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The data revolution in underwriting Does the underutilisation of technology in the underwriting process pose a threat to the competitive position of Lloyd’s of London in the global insurance marketplace?By Daniel van der Westhuizen ACII
The data revolution in underwriting 1
The Chartered Insurance Institute (CII) The CII is the largest professional body for the Insurance and Financial Planning professions, with more than 127,000 members in over 150 countries.
Our purpose is to build public trust in insurance.
We do this through the provision of insightful leadership, relevant learning and an engaged membership.
This report forms part of our programme of insight – delivered with and on behalf of the profession – to drive positive action in support of society’s experience of insurance.
www.cii.co.uk
The Society of Underwriting Professionals The Society of Underwriting Professionals is the professional body dedicated to over 11,000 individuals working in the underwriting sector. As part of the Chartered Insurance Institute, we share a Royal Charter commitment to secure public confidence and trust by raising standards and technical excellence across the profession.
We make underwriters better by sharing insights and good practice guidance which focuses on the latest trends and evolution of the sector.
Our enhanced member experience supports you at every stage of your career and transforms how you engage with both your professional body and each other.
Contacting the CII If you have any queries regarding the content of this report please contact Matthew Connell, Director of Policy and Public Affairs, CII email: [email protected]
Disclaimer All authors named contributed to this report in their own personal capacity. The views expressed are their own and do not necessarily represent the views of their respective employers or the Chartered Insurance Institute.
The data revolution in underwriting 1
The data revolution in underwriting 2
Contents
Introduction 3
The growth of technology 4
The Lloyd’s market 7
A short history of Lloyd’s 7
Attempting to reform Lloyd’s 7
Lloyd’s current 9competitive position
Examining the data 10opportunities – Big Data and IOT
Introducing Big Data 10
Examples of Big Data used 11 in insurance
Introducing the 14 Internet of Things
Examples of IOT used 15 in insurance
The benefits of shared 16infrastructure/Big Data/ IOT methods
Improved service levels 16and reduced admin FTE count
Accurate pricing and 16risk selection, and better data capture
A proactive approach 19from insurers
New coverage and 19product opportunities
The disadvantages of 20shared infrastructure/ Big Data/IOT methods
Endangering face-to-face 20trading in the Lloyd’s market
Assessing the impact 21on Lloyd’s competitiveness globally
Competition against 21existing markets
Potential for new entrants 22to disrupt insurance
Conclusion 23
Appendices 24
References 25
The data revolution in underwriting 3
Introduction
The Lloyd’s marketplace is an icon of the city of London, having been in existence for over 300 years. However just like many other industries, questions are being asked about the disruptive nature of technology in the Lloyd’s environment, and what this means for the future of the market. This dissertation will specifically look at the role of technology in the underwriting process.
This dissertation will look to answer pertinent questions in this regard, such as the following:
• Has Lloyd’s and its syndicates been slow to adopt technological advancements in the underwriting process?
• What kinds of Big Data and Internet of Things (IOT) initiatives exist?
• How can an insurer utilise these initiatives in the underwriting process?
• What is the effect on the underwriting process and insurer as a whole of doing so?
• Is Lloyd’s at risk of significant disruption through underutilising technology in the underwriting process?
This topic has a particular relevance to me, as I am pursuing an underwriting focused career path in the Lloyd’s market. Having seen the effect of technology on the world around me (and the demise of many businesses that were previously strong and stable), I can’t help but feel that the Lloyd’s market is dragging its heels in this regard, and wonder if this might have unfortunate and severe consequences on the market.
3The data revolution in underwriting 3
The data revolution in underwriting 4
The growth of technology
The advancement of technology has had a profound effect on the world over the past century. To gain an insight into the accelerating pace of technological adoption, we can consider the following statistics:
From the invention of the telephone in 1876, it took 110 years to reach 1 billion users, for television this figure is 49 years, for mobile phones 22 years, the internet took 14 years, and finally smartphones and Facebook took only 8 years1. Similarly, Figure 1 shows the rapid growth of internet usage and the plummeting costs of data storage:
Source: Internet Systems Consortium www.isc.org/solutions/survey/history
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Figure 1The growth of Internet use through hosts
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For some industries, technology has been exceptionally disruptive. The standout examples in this regard are Airbnb and Uber – these two companies have in the space of a few years grown to a combined net worth of $99 billion2 – yet neither of these companies own the physical asset their service is associated with. Looking at the music industry, artists and record companies have battled against the growing popularity of illegal online downloads and streaming - estimates are currently around 10% of music royalties being lost, which equates to hundreds of millions of dollars3. Even the criminal realm and law enforcement have been disrupted through the ‘dark web’ - an anonymous community/marketplace which has been described as a “haven for drug dealers, arms traffickers, child pornography collectors and other criminals”4.
