The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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Dear friend,

As the tide goes out on a turbulent 2009, with the currents and counter-currents of its muddy financial floodwaters still burbling under the surface, one market theme has remained remarkably constant - the rediscovery of the subscription market.

Post crisis it became immediately clear that transparent, exchange-driven methods of risk transfer had proven their worth in direct contrast to the spaghetti-like morass of opaque over-the-counter deals that had played such a part in inducing and then exacerbating the global financial freeze of Q3 and Q4 2008 and Q1 2009.

Financial crises come and go with monotonous regularity, but strong markets with a vigorous chain of security endure. The precipitous stockmarket declines of 1929, 1975, 1987 and 2000-03 broke many an investor but not the NYSE, while AIG's woes highlighted the relative strengths of well-run markets such as Lloyd's.

Indeed, in AIG's darkest weeks in the chaos following the first botched US government bailout, it was the paper of its Ascot Lloyd's vehicle that policyholders demanded above all else.

With so many winds blowing in the subscription market's favour, in this year's Spring edition of IQ we decided to put a resurgent London Market on our front cover, under the banner "London: The place to be in 2009?"

We needn't have bothered with that slightly apologetic question mark. As the bigger players' shares are trimmed and shared out at the top end and the mid-market sees less 100 percent placements, business is definitely on the up.

Of course, in today's globalised world 'London' really means a market and clearing house with global licences to transact business almost anywhere on the planet.
This, coupled with a belated but highly welcome rediscovery of the power of technology, means that the opportunities are tangible.

"Now there is a chance to prove once and for all that a collaborative subscription model can be much more competitive than its over-the-counter rival"

And here lies both the opportunity and the greatest danger. The regulatory firestorm unleashed by the financial crisis is bringing underlying themes that touch on fundamental contradictions in the subscription format very much to the fore.

Post crisis, we know that the non-renewal of the EU block exemption for insurance is a near political certainty, while the subscription model is under heavy scrutiny.

Even in Spain, hitherto famed more for its eponymous uncompetitive 'practices' rather than rabid consumer protection, local insurers and a trio of top reinsurers have been fined a record EUR120mn for running an alleged cartel in the decennial liability market.

So now there is a chance to prove once and for all that a collaborative subscription model can be much more competitive than its over-the-counter rival.

The answer is obvious - composite pricing. And new technology is going to make it much easier to execute.
In a market with no slip, double, triple or individual slipping should be the order of the day. We could even become sophisticated enough to handle composite terms and conditions too, although this would only be suited to buyers sophisticated enough to understand what they are buying.

Under this system, the role of the broker as supreme agent of the client would also be greatly enhanced.
These days, underwriters love to tell us that they are so much more technical and analytical - well, here is a chance for them to prove their claims. They'll have to live and die by their own pricing.

The eternal problem of signing down would also be solved at a stroke, because the most expensive line would always be signed down first, and the most competitive lines would always sign in full. (Re)insurers would only have themselves to blame if they quoted too high.
Oh, and if Lloyd's felt up to it, it could go back to the pre R&R days and simply not bother with a financial strength rating altogether.

In this way the subscription market could finally fulfil its global potential as providing not only the solution with the best coverage and best security, but also as the place where best execution is to be found.

Mark Geoghegan, Editor