Chairman outlines vision for insurance market of the futureThu 02 Nov 2017
Speech by Bruce Carnegie-Brown at the London Market Conference 2017
Speech by Bruce Carnegie-Brown at the London Market Conference 2017
When American inventor and agriculturist Cyrus McCormick demonstrated his new horse-drawn mechanical crop harvester to farmers in the 1830s in the US, they laughed him out of town.
Why spend money on an unproven technology when there was an endless supply of labour to reap the harvest manually?
Why use a contraption that with its jiggling wooden bars and sharp blade looked both absurd and dangerous?
Twenty years later, McCormick had the last laugh. By 1856, his company was selling crop harvesters all across the US. Farmers couldn’t get enough of a machine that improved productivity by a factor of six or more.
But he wasn’t the only inventor of a mechanised harvester at the time so why did he succeed and others fail?
McCormick understood three things better than his competitors:
McCormick’s innovative strategy changed farming’s business model forever.
Although these events played out more than 170 years ago, and just in case you think you have stumbled into an episode of Farming Today, I’m sure you can see where I’m going with this story.
McCormick found himself at a key point in agricultural history: a time of transition from manual to mechanised labour.
Today, the commercial insurance market is also facing a key moment in history – at the end of the old industrial, analogue era and at the beginning of a new digital world.
Much as McCormick did, we can see the opportunities that await us. And yet, unlike him, we seem hesitant to shrug off the past and embrace the new.
Some market participants take the view that: “If it ain’t broke, you don’t have to fix it.” After all, the traditional insurance business model has been pretty successful over the years – for more than 300 years in the case of Lloyd’s. There have been some tough times along the way, but in the main it’s paid our bills, paid our shareholders and paid our policyholders.
And it still is. But there are signs the model is vulnerable.
We all know the challenges we are facing:
In combination, these challenges are making us less relevant to our customers.
The latest London Matters report already referred to showed that the London market, while gaining in some classes, is only tracking market share in property and casualty, and is losing share in reinsurance. It found we are not keeping pace with emerging market growth despite insurance business expanding rapidly in these regions.
As you all know, our slow adoption of technology is creating opportunities for tech-savvy start-ups who see the insurance sector as “ripe for disruption”. If we don’t react to this competitive challenge by disrupting ourselves, the London market will surely be disrupted by others.
Relentless downward pressure on pricing is making it harder and harder for our industry to deliver sustainable growth. Technical pricing is out of kilter with risks covered and for many of us profitability is declining. At the same time costs remain stubbornly high. No one I speak to thinks the London market’s expenses are sustainable. They are not just reducing our returns on capital; they are making us vulnerable to more efficient competitors.
And even as we develop new products such as cyber insurance or policies for the sharing economy, we need to reinvent how we distribute them to our customers. The creators of Uber, AirBnB, Google and Facebook – some of the world’s fastest growing and most valuable companies - are not interested in doing business with an industry stuck in the analogue world. We need to make ourselves relevant in this new business paradigm.
You’ve heard it before but it’s worth repeating: these challenges are deep-seated and structural - and they need fixing.
And we would be very foolish to allow the prospect of firming insurance prices post the recent hurricanes to persuade us that change is not required.
The challenges faced by the insurance industry are far too important to be left to the vagaries of the market cycle. We need to take action to make our industry more competitive.
We need to demonstrate the same long-term thinking and commitment to change McCormick showed when developing his revolutionary harvesting machine; the sort of thinking that changed US agriculture for ever and that will propel us into our own brave new world.
Technology was at the heart of McCormick’s revolution and technology is at the heart of the changes taking place in our sector.
Imagine for a moment that you are an insurance customer coming to Lloyd’s in 2025.
You put your property risk up for auction on Lloyd’s online portal. Syndicates bid for the risk or part of the risk online, offering a range of different premiums and covers. The risk can still be syndicated – the auction method allows for parts of the risk to be transferred in the way they can be now. In effect, Lloyd’s now offers its own price and product comparison service.
Because the system is fully electronic, frictional costs are reduced. Your preferred brokers may or may not be involved in the process depending on the complexity of the risk, but they now offer you a range of value-added services based on expert advice. Their fee structures are lower, because digitisation has lowered their costs.
Let’s say you get the cover for the risk – it might have cost you less than it does today because by 2025 the algorithms are so developed, the data sets so rich and the analysis so insightful that much actuarial work is now automated.
Your insurance product is tailored to your needs because the data you provide will allow underwriters to build a bespoke risk profile. You have the option to turn the cover on and off when you need to. The clunky one-policy-fits-all approach we offer today is no longer the way of working.
Halfway through your policy term, a storm destroys your property. Straight after the disaster strikes, satellites beam back imagery augmented by drone photography to build up a picture of the disaster zone and verify the damage has taken place.
When there’s too much cloud cover, insurers use a free online service that aggregates images from all of the CCTV cameras in the damaged area to provide an alternative on-the-ground view.