The growth of technology - continued
Over 1990-2013, computer costs declined on average by 33% per year
Source: John Hagel, Deloitte, 5/14; (KPCB, Internet Trends 2014- Code Conference, May 2014), BCG Analysis, Morgan Stanley Research
1 London Market Group & Boston Consulting Group, (2014)2 Stone, B. (2017)3 Granados, N. (2016)4 Volpenhein, S. (2015)
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The growth of technology - continued
Many have argued that insurance is a sector susceptible to this type of disruption. A recent report by PWC found that three in four insurance companies consider technology as a disruptive risk to their business over the next five years5, and ex-CEO of Lloyd’s Inga Beale previously declared that insurers are at great risk of being “Uber-ised”6. As an example, the first online motor insurance aggregator platform entered the UK market in 2000, and now two thirds of customers use these sites to buy their motor insurance7.
To begin the process of analysing Lloyd’s and the risk technology poses to diminishing its position in the global insurance marketplace, we first need to understand Lloyd’s history and involvement with technology thus far.
5 PWC (2016) (“Opportunities await: How InsurTech is reshaping insurance”)6 Beale, I. (2015)7 Hurley, R., Menon, A., Evans, P. (2015)
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The data revolution in underwriting 7
The Lloyd’s market
A short history of Lloyd’sIn 1688, Edward Lloyd opened his coffee house in Tower Street, and Lloyd’s coffee house soon established itself as a place for brokers to meet wealthy merchants (looking to put forward their wealth as capital), as well as becoming a reliable source of overseas trade and shipping information. Edward Lloyd died in 1713, but this informal gathering of ship owners, captains, merchants and anyone with an interest in overseas trade continued, until eventually Lloyd’s was incorporated by an act of parliament in 1871.
In the years after this incorporation, Lloyd’s would secure its reputation as the leading specialist insurance marketplace globally. The first motor policy and aviation policy was issued by Lloyd’s underwriters. Lloyd’s global reputation was established after the 1906 San Francisco earthquake, where Cuthbert Heath (a prominent Lloyd’s underwriter) encouraged underwriters to pay claims in full “regardless of the terms on their policy”. The following year
Heath would devise the concept of an excess of loss reinsurance policy. Lloyd’s would eventually go on to issue the first insurance coverage for satellites.
Having been in continuous existence for over 300 years, it shouldn’t be a surprise to learn that the industry is rife with tradition. Ties and jackets had to be worn at all times until this rule was softened in 2018, and news of ship losses at sea is still recorded on a ledger with a quill pen. Face-to-face trading, which has largely died out in other industries in the city, was still the norm at Lloyd’s until the coronavirus pandemic.
Attempting to reform Lloyd’sIt might then also not come as a surprise for anyone to learn of the antiquated and inefficient systems and processes in place for doing business at Lloyd’s. Brokers still shop around the market with bulging paper-filled folders and are forced to wait in lengthy queues at the more popular underwriting desks. Underwriting and risk data is not stored between syndicates in a standardised way, and so must be re-keyed into each member’s systems. Not only is this duplicate entry system inefficient and prone to error, but it prevents the operation of good data analytics within the syndicates, and also across Lloyd’s. This exact problem was noted as early as 2004 when Chief Executive of Lloyd’s, Nick Prettejohn, was quoted in the Economist as believing “the market can do even better if only it will shed some of its quirkier characteristics and embrace modern technology and business practices”8.
8 Economist (2004)
The data revolution in underwriting 8
The Lloyd’s market- continued
Around this time, Lloyd’s made an attempt to build a system with the aim of addressing this very problem, although it proved a disastrous failure. Over £50m was spent on developing ‘Kinnect’, although the buy in from syndicates was minimal, and likewise its uptake9. Roll forward the clock to 2016, and Inga Beale laments the current state of Lloyd’s technological advancements - including the predominant use of paper to place risks, lack of communication between back office systems, as well as problems with multiple data entry and the associated lack of available data mining capabilities10. Similarly, Lloyd’s Chairman John Nelson stated that “Lloyd’s was very slow to modernise and we should have done it years ago”11. 12 years that saw the most radical technological advancements elsewhere in the world, yet Lloyd’s has remained stagnant in its own technological progress. Recently there were even hopes that insurers and brokers would start to use iPads in their interactions in the underwriting room12, however bulging files and rubber stamps are still the order of the day.
