I spoke back in November 2009 on the ‘Finish What We’ve Started’ (FWWS) initiatives which aim to complete the work started with the development of the ECF and A&S systems and processes. You may recall the initiatives comprise a new version of ECF (ECF2) with improved usability and functionality, a new method for processing accounting transactions via ACORD messages (eAccounts) and, last but by no means least, a new IMR Security Model which improves the access rights that users have to documents held within the Insurer’s Market Repository.

The market has taken another step forward in market modernisation with the successful implementation of the IMR Security Model in December 2009 (with further enhancements to come at the end of March). As a result the market is already starting to see the benefits of these enhancements.

The Security Model enhancements have allowed certain types of claims and associated expert fees to come into the scope of the ECF and A&S systems and equally importantly have stopped the need for certain types of claims to have to revert back to paper processing. For example, contracts that had been processed electronically but then were subject to Mid Term Broker Changes or Mid Term Carrier Changes, may have had to revert back to paper to preserve the appropriate access rights to the documents for those contracts. However, the enhancements of the Access Control Lists that sit behind each document now allow these types of claims to continue to be handled electronically.

Improvements to the way that documents relating to confidential terms, or to claims that may be subject to conflicts of interest, has meant that brokers and carriers handling certain types of business (for example, aviation) have increased confidence that the IMR is the appropriate way for them to service the business. We have started to see the resultant increase in the volumes handled electronically.

Finally, the IMR Security Model enhancements have, for the first time, provided the ability for Third Parties to access the system. Experts such as lawyers and adjusters can now view documents, subject to permission, and fee collectors can now process fee bills that are linked to the claims they relate to.

The net result of all of this is that more types of claims can now be handled more effectively and efficiently which can only be good news for the London Market and our customers. I’ll keep you posted on the further developments of the FWWS programme.    

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The Geneva Association has confirmed what most of us already knew: insurance is not like banking and it does not pose a systemic risk to the financial world. In a nutshell, insurers are more stable than banks because they are funded by upfront premiums, giving them strong operating cash flow. Insurance policies are long-term with controlled outflows, which aids stability: you won’t have “a run” on an insurer.

During the credit crunch, the Geneva Association observes, insurers maintained relatively steady capacity, business volumes and prices, unlike investment banks. Some insurers did get into bother but that was through their quasi-banking activities, namely derivatives trading on non-insurance balance sheets and their mismanagement of short-term funding from securities lending.

Recognising that, the industry association has put forward five recommendations to address those activities and further strengthen stability. As well as suggesting ways of strengthening risk management it suggests implementing a principle-based supervision framework that captures any non-insurance activitities, such as excessive derivative trading. It adds that it would agree to “macro-prudential monitoring with appropriate insurance representation”.

But Nikolaus von Bomhard, Munich Re CEO and chairman of the Geneva Association, adds something that will resonate with his peers in the industry. “In the public debate, the business model of insurance is not always sufficiently demarcated from the business models of other financial services providers, such as banks,” he said.

That’s why many believe that any reform of insurance regulation prompted by the financial crisis must be proportionate and fit for purpose. Insurers are the shock absorbers of the global economy and through their longterm investments they actually contribute to stability.

They have proved that and regulators should be careful not to undermine them with unnecessary rules that could even cause instability in the sector.

…or is it?

The Emerging Risks Team at Lloyd’s has just published a new report on Behavioural Risks. The report looks at a whole variety of typical biases in human thought processes – and suggests that knowledge of them can help us manage risk better.

Biases with hindsight is discussed in the classic book “Judgment under uncertainty: Heuristics and Biases”, written in 1982 by Daniel Kahneman, Paul Slovic and Amos Tversky.

They suggest that rather than learning from our past behaviour, instead we will tend to view things through rose tinted spectacles – overstating our own abilities.  Summarising the work of a 1975 experiment by Freschoff and Beyth, they say of people reviewing the past:

“They not only tend to view what has happened as being inevitable but also to view it as having appeared ‘relatively inevitable’ before it happened.  People believe others should have been able to anticipate events much better than was actually the case.  They even misremember their own predictions so as to exaggerate in hindsight what they knew in foresight”

This does not suggest we cannot learn from the past – far from it!  But knowing about this bias along with all the others described in our report can help insurance professional be more objective about “facts”.

