I popped along to the ACORD Forum at the Gibson Hall recently wondering what the market was thinking about electronic processing nowadays. As you would expect from a forum organized by ACORD, the speakers and panel discussion participants were all jolly well in favour of it.

There was also an audience participation system (a la ‘ask the audience’ on ‘Millionaire’) whereby we could provide our feedback to a number of questions. Some of the more telling responses were that about 65% of attendees were from IT and the majority of attendees were from suppliers. What does this tell us? That the business is not interested or they have left it up to IT to deal with that sort of thing?  Those suppliers see this as the next ‘cash cow’? One thing all seemed agreed upon was that the issue of electronic processing (including placement) would go nowhere without the business sponsoring this at the highest level – hard to argue with that.

The answer to the question ‘why bother at all’ was eloquently and entertainingly answered (at least in my mind) by the keynote speech from Aon Global’s Chairman Denis Mahoney (all his own words – we had the legal disclaimer, nothing to do with Aon).

The scene was set by Mahoney pointing out a number of drivers that should be influencing market thinking: broker commissions moving from volume based percentages to value based fees; the parlous state of some restrictive practices such as broker access to Lloyd’s and ‘best terms and conditions’ on subscription business (according to Mahoney we need a bid/offer approach); high transaction costs; market process inefficiencies and client dissatisfaction (up apparently, even after CC).

We then had a short aside on rating agencies, culminating in the observation that ‘willingness to pay is not the same as ability to pay’ – quite.

Another interesting point made was that captives/self insurance is increasing ‘as a one way ratchet’, i.e., it increases in a hard market but does not decrease in a soft market – those accounts are permanently gone. Also, it is the best risks that tend to self insure meaning less and less quality balance in the overall market portfolio. As a result the primary insurers are now moving into the reinsurer’s province and experiencing much more volatility because the higher primary retentions lead to lower loss frequency, but higher severity (i.e., Cat losses). We also need to watch the ‘creeping nationalization of insurance’, meaning the increasing number of Government catastrophe schemes necessary as the industry does not have the capacity for the biggest risks.

Now add to the mix the convergence of insurance with the capital markets seen through: growth of insurance linked securitization (both for the low frequency/high severity - Cat bonds values up 550% since 2007 - and high frequency/low value for balance sheet management); direct capital market involvement in start ups and the launch of insurance derivative products and exchanges. (See separate Blog piece on insurance linked securitization if you find this as baffling as I did).

Mahoney believes that our industry is on the cusp of change through this convergence with the capital markets and in the use of technology and went on to review and compare where this had happened in two other situations: UK ‘Big Bang’ 1986 and the SWIFT Clearing System. We will cover this review and his closing key messages for the insurance market in a future Blog item.