9 Ibid.10 Beale, I. (2015)11 Ralph, O. (2016)12 Ibid.
The data revolution in underwriting 9
The Lloyd’s market- continued
9
Lloyd’s current competitive positionSo where does this place Lloyd’s presently in the global insurance marketplace? A recent report produced by the London Market Group alongside the Boston Consulting Group and Morgan Stanley Research13 provides a comprehensive analysis of the present threats and opportunities that exist for the Lloyd’s market. Some key themes emerged.
Problems with infrastructure and service levels were apparent and causing customer frustration. One example was the excessive time it took to finalise policy documents14, while another compared the insurance industry service levels to other financial services sectors and found it inferior15.
The trend for insurance to be placed in local markets as opposed to the Lloyd’s market was noted. If similar levels of underwriting expertise and capacity can be accessed in a local hub as it can be in Lloyd’s, then end customers prefer to have a local service and market knowledge. Previously, many global insurer offices were
used as ‘representative offices’, acting as a funnel to the Lloyd’s market however underwriting expertise and authority levels in these global offices have increased.
With the rapid development of technology, and customer’s needs evolving rapidly, new risks are emerging for which no insurance solutions are currently available. Much of this new risk is intangible (for example cyber, supply chain risk, or reputational risk) and hard to quantify in terms of frequency or severity. While the insurance sector has made efforts to cater for some of these new risks, the pace of customer’s needs developing, combined with limited cover in these policies means take up has been low.
The report argued that the concept of advanced data analytics creating competitive advantage has already started gaining traction in the market, however take up has been varied across lines of business. Larger complex commercial classes (such as property catastrophe) have begun to utilise some of
these techniques, however this is far less common in more ‘specialist’ lines.
These findings by the report raise a number of important questions which this dissertation will seek to answer. To what extent can shared services and infrastructure activity lower costs and improve service? How can London encourage product innovation and entrepreneurialism through the use of technology? How can data and smart analytics be utilised to play a more central role in the underwriting process, and what benefits may this bring?
These questions lead us onto the important topic of Big Data and IOT initiatives.
13 London Market Group & Boston Consulting Group, (2014)14 Actual quote from a US risk manager “People in our industry want to be able to interact in an efficient and speedy manner, I don’t want to have to wait 2-3 months for my policy to arrive fter I have agreed a large insurance placement”.15 Actual quote from a European Risk Manager “Insurers could learn much from the banking industry where they have already automated many processes. A bond (which in effect is a subscription product) can be issued in two hours, but I have to wait more than two months to place my insurance risk”.
The data revolution in underwriting 10
Examining the data opportunities– Big Data and IOT
Introducing Big DataIn light of the staggering pace of technology growth, we can introduce the concept of ‘Big Data’ – “the ever increasing amount of digital information being generated and stored, and the advanced analytics procedures which are being developed to help make sense of this data”16. Another definition is “high-volume, high-velocity and high-variety information assets that demand cost-effective, innovative forms of information processing for enhanced insight and decision making”17.
Big Data analysis has already revolutionised many areas of modern life and many businesses have discovered ways to obtain, evaluate, and utilise this data to their own competitive advantage. For example Tesco was an early pioneer of the Clubcard concept, where extensive amounts of individual customer shopping data was collected and used to provide insights into buyer behaviour, as well as provide an opportunity to personalise offers and discounts to each particular customer18.
While the insurance sector has been slower to adopt Big Data methods, some argue that it is on the “brink of innovation”19. To begin the journey into Big Data however, the most common target for initial Big Data efforts (both insurance and non-insurance related industries) is actually internal data20. In many cases this data may have been collected for years without being analysed, often due to the constraints of out-dated IT systems being used. Increasing the amount of data analysed, and the speed and accuracy of doing so will be a difficult objective to achieve – insurer core IT systems are traditionally fragmented and consists of information silos. The amount of integration and cleansing needed will be even more than an average business21.
Turning towards external sources of data, a trend can be observed in the nature of data available. Until recently, insurers have collected relatively simple and historical information on the risk to be insured. However through
Big Data, a wealth of rich and up to date underwriting information can be accessed (and not only at renewal). Therefore with less historical backward looking data, and more complex real time data, underwriting methods and actuarial techniques will have to adapt to these new and untested data sets. The challenge for insurers will be how to correlate this new information with claims data to provide more accurate, ‘personalised’ pricing to each risk.
