Brokers Are the Innovation Imperative

So I guess we have…always felt that regulators and governments around the world underestimate the role that specialty brokers play and therefore undervalue it, and that ends up with suboptimal outcomes in terms of public policy and supervisory strategy. I think that most regulators around the world look at a distribution chain with more than one intermediary in it and consider that immediately must be bad value because they don’t understand the specialist expertise. But certainly, members of LIIBA and members of [The Council of Insurance Agents & Brokers] bring the right solutions to clients.

I use the word solution very specifically because I think one of the things that we want to get away from is talking about products, because the role of the broker is so much more than just being a transactional purchaser of insurance cover on behalf of their client. Although I think that’s what most regulators see them as. But, as we know, they provide huge risk management expertise, expertise in risk identification, in risk analysis and modeling, and then finding the right solutions for their clients, some of which will involve the purchase of reinsurance. But quite often different services will mitigate risks in better ways.

The context that we’re setting it in, which I think is something which will appeal to both regulators and governments, is how the industry can help address protection gaps that we’re seeing growing across various lines. So we’re looking at four new ways in which risk is changing: increasing digital dependency of companies, and you’re seeing significant protection gaps around cyber insurance; increased climate risk, and there been a significant increase in the amount of losses caused by natural catastrophes over recent years; geopolitics, we sit in a country which may be contributing in a small way to geopolitical instability; and you look at a world where 90% of the value of S&P 500 companies is now an intangible assets. So that’s very different from the traditional insurance world of insuring physical stuff.

We talk about the innovation gap in terms of protection gaps. So why are we seeing a difference between the economic loss and the insured loss across various areas of risk? It’s because as an industry, we’ve not delivered the innovation that allows that gap to be covered. So, obviously the central argument of the report is that most of the innovation in the industry happens in the relationship between broker and client. And so governments and regulators interested in closing that protection and innovation gap need to recognize that and ensure that they’re delivering the right environment that allows that innovation to thrive. But it’s not just about brokers, this is very much calling for collaboration across industry with carriers as well.

A lot of that will be around better sharing of data. That data at the moment tends to be fragmented and so of limited value in terms of defining solutions. And we’re calling for a much more open approach, as you see in technology industries where it’s a very sort of open platform approach and allows people to be a much more innovative industry. That’s a parallel we draw in the report, that actually the insurance industry is structured quite similarly to the technology industry. In technology you have the big platform cloud providers and then a lot of systems-integrating firms that work off the back of that. That’s not dissimilar to big blocks of capital and intermediaries between providing the right solutions to clients.

So we’re actually structured like a quite innovative industry and we need to start learning from how that industry is innovative and make sure that we bring those features to our industry. And that is around probably more open sharing of data and an openness to failure. I think there is a natural risk aversion in the insurance industry, and definitely in the regulators of the insurance industry, that see failure as something to be absolutely prevented. But actually, innovation is very much a fast fail mentality. We need to start adopting that mindset a bit more if we’re going to close the gaps.

I accept that as a representative of the broking community, to sit here and advocate more data sharing is slightly risqué. It’s something that we very much road tested with our community. But I don’t think that what we’re talking about is a threat to anybody’s existing business models.

A lot of it is around data analysis and data development. Indeed, one of the case studies that we’ve cited in the report is actually around the challenge for the suppliers of wind turbines when it’s not very windy, because you lose money and that is an insurable loss. And one of our members has basically developed the first catastrophe risk model for wind farms, [through] use of an enormous amount of data. It’s an incredibly interesting application of data. You also see [a model for] the Ukraine grain corridor, which was developed using a lot of geospatial data to identify safe shipping routes and be able to base the cover around that.

There is a mass of fascinating data available now. We’ve been working with a company in London that—I find this fascinating and I think everybody should find this fascinating, although I can understand why you might not—they can sit in their offices and watch slag heaps in Wales moving from satellites. And they’ve managed to sell some of this to local governments in Wales because the movement of slag heaps is obviously important to them because they might collapse. And there’s been, historically, some awful tragedies caused by that.

They also did a case study. There was a dam that collapsed in Brazil four or five years ago, caused a significant number of deaths and just devastation.

They’ve gone back through the data that they had from the satellites they worked with and they identified that six weeks before it happened, they would have been able to start detecting ground movements that would have allowed it to be mitigated. The sheer scale and specificity of data that’s available now is enormous. And so that is at the core of how you can build really innovative insurance solutions.

We’re hoping this will be the start of a big conversation across the insurance industry and obviously specifically with governments and regulators. My intention is to go and see a number of [organizations], starting probably with the supranational regulators like the International Association of Insurance Supervisors and the [Organization for Economic Cooperation and Development] and people like that and have a conversation and just say, “We think that you haven’t fully understood how our industry works and thus haven’t supported it to the ways that you could.” And I think that’s important, specific conversations. But we hope that this will start a debate. We believe that brokers are absolutely intrinsic to the solutions to some of the problems the report cites. But we can’t do it on our own. So we do need a collaboration across industry.

We hope that it will spark conversation and will be a process and we don’t see it as a once and done thing. We want it to be a living document.

The way the E&S market in the U.S. works is probably as good as it gets in global regulation. You feel there’s more innovation in the E&S market in the U.S. than there is in most other markets, and that’s because it is a lighter touch for complex risk.

That’s a conversation we are having with the Financial Conduct Authority in the U.K. and they’ve made some quite significant moves towards being better at differentiating between personal lines business, where you have consumers that need protecting, and complex commercial business where sophisticated customers don’t need that level of regulatory protection. And they can give a, lighter touch is a sort of phrase that’s got a bad rap around regulation now, but certainly a more proportionate approach that allows for more innovative thinking. And again, back to that idea of failure, sophisticated customers can deal with failure.

We talk a lot about MGAs in the report as well. And the MGA model is probably where you’ll see a lot of the focus on innovative activity and MGAs don’t pose a systemic risk to the economy or the industry. So they whisper it quietly to regulators.

I run a London-based organization and our members are focused on the London market, but I don’t know of any LIIBA member that just places business into London. They all access capacity around the world because that’s in the best interest of their clients to do that. And we have the word international in our association title for a reason. Whilst I am a loyal London market person, [and] I do think that London will lead this process, it’s not a London game. This is about how risk emerges from domestic markets and finds a home in international markets and facilitating that process and understanding that’s a good thing.

Back to a central point that we’ve always argued all the way is that the specialty markets aren’t in competition with domestic markets and government and regulators need to get their heads around that. It’s risk that the domestic markets don’t want. So things like retention rates and unhelpful licensing arrangements don’t deliver anything. They don’t deliver a better regulatory protection for your domestic corporations. They just add risk and cost and they end up with less optimal solutions than they might.