Wednesday, 27 February 2008

Answering Gargamel – Part I of II

I admit to poor form in spending more time trying to (unsuccessfully) identify “Mr. Gargamel” who posted a thoughtful comment to a post (here) than in addressing the many and important issues in the comment.

The crux of his comment is the pivot point of who is boss in the insurance industry – He Who Pays Premium, Places Premium or Writes Policies for Premium.

If you agree that the impact of the internet has been to empower the consumer (who now dictates the terms of engagement for the purchase cycle of many products), then why hasn’t the commercial lines insurance industry evolved to this model?

Personal lines insurance products have – they are all transacted online, competition is fierce and comparison sites are hugely successful.

What’s the difference in commercial lines whether in the US, Bermuda or on Lime Street?

I compare the commercial insurance industry to the syndication of new bond issuance. Although Bill Hambrecht has launched an auction site to connect companies raising capital through IPO or secondary offerings to investor capital, this is both new and relatively insignificant.

Ford issues paper through Merrill, Morgan, Lehman & Goldman because of distribution – these houses can provide valuable analysis AND provide a wide network of significant buyers. There is no comparison site for this large issuance and there is little to no activity on the insurance equivalent – RI3K.

For these reasons, I disagree with the sentiment from the comment that “traditional agency channels will almost certainly decline”.

PS - Adoption of ACORD standards will not by itself empower the Risk Manager, the influence dynamic will not shift from the brokers and underwriters. Instead, adoption of efficient placement using ACORD will help take unnecessary cost out of the process and these savings should be passed on to the client. Call the management team at Web Connectivity to learn more.

1 comment:

Anonymous said...

Indeed, relative to the nascent bond e-issuance platforms/services sector, commercial insurance streams are a good bit more advanced. But unlike, say, bond issuance, there are additional variables that are far more critical- if not peculiar- to insurance/reinsurance/assurance. Specifically:
1.Information, of course, is an elemental part of any market transaction or rational choice model. And enhanced connectivity has almost boundless possibilities for enhancing data-collecting and analysis for insurers/reinsurers, as it does for most financial sector actors. But 'almost' is the critical word in that phrase. Unlike most of the rest of the financial services world, Ins/ReIns is one where exposures inexorably rise over time. The entire purpose (beyond profit-seeking), of Ins/Reins for consumers and underwriters alike, is to identify and model for those exposures. Historically, it's where much of the value-added dimension of the industry is: actuary-created and controlled modeling systems. Understandably,actuaries and their employers have tradtionally had a proprietary mentality about them. Thus at some level, real connectivity has to be seen as deeply threatening to many in the sector as it will-inevitably, I would argue- result in a)opening them up to closer scrutiny and thus either co-option or mimickry if good, or capital flight and exit if bad;b)ceding, or at least sharing, control of these models as they are integrated into other IT models,and c)Boyle's Law. Sooner or later, the information and data- and possibly the analysis, too- will become cheaper and more accessible for consumers no less than providers. If these are even partially true, why bother with innovation when gaming the system is cheaper, easier, proven, and probably more profitable? Keeping up with the competition is one answer, but taking a totalistic look at the sector, it seems like it is, to be polite, deeply reticent about both connectivity and transparency.
2. In no other subsector of the financial services sector have personal relationships been as critical, historically, as in insurance/reassurance. You see this in personal insurance, of course, but even in high-end commercial reinsurance- the 'names'system at Lloyd's as practiced before the Cromer/Neill reports and the Jaffray case, and the intensely personalistic relationships that still characterize institutional relationships (paradoxically)between some insurers/underwriters and major clients . If enhanced connectivity/automation does not necessarily dilute these relationships- I think it must, on some level- how does it add to them?
These are/were intended as existential primers about the industry, from an outsider with no vocational history in the biz.
C'mon, dude, you know who I am.
-Mr. Gargamel in Boston