16 “Marr, B. (2015)17 Bharal, P. & Halfon, A. (2013)18 Bold, B. (2013)19 Llull, E. (2016)20 Corbett, P., Schroek, M., & Shockley R. (2013)21 Boston Consulting Group, Morgan Stanley Research. (2014).
The data revolution in underwriting 11
Examining the data opportunities– Big Data and IOT - continued
Examples of Big Data in insuranceLooking at examples of Big Data, Figure 2 shows sources of Big Data and also the most popular analysis methods by which this data is processed and transformed into useful information:
Tran
sact
ions
Log
data
Even
ts
s
Socia
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Sens
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RFID sc
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%
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14%
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Source: Analytics: The real-world use of Big Data, a collaborative research study by the IBM Institute for Business Value and the Saïd Business School at the University of Oxford.
The data revolution in underwriting 11
Figure 2Big Data Sources
The data revolution in underwriting 12
Examining the data opportunities– Big Data and IOT - continued
Analytics capabilities
Source: Analytics: The real-world use of Big Data, a collaborative research study by the IBM Institute for Business Value and the Saïd Business School at the University of Oxford.
Query
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%
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25% 14%
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The data revolution in underwriting 12
Examining the data opportunities– Big Data and IOT - continued
Below are further examples of Big Data use in insurance.Example 122
The use of satellite data by reinsurers to improve risk selection - the Climate Corporation (a San Francisco based start-up) uses Big Data to predict weather and other agribusiness conditions by taking weather measurements from 2.5 million locations on a daily basis and 150 billion soil observations.
Example 223
Lloyds Banking Group in the UK has begun offering prudent UK bank account holders savings of as much as 20% on their car insurance. By using Big Data methods, they have identified that consumers that stay within overdraft limits or avoided bounced debit card payments have fewer accidents.
Example 324, 25
‘Bought by Many’ uses social media to identify customers with poorly served insurance needs, according to the social media activity. It then helps individuals join groups or even create affinity groups, finding insurance solutions for specific needs and then negotiates with insurers on behalf of those groups. As an example, leading Chinese insurer Ping An has partnered with Bought by Many to create personalised travel insurance.
Example 426
Tesco, which has access to years of detailed consumer behaviour data through its Clubcard scheme, now offers premium discounts on home and motor insurance of up to 40% for customers it deems least risky through analysis of their shopping habits.
Example 527
Aviva’s UK division has used Big Data to determine the optimal distance from the street at which a property is least likely to be burgled – not too secluded nor too exposed. Similarly, Aviva’s Canadian business has discovered that houses within a radius of a few hundred metres from a cinema have a higher likelihood of being vandalised. Maurice Tulloch from Aviva’s UK’s general insurance business, comments, “This is not just a backroom theoretical exercise. If our analyst finds something new on a Monday, that can be live and impacting our prices on the Tuesday.”
22 Boston Consulting Group & Morgan Stanley Research. (2014).23 Gray, A. (2014)24 PWC (2016), (“Opportunities await: How InsurTech is reshaping insurance”)25 Hurley, R., Menon, A., Evans, P. (2015).26 Gray, A. (2014)27 Gray, A. (2014)
The data revolution in underwriting 13
The data revolution in underwriting 14
Examining the data opportunities– Big Data and IOT - continued
Introducing the Internet of ThingsThe ‘Internet of Things’ can be thought of as the “network or system of interrelated computing devices, sensors, living creatures or other objects that have unique identifiers and can communicate with other devices on the network. These objects, or ‘thing’, are capable of transmitting data”28.
Another definition is the “universe of intelligent devices, processes, services, tools and people communicating with each other as part of a global ecosystem”29.
Modern products are not only becoming more technologically advanced (as previously discussed) but are becoming more connected with each other. For example, in 2014 there were 14.4 billion connected devices globally, however this was expected to rise to 38.5bn in 202030 (including 200m connected cars, 700m connected homes, and 1bn wearable devices) and 100bn by 203031. It has been argued that
this interconnectivity means the traditional model for insurance is becoming less relevant and less sustainable32. It is the use of this data generated by connected devices that creates an opportunity for insurers.
28 EY (2016)29 Caanan, M., Lucker, J. & Spector, B. (2016)30 Worth, D (2015).31 Tedeschi, G. & Della Vecchia, A., (2015)32 Ibid.
