The Intelligent Quarterly from the publishers of The Insurance Insider

Summer 2018

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White heat

Toby Esser

There is a feeling of change in the air, and it isn't tied to the inevitable shift of autumn into winter. No, this is something different, something molten, difficult to isolate - and happening as you read this.

From embracing new types of risk to introducing flexible ways of working, exploring modern technology and harnessing the power of networks to compete with giants, ideas are smelting in the crucible of the London market.

From the ground up
Some, especially those outside the industry, may still think that the future of insurance is an endless repeating pattern of grey suits working unrelentingly from 08:00 to 18:00 within a strict, linear hierarchy.

Not a bit of it. The traditional, drab image of most businesses connected with insurance or financial services is being replaced with bold, bright colours and ideas such as hot desking and flexible working hours. In particular, the hallmark of the most modern independent brokers and underwriters is valuing the ideas of all employees, no matter their seniority.

This is a market which must attract and retain new talent, and the best companies will proactively identify and propel the most dynamic young minds into senior positions more quickly than at any time in the past. The next generation, with their fresh thoughts and ideas, need to be given the opportunity to prove their worth.

Accelerating InsurTech
This fresh thinking should be closely linked to actively seeking out InsurTech ideas and start-up businesses, and accelerating them to drive change at a market level. We shouldn't sit around watching technology start-ups struggle to get off the ground, while simultaneously complaining about slow progress in the sector.

It's no secret that the insurance industry needs to modernise, both in terms of its attractiveness to new talent and its actual processes, which are still archaic beyond belief in some areas.

For instance, while there may be good reasons why some classes of business are not currently electronically placed, there is absolutely no reason why all classes of insurance business should not be electronically processed.

Supporting the latest and best ideas will disrupt the traditional business model in favour of more agile, proactive ways of working. But InsurTech start-ups require access to private, corporate and institutional funding, as well as the expertise and insights that broker and carrier partners can offer.

It is all very well saying InsurTech start-ups need the backing and practical support of the industry, but only a few are prepared to lead by example and integrate new technology into their own processes first.

This is where young, independent brokers come into their own - the absence of legacy issues makes these businesses much more agile and open to adopting and quickly integrating new ways of working, unlike their larger, more unwieldy competitors.

This is certainly not to say the market will move away from being relationship-driven, rather that the best technology enables more face-to-face meetings to cover what truly matters, while offering more efficient and effective underlying processes to support every aspect of that relationship.

New areas of risk
Change is also coming to the way the market looks at risk, particularly new areas of risk.

Traditional insurance has tended to work from the "product first" perspective, where an off-the-shelf product is pushed towards a client as part of a "one-size-fits-all" approach.

But innovators in the market have been flipping this approach on its head and have instead focused fully on the client, taking the time to sit down with them and listen to what they are looking for from their insurance products. Such innovators are then working back through the market with forward-thinking Lloyd's underwriters to create a truly bespoke solution.

A more open-minded approach from underwriters is still required. Take, for instance, the peer-to-peer and sharing economy sector, where there is a real need for the insurance industry, and insurance market associations, to wake up and find innovative solutions for areas of uninsured risk.

As the furore over taxi-hailing technology firm Uber's licence to operate in London recently demonstrated, sharing economy initiatives must keep pace with regulation and insurance, and vice versa. Sharing economy and peer-to-peer business models are disrupting traditional models around the world, and represent an area of uncovered risk that the (re)insurance market needs to wake up to.

The short-term letting market is another example of a new peer-to-peer model which has shown huge growth in the last two years, but the sector is now being held back by the slow pace of recognition from some areas of the insurance industry.

This is a new frontier for insurance, and there is great potential for innovation, including developing on-demand premiums, streamlined policy access and much more. But unless the insurance industry works together to recognise and properly service rising consumer demand, it risks not only hindering progress in the peer-to-peer model, but also missing out on the enormous opportunities offered by modern economies.

Independent growth
Expanding into new and existing areas of risk involves growth, both organically and through acquisitions. But realistically, it is a huge challenge for a smaller, independent broker to reach the required critical mass to compete with the international broking behemoths, and their wholly owned global networks.

However, change is coming to this model too. For instance, on the retail side, the large international players can be proficient in servicing multinational clients in some core countries, but they can also let these clients down with poorly performing local offices elsewhere.

This is an opportunity for non-owned network models, which involve independent brokers around the world collaborating to service multinational clients, to come into their own. The Worldwide Broker Network is the largest of these non-owned networks of independent brokers, collectively handling premiums in excess of £50bn ($65.54bn).

There is strength in numbers, but also the advantage that each individual broker is incentivised to give the best possible personal and bespoke service in their region, offering multinational retail clients a real alternative to the one-size-fits-all approach on the table elsewhere.

Competitive edge
The big brokers try to be all things to all people, but this isn't necessarily a sustainable strategy. On the wholesale side, choice is also key, but here consolidation is limiting choice for insurance buyers. Indeed, the UK broker consolidation wave continues to roll, driven by relatively cheap debt, historically low interest rates and interest from private equity backers.

However, having been involved in 11 M&A processes in the UK over the last year, I can say that pricing is the highest I've seen in 25 years - and this concerns me because I feel bidders don't properly take into account exchange rate impacts, particularly considering the US dollar revenue and sterling expense setup of a typical UK broker.

To be successful in the future, brokers must be at the forefront of all the changes to distribution norms that new technology is enabling. The best will have the flexibility to quickly adapt and navigate uncertain landscapes where cumbersome business models may stall.

The key ingredient of course is commercial viability. Whatever the initiative, it must offer a competitive edge to the backer, as well as benefits for the end user, client or employee. New ideas must be able to withstand the fierce heat of competition, and emerge stronger than the sum of their parts.

Toby Esser is executive chairman of AFL Insurance Brokers.

This article was published as part of issue Winter 2017

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