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).
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.
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.
Comments on the Lloyd's Annual Underwriting Survey
What does thr Lloyd’s Annual Underwriting Survey tell us?
1) Lloyd’s is committed to providing more information about its performance than its competitors do. Survey respondents cited such transparency as a major competitive advantage and I believe it's part of why Lloyd’s brand is one of the business world’s most powerful.
4) On the subject of Lloyd’s Market Reform, there is great progress in going to paperless accounting and claims. The report cites 82% agreeing that there is “high commitment” to reform but I’d like to see Lloyd’s boost its market reform marketing efforts by conducting a study about the impact of adopting ACORD standards. For instance, is manual upoad/download sustainable as compared to integrating ACORD standards into the process? We at Web Connectivity have volunteered to conduct this survey.
1) Lloyd’s is committed to providing more information about its performance than its competitors do. Survey respondents cited such transparency as a major competitive advantage and I believe it's part of why Lloyd’s brand is one of the business world’s most powerful.
2) Subprime is a concern to all, not just the D&O guys. The majority of respondents write property, marine, energy, and reinsurance yet “Managing the Cycle” is the most important issue, and “Global Financial Market Instability” the most significant factor, facing the global insurance industry in 2008.
3) Head East – the greatest area of growth according to Lloyd's underwriters is in China and India. I think this should say “untapped area of growth” because I believe Lloyd’s could write a lot more North American risk than it does. The combination of relaxed rules about how brokers can bring risk to Lloyd’s and the ease-of-access through adoption of ACORD standards will make it far easier for brokers to include quotes from Lloyd’s in marketing run-of-the-mill U.S. risk.
4) On the subject of Lloyd’s Market Reform, there is great progress in going to paperless accounting and claims. The report cites 82% agreeing that there is “high commitment” to reform but I’d like to see Lloyd’s boost its market reform marketing efforts by conducting a study about the impact of adopting ACORD standards. For instance, is manual upoad/download sustainable as compared to integrating ACORD standards into the process? We at Web Connectivity have volunteered to conduct this survey.
5) There is one underwriter who should be removed from the premises – see the chart below:
Hitting for the Cycle
I find today’s markets confusing and contradictory.
Where are we in the cycle?
Clearly the insurance cycle is clear – we are in price freefall.
However, in the cycle of efficient markets, we are still writing the history of subprime and its impact on global markets.
Going back to the great quote (here) about the daily losers in the global game of subprime hide and seek, credit market insiders reveal that it’s worse than most know. I there is one constant theme across everyone I know on credit desks, it’s that the worst is yet to come.
Take the story I heard over Sunday brunch about how buyers of loans can’t buy performing loans without having to agree to take on the non-performers that could destroy their chances of good performance. In a rush against the clock, banks are hoping to off-load these non-performers before write-down Judgement Day.
So if it’s going to get worse, why is there price support in the capital markets?
Reading a quote by James Paulsen, Chief Investment Strategist at Wells Capital, a Wells Fargo company, I was struck by his assertion that the housing market malaise has not impacted consumer spending. He’s bullish on stocks. Further, he cites how the falling US Dollar is helping reverse a trend of net exports and that rising value from exports is having a material effect on GDP (appx 1.5%).
Another article in the same magazine talked more about what’s next - that eventually the write-downs will ebb (we estimate that will be at $440B and we’re only just over $260B); that some clever structured finance groups will find another match good investment money with need for good capital needs in a variety of good vehicles, that these vehicles will be securitized and that the bond insurers will have something new to back. Efficient markets win again.
Where are we in the impact of subprime on the insurance industry?
We’re in the denial stage. Advisen data shows clearly that pricing is not affected yet, even among banks buying D&O. As unbelievable as this is (and note that Aon published numbers showing an increase of 18% - see here), one savvy insurance insider told me today in London that the D&O market is not likely to change with the first claims but instead wait until the first reserves are hit. There’s just too much money chasing underwriting profits.
Much like the litigation and resulting D&O hard market came to life years after the investment impact of the corporate scandals of Enron and WorldCom, subprime will be a story for the insurance market in 2010 while the capital markets are onto something new.
As an information provider to commercial insurance providers we constantly review whether we are ahead of the information demand curve – are we providing what our customers need? Recent comments from brokers and underwriters indicate “a subprime fatigue” and one even said that there is “too much analysis”. These comments only make sense if profit-hunting will continue until it’s way too late.
Where are we in the cycle?
Clearly the insurance cycle is clear – we are in price freefall.
However, in the cycle of efficient markets, we are still writing the history of subprime and its impact on global markets.
Going back to the great quote (here) about the daily losers in the global game of subprime hide and seek, credit market insiders reveal that it’s worse than most know. I there is one constant theme across everyone I know on credit desks, it’s that the worst is yet to come.
Take the story I heard over Sunday brunch about how buyers of loans can’t buy performing loans without having to agree to take on the non-performers that could destroy their chances of good performance. In a rush against the clock, banks are hoping to off-load these non-performers before write-down Judgement Day.
So if it’s going to get worse, why is there price support in the capital markets?
Reading a quote by James Paulsen, Chief Investment Strategist at Wells Capital, a Wells Fargo company, I was struck by his assertion that the housing market malaise has not impacted consumer spending. He’s bullish on stocks. Further, he cites how the falling US Dollar is helping reverse a trend of net exports and that rising value from exports is having a material effect on GDP (appx 1.5%).
Another article in the same magazine talked more about what’s next - that eventually the write-downs will ebb (we estimate that will be at $440B and we’re only just over $260B); that some clever structured finance groups will find another match good investment money with need for good capital needs in a variety of good vehicles, that these vehicles will be securitized and that the bond insurers will have something new to back. Efficient markets win again.
Where are we in the impact of subprime on the insurance industry?
We’re in the denial stage. Advisen data shows clearly that pricing is not affected yet, even among banks buying D&O. As unbelievable as this is (and note that Aon published numbers showing an increase of 18% - see here), one savvy insurance insider told me today in London that the D&O market is not likely to change with the first claims but instead wait until the first reserves are hit. There’s just too much money chasing underwriting profits.
Much like the litigation and resulting D&O hard market came to life years after the investment impact of the corporate scandals of Enron and WorldCom, subprime will be a story for the insurance market in 2010 while the capital markets are onto something new.
As an information provider to commercial insurance providers we constantly review whether we are ahead of the information demand curve – are we providing what our customers need? Recent comments from brokers and underwriters indicate “a subprime fatigue” and one even said that there is “too much analysis”. These comments only make sense if profit-hunting will continue until it’s way too late.
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