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Examining the data opportunities– Big Data and IOT - continued
Examples of IOT in insuranceExample 1 - Sensors on moving objects/vehicles
This is arguably the most widespread and advanced deployment of IOT - sensors on movable objects, usually linked to a GPS framework and/or information sources within the vehicle it is connected to. Distances travelled, speed, frequency and level of braking, time of day journeys are undertaken, and many other important underwriting factors can now be ascertained on an individual risk basis through the use of telematics. Originally, insurers had to fit aftermarket sensor kits to a vehicle for this offering to be possible, however some carmakers are already integrating these sensors into their latest offerings33. Although this area of IOT has thus far focused mainly on the motor market, the same formula can apply to marine or aviation risks, or other forms of craft to determine how those risks are used34.
Example 2 - Wearable/personal technology
Wearable technology (sometimes called ‘fit-tech’) presents the opportunity to monitor a variety of health-related metrics. Heart rate and movement (for example the number of steps walked in a day) are some of the simpler metrics35, while technology is rapidly developing for blood metrics, alcohol consumption, ECGs, and drug administration36. There are even socks and shoes starting to enter the market that can alert diabetics early on to potential foot ulcers, odd joint angles, excessive pressure, and the level of blood circulation in their capillaries37.
Example 3 - Location based sensors is for property-based risks (also known as ‘smart home’ or ‘smart business’)
These sensors include smart thermostats, security technologies (such as alarms or cameras) and industrial control systems38, and can be placed in warehouses, factories, offices, or homes. These technologies enable the monitoring of heat/fire, water/flood or unauthorised entry39.
Example 4 - Geographic Information Systems
Possibly not as widely used as the previously mentioned examples of IOT information is ‘geographic information systems’ (GIS). This includes geophysical, topographical, climatological and hydrological data, as well as information about utility grids and flight path and that may include drone and satellite imagery40.
33 Deloitte (2016)34 EY (2016)35 Boston Consulting Group & Morgan Stanley Research. (2014).36 EY (2016)
37 Smith, S. (2016)38 EY (2016)39 Boston Consulting Group & Morgan Stanley Research. (2014).40 EY (2016)
The data revolution in underwriting 16
The benefits of shared infrastructure/Big Data/IOT methods
Having introduced Big Data and IOT, we can now look at the opportunities and benefits available to an insurer from utilising these technologies.
Improved service levels and reduced admin FTE countAs mentioned previously, an insurer’s journey to effectively utilising data starts internally – and to accomplish this Lloyd’s must implement a shared infrastructure system. Recently Lloyd’s devised a Target Operating Model (TOM), designed to streamline areas of the market that are inefficient, and make London an easier and more cost-effective market to do business41. Part of TOM is the Placing Platform Limited project, which aims to build a common infrastructure for data entry in the Lloyd’s market. This type of project could reduce the number of FTEs needed in this processing/admin type role – one estimate (for similar projects in non-Lloyd’s market insurers) was an up to 80% reduction in admin FTE, which equated to a 1.1% improvement to the combined operating ratio42. There is more to simply saving
money however, as Inga Beale comments, “I think we all recognise that this model will do more than just save us time and money. It will allow us to better understand our business and the risks our clients face”43. The natural progression is then to look at external data, and this leads us on to examining the benefits of using IOT and Big Data methods.
Accurate pricing and risk selection, and better data captureDue to the unique data capture capabilities that Big Data and IOT present we can now ascertain rating factors which were previously impossible44 - these methods are also less prone to human misinterpretation or misunderstanding of what must be disclosed. As much of the risk characteristics are reported by sensors or data available, this ought to be more reliable than human judgement and therefore more accurate and trustworthy. For example, telematics has allowed insurers to help mitigate the effects of the European Court of Justice ruling which outlawed the use of gender as an underwriting factor, with many in the industry fearing age-based pricing may follow suit45.
A recent report predicted (rather crudely46) that successful use of Big Data to enrich the underwriting process would give an
41 Reid, B. (2016)42 Boston Consulting Group & Morgan Stanley Research. (2014). Although this estimate assumed a very high level of automation introduced and was not prepared with the Lloyd’s environment in mind, it still gives an idea of the direct relationship between efficiency and cost savings/profitability in this function.43 Beale, I. (2015)
44 Insurance Nexus (2017)45 Boston Consulting Group & Morgan Stanley Research. (2014).46 By assuming an original loss ratio of 67%, and then reasoning that there are examples where the use of such techniques in the UK has resulted in a 20% reduction in the loss ratio. The research assumed a 50% success rate in application which reduces the assumed loss ratio by 6.7ppts from 67.0% to 60.3%.