The report includes a case study on emerging risks management, which I believe is particularly susceptible to these biases (due to the great uncertainty around probability and impact in this field). We hope it will provoke some debate and also provide a useful background to Paula Jarzabkowski’s ethnographic study of the Lloyd’s market.

Tags: Behavioural Risk, Emerging Risk, Paula Jarzabkowski

A lot can happen in a month and the Endorsements Initiative is certainly testament to this. To date the initiative has received an overwhelmingly positive response and as a result received unanimous sign off by the Endorsements Management Group to move to ‘live’ status.

Broker involvement was spearheaded by Aon, Marsh and Willis and the LMA and IUA sought a mirror commitment from the insurer community. To date we have ’signed up’:
• 48 managing agents which represents 100% of the relevant Lloyd’s market
• 18 IUA members, together accounting for 61% of the premium endorsements on business processed through the bureau by IUA member companies
• 10 major brokers representing some 53% of the total business placed in Lloyd’s.

So what’s it all about?

The ultimate aim of this initiative is for all endorsements in the London Market, irrespective of complexity, to be submitted and agreed electronically using electronic messaging – specifically via ACORD XML. This will initially focus on direct Marine Cargo and Hull classes of business – but to ensure we get maximum participation, a limited number of other classes will be included where there is a sufficient level of interest.
Not only will this help prove that electronic processes can by used effectively, it will enable the front line brokers and underwriters to get real experience of the benefits offered by the use of electronic messaging to support the process.
Support is an important word when talking about electronic messaging and it really is important to emphasise that while the submission and agreement must be done electronically, face to face negotiation between broker and underwriter is not precluded. This is true across the placement process.
This initiative really is important in kick-starting the wider adoption and use of electronic messaging, particularly from a practitioner perspective. It is encouraging to see the level of interest around the London Market, now we just need to ensure that we are both technically and operationally ready for the 01 June. A tall order? Not at this rate…
More information on the endorsements initiative can be found on the LMA website.
And the newly relaunched Exchange site.

A way to save time in keeping up to date
I’m sure you all like to keep up to date with the latest blogs and news on lloyds.com but do you find it takes a long time to find the relevant website or page, or you’ve missed something as it has moved off the front page before you got to it?  Have you thought about using an RSS feed? Once setup you will be able to have all the websites and pages you are interested in, in one place and at a click of a button.  The websites and pages are then automatically updated with the latest information without you doing a thing!  Never miss an important event again!

RSS stands for Really Simple Syndication and it’s really easy to setup.

Click the link below to find out more about what an RSS link is, how it works and how to set one up:
http://www.lloyds.com/News_Centre/RSS_feeds.htm

Tags: Lloyd's Exchange

Marine insurers whose premium income has been hit by the devastating fall in volumes and values in global trade and by the dramatic drop in ship values, must be on watch for more risks on the horizon, according to the executive committee of the International Union of Marine Insurance (IUMI).

At the group’s annual winter meeting at Lloyd’s, IUMI president Deirdre Littlefield of Starr Marine outlined a catalogue of problems facing the industry, which could feed through to insurers.

She said: “Newbuild cancellations and deferments are increasing, but a huge amount of tonnage still is due to be delivered this year and next. Regrettably, we have not seen a significant leap in the scrapping rate of old ships, which is almost beyond belief in the present crisis.”

Owners and charterers are doing all they can to reduce costs possibly leading to skimped maintenance and deferred repairs, Ms Littlefield warned. “It’s bad news for insurers who cover hull, cargo and liability risks. The situation is compounded by the emergence of new problems.”

These are mainly technical but could lead to big headaches for underwriters, she suggested. Fuel management is becoming an urgent issue as more stringent MARPOL rules for reducing emissions mean that the type and quality of bunker fuels are of vital concern. If onboard fuel management goes wrong, there can be potential catastrophic consequences.

Of equal concern is the impact on machinery from the growing trend of slow steaming, now being implemented by a number of operators to cut fuel costs. Large, high-speed diesel engines are designed to operate only at sustained high service speeds.

In another area, underwriters, through surveyors, need to monitor the standard of repairs carried out at yards which have been equipped for new construction only but which are now desperate for work, Ms Littlefield said.