Once this data reaches a certain evidential threshold, the claim is triggered automatically – you don’t need to submit it. The payment is made electronically, underpinned by distributed ledger technology, such as blockchain, within days of the claim being made.
Think of the benefits once this vision becomes reality:
Of course, these developments may come at a cost. McCormick’s invention drove the rural workforce into the cities to look for the jobs that no longer existed in agriculture. We have to expect similar disruption to our own sector. For how long can actuarial science repel the advances of algorithm-derived risk pricing? How will the role of the broker and the underwriter change?
The challenge for all of us is to work out our value in the insurance buying chain. I am very fond of saying there is too much activity as a substitute for achievement in our industry. By which I mean that we do a very poor job of differentiating between that part of our role which is process and that part which genuinely creates value.
Digitisation will eliminate manual processes but it will not eliminate the valuable part of what we do. That’s why each of us, whichever part of the insurance chain we are in, needs to be clearer on what their value is. We need to enhance, develop and where necessary redefine our value so we are relevant in 2025 and beyond.
The good news is that all the technology I have referenced today already exists. We don’t need to invent everything from scratch. What we need to do is to put it all together so we can provide one seamless experience for our customers.
And while this is easier said than done, of course, there are a number of London market and Lloyd’s projects in flight. For example, electronic placement is up and running - and the adoption rates are improving. Today there are 90 underwriting firms and 25 brokers on the platform, and over 10,000 risks have been bound.
We have standardised data in the placement process so information can flow seamlessly between brokers and underwriters, without rekeying.
Reforms to central services now mean brokers can interact with the bureau using the same data and process standards as they do in other markets. This radically reduces the administrative burden on brokers.
And coverholders, who make up a significant percentage of our market, will see real improvement in simplifying their audit and compliance processes from next year.
These projects, known collectively as the London Target Operating Model, need to be fully embraced and adopted.
As with all technology projects, there have been teething troubles as we parallel process in both the digital and analogue worlds – that’s to be expected.
This means we have yet to reap the benefits of becoming digital but I believe that 2018 will be the year when the digital future becomes a digital present in the London market.
Of course, the TOM work is just the start of the story. As our operating systems and processes become more efficient, we can look at how we can help the market compete more effectively – for example, by providing higher quality data and data analytics.
In other areas such as pricing, risk selection and underwriting decision-making, it will be down to individual companies in the Lloyd’s market to adopt new technologies.
Some companies are cautious about adopting these new ways of working, but many others understand the benefits, quietly investing in data and new technologies, cleaning up their operating models and hiring experts to take competitive advantage of the post-TOM world.
The businesses that get this right will gain a first-mover advantage.
If you are not leading your peers on this, you need to ask yourself “why not?”
And we are making progress on the other challenges I mentioned, too.
We are re-making the case for the value of insurance with renewed vigour. London’s contribution to this is boosted by the excellent and welcome LMG campaign Chris mentioned at the outset. This is exactly the kind of positive, front-foot action we need to remind the world of what we do and how well we do it.
Cross-market initiatives such as the Dive-In diversity festival are starting to change the perception that our sector from one that is stuck in the past, to one that shows we are open, dynamic and outward looking. This will help us attract a new generation of insurers and leaders who will carry on the work that we have begun, to secure the future of our industry.
There’s so much more good stuff we are doing of course – and we should be very proud of the changes we are starting to make. But the fact remains we need to do more – and we need to do it faster. And for those that haven’t started, it’s not too late – but the time is now.
For Lloyd’s, our priorities must be to execute on our plans to digitise the market; to improve our competitive position across insurance classes; to continue to lead the insurance market in innovation; to enhance our returns; and to protect our credit ratings. And by focusing on these things, we will aim to continue to build Lloyd’s brand and reputation globally.
I want to conclude with a reminder of why it is worth making all this effort; of why it is vital we succeed in making our industry fit for the future.
Insurance underpins human progress and development. Without insurance, mankind could not plan to travel to Mars, invent the sharing economy and turn driverless cars from being a Silicon Valley fantasy into a rapidly approaching reality.
Without insurance, global economic development would be pegged back by the punishing impacts of natural disasters, businesses would crash under the cost of remediating cyber-attacks and communities would spend years rebuilding after catastrophes strike.
Insurance transfers risks away from the public purse onto the private sector and helps build resilience.
Nowhere is there a clearer demonstration of the value of insurance than in the recent payment of billions of dollars of claims to help the people of the Caribbean and the US recover from the disaster of three hurricanes in the space of a month.
As we pay these claims – as we pay all our claims - we should remind ourselves and our customers of the power of insurance to put businesses, communities and people back on their feet after disaster has struck. If we don’t make the case for the value proposition of our industry, no one else will.
The lessons of history are clear: the winners in business are those who align purpose and capability, those who continually react to the circumstances they encounter, and who constantly reinvent themselves and strive to do better.
McCormick beat his rivals because he adapted faster and did things better. In success terms, he literally reaped what he sowed.
His focus on excellent customer service, efficient distribution and new technology is a blueprint the insurance sector would do well to follow.
Thank you for listening.