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Figure 3
The benefits of shared infrastructure/Big Data/IOT methods - continued
improvement on the combined operating ratio of 6.7%47. The same report predicted a 15-25% combined operating ratio improvement for telematics use in vehicles, and a 40-60% reduction due to smart home technology use. More extensive information can be seen in Figure 3:
Source: Association of British Insurers, BCG case experience, DFT UK; Morgan Stanley Research. * Based on UK claims split in 2012. Other technologies such as on-demand policies and in-car accident prevention technologies will also have an impact, but are not modelled here.
47 Boston Consulting Group & Morgan Stanley Research. (2014).
The data revolution in underwriting 17
Current motor risk/losses Risk reduction through adoption of smart devices
Future potential motor risk/losses
-5% reduction in accidents due to educational programmes linked to telematics. Speed limitsSafe distance to other carsSafer turns and breaks etc
Reduction in fabricated bodily injury claims due to whiplash~70% of total value of bodily injury claims in the UK. 10-15% of which are fabricatedElimination of fraud10-20% of claims due to fraud in both underwriting and claims assessment Fraud can be eliminated in policies equipped with telematics
0%
100%
20%
40%
60%
80%
0%
100%
20%
40%
60%
80%
15-25%Reduced
risk
Other Theft Property damage
Bodily injury
Accidental damage
The data revolution in underwriting 18
Current home risk/losses Risk reduction through adoption of smart devices
Future potential home risk/losses
Cause of claims Water leakage Fire
Theft
Total
Connected devices availableConnected metersConnected electronic ManometersActive leakage detection devices
Smoke detector CO2 detectors
IP DIY alarm systems
Advanced alarm systems
Prevention potential ~20-30% ~70% ~~70% ~10-80%
40-80%0%
100%
20%
40%
60%
80%
0%
100%
20%
40%
60%
80% 40-60%Reduced
risk
Water damage
Electrical Theft Water damage
Fire
Source: BCG case experience, smart systems suppliers; BCG Analysis, Morgan Stanley Research
The benefits of shared infrastructure/Big Data/IOT methods - continued
The data revolution in underwriting 18
The data revolution in underwriting 19
A proactive approach from insurers Another opportunity created by these technologies is to allow the insurer to play a more proactive role in loss mitigation. Insurers have traditionally dabbled in risk mitigation/improvement techniques, for example by partnering with allied sectors or by offering optional small sums of money to policyholders for use towards improving the risk exposure in some way. However Big Data and more importantly IOT technologies take this concept much further.
As an example, the installation of a telematics box in a vehicle can give insurers an idea of the general condition of the vehicle (through on board diagnostics, etc) – now insurers can play a role in alerting drivers before a potentially dangerous and preventable malfunction48. Similarly, wearable technologies that constantly monitor policyholders’ health can alert them at an early stage that a doctor must be seen49, or smart home/business technology can act as an early warning system for certain perils (such as fire, escape of water, or unauthorised entry) which may avoid or lessen the damage.
As Daniel Knight, Chief Product Officer of Neos50 puts it, “No-one wins if something gets flooded or burnt down. It’s a bad experience. We have always been acutely aware of that. Can technology and data stop these things happening? This is where we are focusing.”51.
Through this proactive approach, the frequency and/or severity of claims can be reduced causing a direct reduction on the loss ratios (and therefore premium levels) and insurer profitability52. More importantly perhaps is the changing value proposition for policyholders – from only delivering value at the point of claim, to delivering value throughout the duration of the policy. This is a prized tool for the insurer, as insurance has historically been viewed as delivering poor value to customers. As David Williams (Technical Director at AXA Insurance) points out, “If you look at most insurance products, fewer than 10% of customers make a claim. That leaves 90% who most years think they are shelling out for nothing at all. This doesn’t build a trusting relationship”53.
New coverage and product opportunitiesMany areas of both the personal lines and commercial lines market have become increasingly commoditised, where competition is primarily on price rather than coverage or service. However, by utilising the power of Big Data and IOT technology insurers can look to create new types of coverage/products, from the more holistic viewpoint gained by the depth and breadth of the data capture54. If these technologies can help insurers develop the right product, for the right segment, at the right time, then the policyholder’s perceived policy value and insurer brand loyalty will undoubtedly increase55.