Laid-up ships are another worry and underwriters need to pay close attention to the conditions of cover for vessels which have been idle without being deactivated, or just lying at anchor or drifting awaiting firm orders, often with minimum maintenance and prone to collisions or typhoon damage.

More than ever, the IUMI president concluded, there is an acute need for underwriters to focus clearly and selectively on the risks presented to them, and aim for a price that is realistic yet fair.

Tags: IUMI

You may remember that back in November of last year, I blogged about the Future of Central Services processing work that Market Operations had presented to the London Market Group. Since then, the LMG have appointed Tim Carroll, Underwriting Director at Canopius, as the Project Sponsor to provide direction and report to them on the project’s progress. Tim comes with a wealth of experience in both the Companies and Lloyd’s markets, so is ideally suited to spearhead a cross-market initiative.

To quickly recap, the Future of Central Services project will define an optimum processing model for the London market beyond the “Finish What We’ve Started” workstreams. Throughout 2010, various working groups will design and review new ways of processing business that uses modern technology and data standards (ACORD). One of the key goals of the project; to provide insurers with choice in the central services that they utilise, will be at the front of everybody’s minds when designing these processes. The project team will be liaising significantly with the market to seek insurers’ views on whether the provision of services should be lightweight or heavyweight; in other words: to what extent should market infrastructure (e.g. document repositories) and business services (e.g. policy checking) be provided ‘on a one size fits all’ basis? Heavier provision of central services obviously runs contrary to enabling a choice of services and of service providers; therefore we expect the project to strike a balance between maintaining the economies of scale and efficiencies that we currently enjoy for subscription risks and enabling insurers to perform some processing in-house or with a third-party outsourcer. Additionally, we would be keen to hear the extent to which insurers would like to invest in internal infrastructure.

If you would like to share your views on this particular topic, please do not hesitate to contact me. Alternatively, please contact the Project Manager, Simon.Collins@lloyds.com.

I will be updating my blogs with the progress of this project, and the others that Market Operations are involved with, throughout the year, so please check back regularly to be kept informed.

A way to save time in keeping up to date
I’m sure you all like to keep up to date with the latest blogs and news on lloyds.com but do you find it takes a long time to find the relevant website or page, or you’ve missed something as it has moved off the front page before you got to it?  Have you thought about using an RSS feed? Once setup you will be able to have all the websites and pages you are interested in, in one place and at a click of a button.  The websites and pages are then automatically updated with the latest information without you doing a thing!  Never miss an important event again!

RSS stands for Really Simple Syndication and it’s really easy to setup.

Click the link below to find out more about what an RSS link is, how it works and how to set one up:
http://www.lloyds.com/News_Centre/RSS_feeds.htm

Tags: ACORD, Lloyd's Exchange

Did you see the weather forecast? I mean the long range forecast for Atlantic hurricane activity.

In the US, highly respected wind watchers Philip Klotzbach and William M Grey of the University of Colorado department of atmospheric science have put their money on the 2010 hurricane season being “somewhat more active” than the average 1950-2000 season.

 After the lull of 2009, Klotzbach and Gray predict that activity will return to levels more typical of recent times. They expect to see between one and 16 named storms, six to eight hurricanes and three to five major hurricanes.

 Over in London, fellow scientists Adam Lea and Mark Saunders of the Aon Benfield UCL Hazard Research Centre also predict an active hurricane season. They reckon there will be 13.9 (+/- 4.9) tropical storms, 7.4 (+/- 3.1) hurricanes, 3.4 (+/- 1.8) intense hurricanes. Or put another way, the University College London team thinks there is a 62% probability that the hurricane season will be above average and only a 14% chance that it will be below normal.

The thinking behind Klotzbach and Gray’s early prediction is that 2010 is unlikely to be an El Nino year. (El Nino refers to the warming of the sea in the Eastern Pacific.) The absence of big windstorms in 2009 was attributed to the moderate to strong El Nino event.

According to the latest research from the US Climate Prediction Center, the current El Nino will persist into the Spring – but peak before June 1, the official start of the US hurricane season.

The odds on there being a consecutive 2010 El Nino are very low based on previous experience, Klotzbach and Gray say, so conditions are ripe for a return to hurricanes.

