but it is entirely up to the market to decide whether to trade convenience for a reduced investment.
The market may also decide that it wants to alter the planned time horizons to access the benefits of modernisation – either speeding up work or slowing it down depending on the amount of budget it has available to it at the time.
The important thing, though, is that the market now has the information it needs to make these decisions.
And we are also carefully managing the costs of running the programme. We are very aware this is your hard-earned money we are spending.
The 2016 spend is under budget – partly due to signing some major fixed costs deals with suppliers and also because we are switching from using the consultants we brought in to get the TOM up and running, to hiring market people in house – a sign that the programme is maturing.
I hope I have demonstrated that we have delivered a considerable amount of work, that there is clarity about what will happen for the rest of this year and by the end of 2017 – and that we understand the costs and benefits of what we are doing.
The challenge is not the build. As you can see, we are very clear about what we are delivering and why. And I hope you can also see that we are actually delivering what we promised. The challenge is ensuring that systems are adopted and that usage increases – and that is where we need your help.
So, I want to close by sharing a vision of where I think we can get to.
Through the TOM, we will have built a modernised London Market to which businesses will want to transfer their risks because it will provide solutions that strengthen their balance sheet, at competitive prices and through processes that are simple, swift, secure and seamless.
We will have delivered solutions that mean information is only entered once – reducing errors and administration for everyone in the chain from buyer to broker to insurer.
There will be a choice of channels – face-to-face negotiation or full electronic placement – whichever works best depending on urgency, complexity and need.
Money will move easily around the system. Premiums will arrive on time to give certainty that insurance is in place, and claims will get paid fast to help clients manage their cashflow in their time of need.
Clients can do business with London as easily as their local market, whilst being able to find specialist solutions to complex risks.
It is ambitious, but our market deserves nothing less and I know that by working together we can achieve this vision.