Gemma Burns, Head of Digital Underwriting — AEGIS London
Chrissie Hall, Cargo Underwriter — AEGIS London.
Since the publication of the first London Matters report, in 2017, there’s been a spotlight thrown on the London market’s distribution and acquisition costs. Many now believe those costs are too high; others, however, are yet to be convinced. For those who are convinced, the argument runs that someone in the market has to be prepared to take some pain. Many underwriters, though, point to the risks their balance sheets run, the time and effort required to build products and pay the resultant claims. Many brokers cite the mass of administration, the meetings, the endorsements, the risk management. London’s distribution chains are longer and involve more parties, each accruing cost, than any other market. The net result is clients in the US can face London premium prices above those offered by domestic rivals.
For underwriters, technology offers the most promising method of cutting cost. At AEGIS London, we created our Opal online quote-and-bind platform with the specific objective of making SME business cost efficient for a Lloyd’s syndicate. This was achieved by building an online platform that reduced the amount of work that both brokers and underwriters needed to undertake in order to bind risks. Less work means lower costs and, consequently, previously unviable SME business becomes profitable.
It sounds simple, and in many regards it is simple. But using technology to reduce distribution cost is very much a two-way street. It’s fine for underwriters to build these platforms, but unless brokers buy into the benefits of an online quote and bind system, the platforms won’t succeed.
The traditional approach to putting pressure on costs frequently resulted in one party in the chain – usually the one in the middle – being squeezed from both sides. With new technology, the pitch is that everyone in the chain shaves a few points off their costs with the upside that the volume of business flowing along that chain will increase markedly. If brokers are prepared to review their acquisition costs and reconcile commission levels against the ease of placement, they can gain access to a much more diverse book of business, much of which sits just under the London market’s radar.
The key to winning brokers’ support for new technology is the convenience of the system. Opal, for example cuts down administration time and provides immediate downloads. For brokers working in the traditional manner, the cost and time required to issue a policy and schedule for a small risk can be onerous. By contrast, the same feat on a digital platform is quick and simple. Renewals are even easier as the data has already been input.
What’s also important is that a platform like Opal doesn’t try to reduce cost by cutting brokers out of the chain. This isn’t about disintermediation – that’s no way to engender broker support, particularly in London. It’s about brokers flexing their commission depending on the degree of involvement they have in the placement. If a US-based wholesale broker does the bulk of the work, then the London broker might justify a lower commission.
Another benefit can be illustrated in the London cargo market. Since the Lloyd’s Decile 10 initiative, the hardening of rates and considerable market movement over the last few years have seen the demise of lineslips previously used to facilitate SME business. The result is that small-to-medium risks have become harder for brokers to place. This creates the perfect opportunity for digital platforms to step in.
So why haven’t more syndicates and their broker partners adopted this approach? The answer is that building and launching a digital platform is far from easy. The track record at Lloyd’s in this area is far from optimal. Rumours about platform launches in the market and their subsequent failures abound. And once you’ve got the platform, you need to populate it with attractive products. At AEGIS London, we were fortunate to have a deductible buyback product that worked perfectly and brought in enough capital to fund the next product. Other syndicates may not have a product that proves as well suited.
Building a new platform and populating it with products is a long journey. We began work on Opal back in 2017. But the rewards are valuable – not just to the business, but to the market as a whole. There’s no doubt that Covid-19 has accelerated the development of online trading dramatically. 2021 will likely see several platforms come to market. But unless those businesses keep underwriting discipline and strong broker relationships at the heart of any digital platform, the necessary ‘win-win’ result and the chances of success are dramatically lessened.
First published in Insurance Day 13 December 2020.