Revolutionising Lloyd’s without ILS market input could backfire

You wouldn’t try to revolutionise an industry, a business model, or dramatically change its strategy, without including an element, participant, or driver that is one of the fastest growing parts of that industry, model or strategy. Would you?

I worked in the online travel industry for some years and experienced first-hand the repeated attempts by incumbents to revolutionise their business in response to the internet as a distribution channel and emerging efficiencies in that market’s value-chain.

Most of these failed, as they didn’t embrace the new user-friendly internet and e-commerce driven technologies that were being made available to them or include the start-ups that threatened them.

So many times, these industry-type initiatives were launched (from standards, to platforms, to new ways to raise funding, to product developments) with the promise of reinventing market processes to prepare incumbents for the new world.

But all too often, by starting off already mired in the legacy of the industry’s history and status-quo, the end result was nearly always a failure to achieve the step-change in progress that was required to keep pace with fast-moving internet-based online travel start-ups.

More often they ended up being closer to attempted land-grabs, or outright attempts to make life more difficult for the disruptors, which typically ended in failure as well. Taking their eyes off the real reasons the pressure was on them in the first place, which left gaping holes for disruptors to exploit market-wide inefficiencies

Insurance and reinsurance are beginning to feel a little bit like that world I once worked in, as urgency to adapt, change and embrace the future, results in costly programs of work and investments that promise transformation, or indeed a revolution.

The size of the write-downs and write-offs of technology or start-up related work and investments across re/insurance is likely outpacing the return those investments have generated at this time.

Right now, Lloyd’s of London is in the middle of a program that aims to “revolutionise” the market for the future, as it ploughs ahead with its Future at Lloyd’s strategy.

With six specific areas of initiative underway at Lloyd’s already, Chairman Bruce Carnegie-Brown said in a speech at the New York City Dinner this week that the new strategy will “revolutionise” Lloyd’s, to the benefit of its customers, and he challenged the market to turn this vision into reality.

He said the Future at Lloyd’s strategy will be, “powered by technology designed to create the most customer-centric digital insurance platform in the world.”

“No one else can rival the Lloyd’s ecosystem,” he said, explaining the strategy in more detail including the concept of a two-tier market with dual platforms for complex and non-complex risks.

“This is new for Lloyd’s, but dual platforms exist today in other financial markets as does the technology to support them,” he said.

He also mentioned the plans for making Lloyd’s more attractive to investors looking to access insurance and reinsurance linked returns.

“Today, capital attaches to the Lloyd’s platform in many ways, but the prospectus challenges us to simplify this process and make it more flexible so that we become more attractive to capital providers,” Carnegie-Brown continued.

He discussed speed to market, highlighting the idea of a “syndicate in a box” that would allow start-ups to get into the market more easily, while also saying claims processes are also key, as “our claims-paying record is strong, but we need to shorten the time it takes to get claims payments into the hands of our policyholders.”

Carnegie-Brown also said that the Lloyd’s of the future would have an ecosystem “in which additional services will be provided more efficiently and more cost-effectively, where Lloyd’s facilitates innovation and makes improved data available to enhance underwriting decisions.”

In addition, the need to secure “the full support of stakeholders across the market” was highlighted by Carnegie-Brown.

To this end, Lloyd’s also this week announced the establishment of new Global and London advisory committees to help it deliver its strategy for the future, as our sister publication Reinsurance News explained at the time here.

These advisory committees are, “responsible for supporting the creation of the future at Lloyd’s, which is focused on offering better value for customers through cutting-edge risk management products and services, simplifying access to the market, reducing the cost of doing business, and building an inclusive, innovative culture that attracts the best talent,” Lloyd’s said.

But one constituency that is also a key stakeholder in the Lloyd’s insurance and reinsurance market is conspicuously missing from the lists of committee members, insurance-linked securities (ILS) fund managers and their ILS fund investors.

The ILS market is a key trading partner of Lloyd’s market participants, having been a major source of reinsurance and retrocession over recent years, as well as a partner for some in need of access to more efficient capacity.

At the same time, at least a handful of ILS fund managers have operated within the Lloyd’s market directly in some manner, with the largest Nephila Capital now having its own syndicate and managing agent as well.

With the ILS representing a decent 30% or so of all-important global property catastrophe reinsurance and retro underwriting globally, it’s surely a big enough stakeholder in Lloyd’s and the re/insurance market more generally to warrant a seat at the table in advising Lloyd’s on its future?

Yes, Lloyd’s does have its plan for capital to be able to access Lloyd’s more efficiently.

But the way this has been laid out so far suggests capital as a mostly following capacity source, or just retro for the market itself and its participants, and does not go into detail about how it could be made easier for managers of ILS capital to operate more simply at Lloyd’s.

That’s certainly not aligned with the desire to demonstrate alpha and institutional quality investor alignment that the average ILS fund management firm has. Or the desire for alignment with its risk-providing partners, that the average ILS investor wants.

The syndicate in a box may go some way to answering part of this question, but right now it’s far from clear what that would offer an ILS fund that wants to access Lloyd’s risk, that they couldn’t just get from reinsuring Lloyd’s syndicates as they do today.

In reality, most of Lloyd’s future vision is around getting investors directly into Lloyd’s, to the benefit of its members, rather than in allowing sophisticated managers of third-party capital to play more readily in the market, which would compete with the members, it seems.

That’s natural, as these programs of change are typically designed not to go too far to upset the status-quo and try to reinforce the benefits for those on the inside. But that’s often a reason for their failure.

Like the online travel industry, not all incumbents will survive, but they do stand a much better chance if they embrace the disruptors in the industry, rather than adopting protectionist-like attempts to protect market share.

So, I’d suggest Lloyd’s might be wise to bring an element of ILS market expertise into its new advisory committees, to ensure it is making best use of the experience of the ILS market and creating workflows and business processes for the future that are compatible with the visions of the ILS market and end-investors as well.

ILS is going to be increasingly intertwined in the insurance and reinsurance market in one form or another. Hence it makes sense to build your strategy for the future around this and to support this.

Efficient capital and capital markets increasingly direct participation in reinsurance is responsible for driving much of the industry change that has now driven Lloyd’s to attempt to reinvent itself again.

There remains once place on the Lloyd’s Global advisory committee that is still to be filled, with Lloyd’s saying that this additional member “will be announced in due course.”

Will that member represent ILS market interests and help Lloyd’s to ensure the position it adopts for the future is compatible with the vision of one of the fastest growing parts of global re/insurance and risk transfer?

I really hope that might be the case, as it’s important to include a constituency that is both a trading partner and capital provider to the Lloyd’s market, even if it is one of the biggest threats it faces.

I’d hate to see Lloyd’s revolutionise itself into irrelevance, or have a “Blockbuster moment”, by failing to include and embrace the future, as has happened to so many in the travel industry and continues to be seen in other sectors to this day.

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