The benefits of shared infrastructure/Big Data/IOT methods - continued
48 Ibid.49 PWC (2016) )”InsurTech: a golden opportunity for insurers to innovate”50 A promising new start up focussing on home insurance products through smart home solutions
51 Insurance Nexus (2017)52 Caanan, M., Lucker, J. & Spector, B. (2016)53 Insurance Nexus (2017)54 Ibid.55 Boston Consulting Group & Morgan Stanley Research. (2014)
The data revolution in underwriting20
The disadvantages of shared infrastructure/Big Data/IOT methods
Endangering face-to-face trading in the Lloyd’s marketFrom the literature available, there is very little information on the potential disadvantages of introducing technology. The only reasoning I have come across against introducing technology into the processes at Lloyd’s is that the unique and historical face-to-face trading environment may be compromised or eventually die out. This school of thought feels slightly irrelevant however.
Policyholders do not find security in Lloyd’s face-to-face trading – this lies in the financial security and good reputation of the market. Brokers do not choose to place risks in the London market due to face-to-face trading – this is due to the expertise of underwriters and capacity to write risks that other markets cannot. Essentially, some in the market are trying to hold onto a historical remnant that does not always add value to Lloyd’s overall value proposition. Insofar as the underwriter fully understands the risk in question (which for the most complex risks may require a
discussion in person), face-to-face trading is not a necessity. This view is mirrored by Bronek Masojada (Chief Executive of Hiscox), who stated, “There’s a role for face-to-face broking for complex risks. It just shouldn’t apply to all risks, there are risks in Lloyd’s that don’t need to be done face-to-face — 80 per cent of what is done could be handled electronically, only 20 per cent needs face-to-face”56.
56 Ralph, O. (2016)
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Assessing the impact on Lloyd’s competitiveness globally
Competition against existing marketsWhile syndicates operating within the Lloyd’s marketplace will naturally compete against one another, the Lloyd’s marketplace itself will compete against other large insurance hubs such as Hong Kong, Dubai, New York, Bermuda, Singapore, or Zürich. The growing trend of global risks increasingly being placed in their local insurance markets is a direct threat to the Lloyd’s market (as the majority of risks placed there are international). To counteract this, Lloyd’s must work towards exploiting all the benefits that technology can offer to ensure it is at the forefront of the global insurance marketplace.
By harnessing the power of technology, Lloyd’s can become a leader in service levels, which will increase the ease of doing business compared to other markets. Through the underwriting insights that can be gained from technology, Lloyd’s and it’s syndicates will be able to outperform its rivals in terms of risk selection – as risk selection is largely a ‘zero sum’ game, the Lloyd’s market will be able to select the best performing risks, and its peers will unwittingly end up picking up the
lesser desirable risks. This is especially relevant as Lloyd’s declared an underwriting loss for 2016 and so profitability is a serious issue57. By developing products for which there is an unfulfilled insurance need, Lloyd’s can reinforce its reputation as a market with world leading knowledge and expertise - as such Lloyd’s will see risks that other markets across the world will not be able to accommodate. Being able to offer unique insurance products is an excellent differentiator and positions the Lloyd’s market as a forerunner in the global insurance marketplace. Finally, by utilising the possibility of a proactive involvement in policyholder’s risk management, policyholders and brokers should see greater value in placing risks in the Lloyd’s market compared to other regions across the world.
57 Cohn, C. (2016)
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Potential for new entrants to disrupt insuranceIt is not only the established insurance markets that must be considered, as technology creates the ability for new entrants to disrupt the market. Established insurers have historically held an advantage due to years of detailed risk data, and possessing best in class systems for complicated analysis58 - one of the reasons prospective newcomers have been few and far between. However, the availability of in depth and detailed risk data has become more widespread, alongside the cost of technology falling. For example, cloud computing has made powerful, high end computing systems available on a pay per use model, meaning complex risk analysis is no longer the exclusive jurisdiction of the largest insurers59.
A limiting factor for standalone entrants to the market would be the large start-up capital requirements and regulatory burdens meaning high barriers to entry60 - to circumvent this, new start-ups are setting up joint ventures with established insurers61. This is a fairly moot point however as the possibility of disruption
to the Lloyd’s market exists in either format (be it standalone or joint venture). I completely agree with the Director of AA Insurance, Simon Douglas who states, “The winners in the insurance market will be the ones that have got the data insights that others don’t have. It could be supermarkets, banks or social media companies”62.The best way to prepare against these threats is to ensure Lloyd’s is making the best possible use of available data in its underwriting and its infrastructure – this will ensure the potential advantage other new entrants can gain from fully utilising technology is minimised. Similarly, if a new entrant does disrupt the market, the comparative shift needed to respond to such a technology will be lessened compared to Lloyd’s current position.
