Bite Needed For London Mkt. Reforms

The progress made by the London market to reform and modernize archaic business practices is moving at a frustratingly slow pace. Although some progress has been made over the past 12 months, much remains to be done, and London still lags behind its competitors in the United States, Bermuda and continental Europe in the area of efficient market practices.

The time has now come to cast aside the traditional “ask nicely” approach and to dump the carrot in favor of the stick. London must act decisively against market participants who stand in the way of more efficient ways of doing business. In particular, we should be setting non-negotiable deadlines and backing these with tough sanctions for those who insist on holding the rest of the market back.

The London insurance market is a huge and disparate entity. Achieving consensus is extremely difficult. Making progress on reform initiatives requires a complex accommodation between the various interests of many different players. But without significant progress, the market as a whole will never achieve a competitive advantage.

But to give credit where it is due, some positive developments have occurred over the last 12 months. The Lloyds market is now significantly more cohesive following much needed reform instigated by the Lloyds Chairmans Strategy Group. The CSGs big idea was to replace Lloyds previous internal regulatory authorities with a single Franchise Board to create a more effective and transparent organization.

Depending on the extent to which it is prepared to get tough in enforcing its will, the Lloyds Franchise Board could now provide some real impetus to the drive to modernizing working practices in the London market.

But with the best will in the world, Lloyds cannot drive reform single-handedly. A large part of the London marketthe non-Lloyds company marketconsists of operations parented in the United States, Bermuda or continental Europe with no history of acting in concert.

Obtaining a supportive consensus in favor of reform in this sector of the market is easier said than done. Predictably, therefore, it is the company market that has shown the greatest resistance to the London Market Principles, the market-wide initiative intended to promote modernization and best practice.

There is a real chance, however, that the ongoing, collaborative work being carried out by Lloyds and leading London brokers will establish a body of custom and practice that will filter through to the company market and help reform the way the entire market does business.

In fact, there are already indications that this is beginning to happen. The company market, having initially expressed concern that LMP would disenfranchise underwriters, has now broadly come to accept that the process is not about restricting underwriters ability to exercise their professional skills, but about achieving efficiency and clarity. As a result, carriers resistance to, and suspicion of, LMP has ebbed away considerably.

Adoption of the LMPs standardized underwriting slip in the Lloyds market has now reached around 70 percent, which represents a significant step forward.

In some parts of Aon, use of LMP slips has reached 100 percent, and were working hard to extend this across the board. Further good news on this front comes with the Franchise Boards decision to mandate the use of properly completed LMP slips from Jan. 1, 2004.

There is the risk, of course, that business could be driven away if the Franchise Board is seen to be adopting a heavy-handed approach or interfering too much in the internal management of Lloyds underwriting entities.

This applies equally to the boards attempts to monitor and assess managing agents business plansanother new development that has met with less-than-universal approval.

Its a very fine line. The concepts and principles that underpin the actions of the Franchise Board are both sensible and laudable. But there must be an element of concern that the markets capital providersmost of whom also have non-Lloyds operationscould decide to move outside the franchise umbrella if the red tape becomes too constrictive.

Lloyds is not the most efficient market in the world, and the costs and constraints could quite conceivably come to outweigh the perceived benefits for many participants.

LMP, of course, is not about limiting anyones freedom of action or imposing additional costs. It is about making the London market more efficient. A key part of this is establishing contract clarity and, in the fullness of time, contract certainty.

From a brokers point of view, this means that our clients will know, on day one, exactly what they have bought. They will have a policy wording from the outset that provides full details of the cover they have purchasedrather than waiting six months to find out what they have bought or arguing after a claim has arisen over what the policy would have said, had there been one!

As things stand, there are a number of roadblocks to the reform process. One of these, arguably, is XIS, which is 50 percent owned by Xchanging, a back-office specialist; 25 percent by Lloyd's; and 25 percent by the International Underwriting Association of London, the body which represents the collective interests of the London company market.

XIS was formed two years ago when Lloyd's and the IUA merged their back-office business processing units into one entity in partnership with Xchanging.

In the past, when efforts have been made to introduce new and more efficient ways of doing business, XIS has effectively put the brakes on, arguing that new processes will require higher levels of investment that it cannot justify. Taking electronic premium advice notes as an example, XIS is concerned that it needs more brokers, not just the big two, to get involved before the system becomes a viable proposition.

I sympathize to some extent with XIS because history suggests that brokers will agree to the concept of a new system with considerable enthusiasm only to stage a hasty retreat once the financial implications become clear. So, again, the question is how do we get all the market to move forward in concert?

The answer must be to back reform with a stronger set of teeth. The entire London market–the broking community, Lloyds, the company market and XIS, which now operates an effective monopoly on the markets processing function–all need to come together around the same table and agree to measurable and enforceable deadlines for implementing reform.

There is nothing like a deadline with penalties attached to focus the mind. A good example of this in the United Kingdom is the Financial Services Authority, which takes over the regulation of the selling of non-life insurance in January 2005. The insurance community leapt into action as soon as it became clear that brokers would be closed down if they had not obtained authorization by this cut-off date.

I firmly believe that the London market will have to look at something similar in terms of the reform process to bring us up to the same levels of efficiency as our competitors in other markets around the world. It could also prove very helpful to involve the FSA at an early stage in discussions over how the London market can be reformed. The regulators input could provide a further spur to action.

It all boils down to the question of service. By and large (re)insurance buyers around the world say they like doing business with the London market. But they do business with the London market despite the service levels and not because of them. Brokers and underwriters will win if they can provide a better service to their customers who increasingly benchmark performance as well as cost. Ultimately, what gets measured gets done.

Underwriters might argue that in the middle of a hard market they should focus on maximizing returns rather than worrying about coming up with more efficient business practices.

However, with signs of the market already beginning to soften, underwriters must wake up to the fact they need an efficient platform from which to work. Without this, they will be unable to provide the return on investment their capital providers demand. The result will be that, once again, business flows elsewhere.

I believe that executives at the most senior level from the broking companies, the underwriting entities at Lloyds and in the company market, the FSA, and XIS should get together and plan a new concerted program for reform. Then we should all agree to back this plan with meaningful deadlines and sanctions.

If the London market is to survive, we must all accept this discipline together.

Nigel Roberts is managing director, specialty division, Aon Limited in London. He is also a member of the board of the London Market Brokers Committee.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 1, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.