Lea and Saunders take a similar tack citing weaker than normal trade wind speed over the Caribbean and North Atlantic and higher than normal sea surface temperatures in the North Atlantic as key predictors.

Both sets of forecasters admit that the precision of such an extended outlook is low. But some insurers need reminding how lucky we were in 2009. A big insured event would have shaken the industry to its capital foundations in 2009, at a time when the financial markets were in recovery mode.

How will the markets respond if the wind blows a hole in insurers’ balance sheets in 2010? Has the insurance industry really reloaded sufficient capital?

http://www.tropicalstormrisk.com/

http://www.cpc.noaa.gov/products/analysis_monitoring/enso_advisory/

Tags: Hurricanes

Liability insurance is growing all over the world. In 2008, businesses spent around USD142bn on liability insurance worldwide, around half of which originated in the US.

Importantly, emerging countries’ share is expanding. China generated USD1.2bn in 2008 with its market growing at an annual average rate of 22% per annum since 2000. Other emerging markets grew at an average annual rate of 10% over the same period. Central and Eastern European markets generated an additional USD2bn and have grown at an annual average rate of 19% since 2000.

These numbers come from a Swiss Re sigma study, which warns that there are challenges as well as opportunities in commercial liability insurance. Swiss Re’s researchers are worried that insurers are underpricing and under reserving the business. “Commercial liability rates are declining in all markets especially in the US, since 2004” according to Swiss Re’s Thomas Holzheu. “Because interest rates are low, business cannot be cross subsidized with investment results… prices should instead be increasing.”

Liability business, whether it relates to products, pollution or professional services, is a longtail business. Unlike property insurance it provides broad coverage often with high limits. It is affected by inflation which can send losses soaring.

Also, emerging risks to do with technological and social developments are a constant challenge and insurers have to closely monitor changing standards around food safety, employment practices and financial loss compensation, for example – compensation culture is another growing problem.

The big challenge for insurers (and governments and businesses) is keeping liability risks insurable in this complex environment. It means insurers monitoring drivers of liability claims and building them into actuarial models. But most important, Swiss Re stresses, is maintaining prices that reflect claims trends.

Liability premiums and GDP (USD bn), 2008:
Source: Sigma no. 5/2009

As we approach the end of 2009 it seems an ideal time to reflect on the year – and what a bumper year we as a market have had!  It has certainly been challenging and one that has been packed full of major developments helping to modernise the market, so let me begin….

The Lloyd’s Exchange

We have delivered the Lloyd’s Exchange which is essentially a messaging hub -  it supports the face to face process of doing business in the room with information and documents being exchanged electronically using ACORD standards.

By the end of the year we expect over 50 organisations to have connected and we are currently working with the LMA to promote the completion of endorsements via the Lloyd’s Exchange – this is primarily being driven by the market with significant involvement from Aon, Marsh and Willis in addition to Beazley, Brit and Catlin amongst others.

 -What’s in store for 2010? Initially we are focusing on exchanging placement messages; however the Exchange has the potential to support the complete end to end business process electronically. As such, we will explore with the Market how other message types could benefit from being passed over the Exchange. The technology has been proven and now the emphasis is on helping the Market realise the benefits of exchanging information electronically.

Lloyd’s Information Project

Part of this project aims to offer choice in how information is provided to Lloyd’s and I’m pleased to say that we have successfully delivered a solution that will allow a pilot group of Managing Agents to report their Service Company business directly.

Work has also been carried out behind the scenes to ensure standardisation in the information that we store and use for tax and regulatory reporting purposes, to prevent, on an ongoing basis, any duplication or inconsistency in the data captured. This will also facilitate the reduction in the number of reports needing to be produced and in time, reduce the reporting burden. 

The Future of Central Services
We are working with the market to define a future model for the provision of central services, which reduces risk & costs, or increases processing efficiencies. We have been working closely with the London Market Group (LMG) & a cross market group which is made up of Managing Agents, IUA companies, brokers, IUA, LMA & LIIBA. They have reviewed the proposed model and agreed the next steps, which are to conduct detailed design work to support the Future London Market Process Model which we will complete throughout 2010 through the Future Processes Steering Group.

ACORD Standards

The progress in the market uptake of ACORD standards in 2009 has been encouraging.  One of the highlights is the agreement on implementing one version of the standard for placing (2009.1) for the first time without customisations to suit individual’s processing needs.