Assessing the impact on Lloyd’s competitiveness globally - continued
58 PWC (2016) (InsurTech: a golden opportunity for insurers to innovate) 59 Boston Consulting Group & Morgan Stanley Research. (2014)60 PWC (2016) (InsurTech: a golden opportunity for insurers to innovate)61 Carrier management. (2016)62 Gray, A. (2014)
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Conclusion
Looking to the future however, it seems clear to me that the reluctance of Lloyd’s to embrace modern technology in its processes poses a serious threat to its competitive position globally. If it does not exploit the opportunities available then Lloyd’s’ dominance will almost certainly be challenged.
The arguments against technology utilisation in this market are few and unconvincing, however the opportunities that technology presents are numerous. Through streamlining its internal processes, Lloyd’s will be a much more efficient and easier place to do business, as well as being able to produce previously unknown risk insights through better leveraging existing data. Insurers have always found advantage in selecting risks more successfully than their peers, and these technologies help underwriters gain large amounts of quality, up to date underwriting data, resulting in more informed underwriting decisions which directly
impact loss ratios. This greater awareness of the insurable risk will allow new products to be developed to better suit the needs of the end client, reinforcing London’s reputation for innovation and flexibility while offsetting the commoditisation of more traditional risks. Additionally, the insurer can now play a more active role in diminishing the frequency or severity of losses, and in turn increasing the perceived value of insurance products.
Digital technology presents both profound threats and opportunities to the insurance industry – embracing what technology has to offer will mean the threats are diminished and the opportunities are maximised as far as possible. The sooner Lloyd’s starts on its data revolution journey, the better placed it will be to successfully react to a disruptive technology, and to outperform other insurance markets across the world.
By building a community of leading expertise in insurance, and constantly looking to innovate and react to the changing insurance needs of the world, Lloyd’s of London has managed to remain in operation for over 300 years.
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Appendix
Challenges/limitationsThe production of this dissertation posed quite a few challenges. There is a large body of information on the effect or influence of technology on the insurance sector, although written from differing angles and viewpoints. As such it posed a challenge for the scope of the essay not to creep wider and wider, as word limit constraints would then prevent any depth of analysis. Having said that, very little of the available literature focuses on this topic from the viewpoint of the Lloyd’s market. Much of the research on the topic is personal lines focused, as this is where most of the developments in Big Data/IOT technology are currently focused. This makes difficult translation into the larger, more complex risks of the Lloyd’s environment (as well as the additional role of the broker intermediary).
Many reports and articles used ‘broad brush’ statistics which seem vague and are unclear. For example a report might state “74% of insurers believe they are at risk of disruption from technology”, however the methodology used to derive the statistic is not declared. Using this example a reader might wonder what type of insurers were used to create this statistic, if this figure is more concentrated in certain lines of business, or who was questioned to declared this position in the
insurance company (only senior management, or employees across the board?).
Due to the fast moving nature of technology, any report or statistic produced also becomes outdated rapidly. This means only the more recent publications have enough reliability to be useful, which restricts the available sources to research.
Finally, as mentioned the area is fast moving and constantly developing. Towards the end of finalising this essay, information/research that was newly released on the topic had to be ignored (as otherwise the work would never have been finished!).
Topics considered ‘out of scope’Due to word limit constraints, there are some important topics which were not discussed (which may nevertheless be relevant to the question at hand). These are listed below:
• The role of the broker is profoundly affected by the introduction of technologies discussed in this dissertation. Is it the role of the broker to encourage the uptake of smart technologies in clients? Who ‘owns’ the use of technology in an insured – the broker (who permits the underwriter to access the data), or the insurer directly? These have not been discussed.
• The role of Artificial Intelligence (AI) in the underwriting process was not mentioned.
• The relationship between Lloyd’s itself and the syndicates was not discussed. Where do the responsibilities lie in the implementation of technology in underwriting? What can Lloyd’s do to encourage technology use by the syndicates?
• The likelihood of effective implementation of the current initiatives in place at Lloyd’s (such as the Target Operating Model, or the PPL initiative) have not been discussed.
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