Wednesday, 27 February 2008

Answering Gargamel – Part II of II

To further the discussion of how the insurance industry is evolving, it’s important to put into context what commercial insurance is transacted online.

ACE, among others, offers D&O quotes on its website. This is driven by a matrix of basic exposure assumptions as maintained by ACE underwriters. The key is that this commoditisation of D&O is only available for small clients, to get a quote from anyone, including ACE, you have to speak to an underwriter which means you have to go through a broker.

No insurance underwriter is prepared to provide online quotes for large, complex risk. There’s no liquidity, no exposure benchmarks to use, it’s not like adding spreads to treasury bonds and deriving pricing. Just like new issue pricing in the bond markets, new issue insurance pricing is more art than science.

This is why the adoption of technology is evolving late – just as I was nearly done with implementing online trading solutions for the secondary bond market before we drafted the first prototype for new issuance.

That being said, it’s sad that there is still paper in the process and I applaud the progress made by those firms at Lloyd’s who have made online accounting and online claims processing such a success. The majority of this success is made possible by simple, yet deep, integration using ACORD standards.

Mr. Gargamel I apologize for the delayed response, but I hope I’ve addressed your points. Thank you for the thoughtful comment to Part I of this response (see here).

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