Development of e-Accounting is well underway too – with some brokers hoping to send premium information to the bureau using ACORD accounting messages early in 2010.

There is more to look forward to in 2010.  One of the ECF2’s (Electronic Claims File) project’s remits is to agree how the ACORD claims standard is to be used for the advice and management of multi-party claims using ACORD messages.  For placing, apart from meeting the 2009.1 implementation deadline in February, the New Year will also be kick-starting with applying the standard in the Endorsement Pilot (via the Lloyd’s Exchange).   We really are moving to an electronic world and a more efficient market place – let’s keep up the momentum!

London Market Group (LMG) (formerly Market Reform Group)
The change of name and extension of remit for this group is truly significant; it is a reflection that the market has been reformed through the implementation of Contract Certainty, ECF, A&S and Electronic Policies and now it is about wider collaboration and continuously improving the market through modernisation. This will ensure that London remains at the forefront of the global insurance industry, enhancing the competitiveness of the London market.

So, to everyone out there in the London market please pause for a moment to reflect on these achievements – congratulations are truly deserved for the progress that we have made together – this really is a time to celebrate!  Particular thanks to the 100 or so individuals from over 30 firms that have been instrumental in delivering these achievements.
This is my last blog of 2009 but I look forward to blogging again soon in 2010 – if you would like further information on any of these subjects or would like to suggest a future topic for me to blog about please do get in touch.  In the mean time, may I take this opportunity to wish Season’s Greetings to you all.

A way to save time in keeping up to date
I’m sure you all like to keep up to date with the latest blogs and news on lloyds.com but do you find it takes a long time to find the relevant website or page, or you’ve missed something as it has moved off the front page before you got to it?  Have you thought about using an RSS feed? Once setup you will be able to have all the websites and pages you are interested in, in one place and at a click of a button.  The websites and pages are then automatically updated with the latest information without you doing a thing!  Never miss an important event again!

RSS stands for Really Simple Syndication and it’s really easy to setup.

Click the link below to find out more about what an RSS link is, how it works and how to set one up:
http://www.lloyds.com/News_Centre/RSS_feeds.htm

Tags: Lloyd's Exchange, Market processes

The Economics of Climate Adaptation (ECA) Working Group has published a report titled “shaping climate resilient development“.  It is an excellent report and focussed around a series of case studies.  It proposes that decisions on which of the many adaptation options to adopt should be taken using detailed cost benefit calculations.  A sensible suggestion at face value; but there are problems which I’ll describe below.
 
Before I do,  I wanted to note that the report itself considers some of these issues though not quite the way Im describing it below.
 
Lets consider why people buy insurance.  From a cost benefit point of view its an odd product.  How many other products do you pay money for something you expect to be less valuable than the price?
 
It comes down to the word “expect”.  In the context of cost benefit analysis, you compare the expected cost with expected benefits.  The argument is that you chose the option where expected benefits outweigh costs.  So that means you should not choose insurance, right? 
 
We’ll no, probably not.  People buy insurance to protect against extremes.  They are willing to pay more than their expected benefits because, just occaisionally they’ll receive much more back than they put in.
 
Mathematically, the way round this is to introduce the concept of “utility“,  this is just a obscure way of saying “happiness”.  We shouldn’t be trying to maximise expected benefits but to maximise utility.  To aim to be “happier”.
 
This is why insurance works.  An insurer is happier selling you an insurance policy, because, by the law of averages (and providing premiums are based on the level of risk), we expect to make a profit; but simultaneously the policyholder is happier buying it, because they prefer a small guaranteed loss (the premium) against an uncertain very large loss that may lead to financial ruin.
 
Its a classic, win-win.
 
So I like the ECA’s new report; and it does indeed discuss the case for insurance  – but I’d have preferred a more direct discussion of utility.  Cost benefit may not be the best way to consider adaptation;  concepts such as “resilience”,  “no regrets” and “utility maximising” may be far more relevent.   A robust policy in the face of great uncertainty may be far better than an “optimal” one.  Because to truly optimise things you need to be really sure of your facts – and with climate risk we just aren’t.
 
Nevertheless I commend the report to you – it’s case studies are very interesting.