Never shy about expressing his views on the harsh realities facing insurers and brokers, Dennis Mahoney, chairman and CEO at Aon Global, based in Bermuda, told traditional players straight out during last week's appearances at the ACORD London Forum that more efficient capital market players will bury them if they don't rid themselves of the paper transactions weighing them down, as well as adopt standards for electronic trading. A complete report follows.
The conference was lively and presented attendees with many challenges I'll share with you here over the next couple of weeks. But Mr. Mahoney, appearing on two separate ocassions, made the most noise with his blunt assessment of the industry's long-term prospects if insurers don't wake up and smell the Starbucks coffee being sipped by those trading on their laptops rather than lugging around mounds of paper at Lloyd's and other key markets.
Indeed, he warned that traditional insurers might quickly be replaced by capital market players if carriers don’t work together to drive costs and inefficiencies out of their business processes by adopting standards and going electronic.
“Challenges don’t always come from within, but from without with the capital markets and insurance markets rapidly converging,” he said during a panel on the industry’s challenges and opportunities. “We’ve got to become more efficient and remove frictional costs.”
A big part of the problem is a lack of cooperation among insurance companies and their brokers in terms of standardizing data exchange so they can process more transactions electronically, he said.
“We need to put aside our competitive differences and realize there is a much greater threat out there—the potential for more efficient players to take over our business,” he said the day before the ACORD panel, during his keynote address. “If we don’t act collectively, our product is going to be replaced."
Noting that capital market players trading catastrophe bonds and other insurance-like derivatives are totally electronic, compared to a traditional insurance market that still relies too heavily on paper-based transactions, Mr. Mahoney said that in a short period of time, e-traders could “force we, the inefficient players, out of our own markets.”
Traditional carriers and brokers don’t have a lot of time to dawdle, he warned during his keynote speech. “The convergence of the insurance and capital markets is happening far faster than anyone realizes,” he said--noting that in the United Kingdom, securitization is not limited to catastrophe exposures, but is being expanded to trade in “high-frequency, low-severity risks like motor coverage.”
During the panel discussion, he said that insurers “can’t afford to operate under the delusion that we can change at whatever pace we choose. In fact, we must change to meet the demands of our customers and trading partners, as well as to meet the pace being set by our new competitors in the capital markets.”
Making the transition to electronic transactions, based on industry-wide data standards negotiated via ACORD committees, is critical if traditional carriers are to compete in the long term with the capital markets, where virtual trading has long been the rule rather than the exception--as it remains with insurance, he said.
“We must move quickly to an electronic marketplace to drive out current inefficiencies before those inefficiencies drive us out of the market entirely,” he added, lamenting that London in particular still has a long way to go to break its paper-dependency and go completely digital.
Indeed, on Oct. 17, the day of his keynote speech, the London Market Reform Group announced that 45 percent of the market’s total volume of claims is now being handled electronically via the Insurers’ Market Repository—up five percentage points from the start of 2007, but well below the target of 60 percent set for the end of the third quarter.
“If you think we’re making progress, go outside and stand on the corner here and watch all the brokers running around with their arms full of paper,” said Mr. Mahoney. “I’m always tempted to just stand by the door and stop anyone carrying piles of papers and demand to know where they think they are going and why they need all of that baggage to do business.”
Replacing bits of paper with bytes of data will not only cut expenses, but will also allow the market to grow considerably, he predicted in his keynote speech.
“Whenever markets go electronic, volume always increases exponentially, but margins compress dramatically,” he said.
To accomplish this goal, however, setting and implementing data standards are both crucial tasks, he added.
“We need more standardization of products to have an efficient electronic market, and that should not be a problem since so much is identical in every transaction,” he observed. “We too often use customization as an excuse to avoid cooperation on standards, when what we should be asking ourselves is what makes us truly unique in this market.”
Tomorrow, I'll share with you some of the hurdles cited by other speakers blamed for holding up adoption of standards and implementation of e-trading. But in the meantime, feel free to share your thoughts about Mr. Mahoney's reality check.
Comments (4)
The view from the bottom confirms what is being said here. We 'Main Street' offices have been hearing for years about single-entry, multi-company interface (SEMCI) and other standards.
But they don't come about for the worst of reasons--carriers don't want to make it easy to shop their coverages with other markets.
As pointed out in this article, there are forces from outside the industry that will soon eat our collective lunch if we don't get past that.
Posted by Aaron Stein | October 23, 2007 10:42 AM
Posted on October 23, 2007 10:42
Well said. The hungry, aggressive business people will consume the complacent.
Then those who were run over will lament how the industry has changed and lament the collapse of decency.
Those who fail to evolve, go extinct.
Posted by Craig Dolan | October 23, 2007 1:46 PM
Posted on October 23, 2007 13:46
Barring any substantial shifts in regulatory structure (which I'm not ruling out), I think this capital markets convergence is really only a threat for reinsurance and ultra-large commercial risks.
At the end of the day, if you write insurance, you have to form an insurance company, issue insurance policies, and subject yourself to state regulation and state insurance regulators.
State regulators aren't nearly sophisiticated enough or adequately staffed to tackle issues such as securitization. Furthermore, most insurance markets aren't nearly liquid enough to attract non-traditional investors.
I think the capital markets will only be competitors for short-tail mega-cat risk in the short-to-medium-term. It does fill an important gap in the marketplace, though.
Posted by Anonymous | October 23, 2007 2:03 PM
Posted on October 23, 2007 14:03
The insurance industry, one of the last mega-bastions of paper-based processes, was similarly chastised by Ross Perot nearly 30 years ago in his classic assessment of insurance industry practices.
The underlying issue, then as now, is the threat of transparency combined with the potential for disintermediation enabled by pervasive electronic systems.
However, as pointed out at the ACORD London Conference, open market dynamics will force implementation of electronic systems throughout all layers of the industry--regulators, reinsurers, insurers, brokers and alternative risk-financing vehicles.
Whether change comes internally from innovative insurance industry players or externally from the captial markets matters not. The movement to pervasive electronic systems is inevitable.
Posted by Edward Kalbaugh | October 25, 2007 10:56 AM
Posted on October 25, 2007 10:56