In Lloyd’s coffee house in London more than 330 years ago, the property and casualty insurance industry was formed to spread the risks of cargo-carrying ships plying the world’s seas.
The compelling reason for building this new model is the existential threat of keeping things as they are. If insurers and brokerages don’t begin to share their own and client data in novel ways to reduce acquisition costs and operating expenses, some other entity—like, say, a giant technology company—might squash them like a stack of yesteryear’s CDs.
“The cost base from which we all are working is fast becoming unsustainable,” warns Alastair Burns, chief marketing officer at London-based insurance holding group Navigators International. “A war on cost must be waged in the insurance marketplace.”
This cost base is predicated on the traditional ways of providing insurance to businesses that have not changed much since Edward Lloyd ground his first cup of coffee. Companies from the largest corporations to the smallest Main Street businesses rely on an insurance broker or agent to understand their risks and transfer them to an insurance carrier willing to absorb these exposures. The insurer then spreads these risks through global reinsurance markets.
This system has worked pretty well for centuries. Then along came data analytics—the ability to search through massive volumes of data to discover useful information for decision-making purposes. This technology and others—machine learning, robotic processing automation and artificial intelligence—have created a dangerous entry point for non-insurance entities to potentially compete against brokers and carriers, leveraging capital in some cases from institutional investors.
Other industries have collapsed from such incursions. The new insurance model under discussion would fortify the barricades. By sharing client data, brokers and carriers can reduce the cost of insurance, pave the way toward the development of innovative new types of insurance, and, most important, keep non-insurance entities at bay.
“Whoever has data is king,” says Jonathan Prinn, group head of broking at Ed Broking, a wholesale insurance and reinsurance brokerage company based in London. “If this data isn’t shared amongst us, we will fail to provide value to our clients. And if we fail, someone else will provide this value.”
Data Sets Sail
A group of partnering organizations from the insurance, technology, management consulting and shipping industries has announced the introduction of the world’s first data-sharing platform for the marine insurance sector. The blockchain-enabled platform connects shipping clients with brokers and insurers to more seamlessly transact marine insurance.
Partners in the revolutionary venture include Microsoft, consultancy EY, insurance data standards company ACORD, broker Willis Towers Watson, global insurers XL Catlin and MS Amlin, software security provider Guardtime, and Danish shipping conglomerate A.P. Møller-Maersk A/S. Following a successful, 20-week proof of concept phase in 2017, the platform, which is built on Microsoft Azure global cloud technology, went live in a phased rollout earlier this year.
Data on a wide variety of exposures from multiple parties are integrated on the platform with information about insurance contracts. The goal is to remove the friction between these parties to speed up the insurance process. By having all the data involving a risk transparently available on the blockchain—and all the parties needed to transact insurance in this secure ecosystem—traditional manual data entry and rekeying of information are eliminated, speeding up insurance processing times and reducing related costs.
“This first-of-a-kind effort has the potential to dramatically reduce time, cost and risk across the entire insurance value chain,” says Bill Pieroni, ACORD’s president and CEO.
Simon Gaffney, chief data officer at Willis Towers Watson, says, “The initiative has the potential to streamline and simplify insurance transaction efficiency using new technologies—an essential development for the insurance industry.”
As the novel data-sharing platform is rolled out across the rest of this year, the partners anticipate a learning process that will guide the development of additional blockchain-enabled platforms for other lines of insurance. “We look forward to deploying this technology across the marine insurance industry,” says Shaun Crawford, EY’s global insurance leader, “and are exploring how these findings and insights will be applied to other specialty insurance markets and beyond.”
Need for a New Model
One of the clear concerns facing the industry is client acquisition costs, which are much higher than the acquisition of new customers in other industries. Prinn blames high acquisition costs for Lloyd’s of London’s dismal 114% combined ratio in 2017, meaning the venerable insurance marketplace paid out more money in claims than it received in premiums.
“The cost of underwriting and broking commissions at Lloyd’s was about 42%, which is unacceptable and untenable in the world going forward,” he says. “No intermediary model I know of is anywhere close to 42%.”
In the United Kingdom, Prinn says, “real estate agents charge around 2%, credit card companies like Mastercard charge around 1.3% and moving $2 from a bank account to buy coffee using Apple Pay is free.”
The 42% figure he cites is composed of 30%-plus broker commission levels and the carriers’ administration costs, which last year ranged between 10% and 12%.
One could argue these expenses are less in the United States—according to A.M. Best, incurred broker commissions/expenses plus underwriting expenses are between 30% and 31%—but that’s beside the point. “Too much of the money that comes into the system is now consumed by acquisition and operating costs,” says Jamie Garratt, who heads the digital underwriting strategy at Talbot Underwriting, a London-based underwriting services provider.
The culprit, the interviewees contend, is the traditional linear process of transacting insurance, whereby a business goes to a broker who goes to a carrier that goes to a reinsurance broker who goes to a reinsurance carrier. The alternative is the sharing of data among brokers and carriers in a free marketplace. “If brokers share client exposure data with all and not just some insurers, everyone’s cost base reduces,” Burns says.
Garratt agrees. “If we can move data quickly and with much less friction between a client and the end risk bearers,” he says, “we can remove the replication of work up and down the value chain, reducing the high cost this produces for all of us.”
The Match Game
In the electronic equivalent of a giant convention, 380 insurers and managing general agencies gather on a daily basis with more than 30,000 independent insurance agencies to streamline their business dealings. The means of this extraordinary sharing of information is an industry exchange launched by IVANS, a division of Applied Systems.
The exchange gives the MGAs and agents a real-time way to transact electronically with the carriers, from identifying markets to quoting and servicing insurance business. The carriers share their data with IVANS, which in turn shares it with the agencies on the exchange.
Previously, agencies using their agency management systems needed to log on to one carrier’s website to download an insurance policy and then on to another carrier’s website to do the same—obviously not an efficient process. “By automating the process of sending information from the carrier system to the agency management system, we’re helping agents to spend more of their time on servicing their customers and growing the client base,” says Thad Bauer, vice president and general manager of the IVANS division.
The exchange is averaging about 700,000 daily transactions between agencies and carriers. While the exchange focused initially on standard lines of insurance business, it’s now expanding its scope to more complex lines like surety and employee benefits.
Applied also expects to use the exchange to create statistical and benchmarking data to be shared internally and with the broader industry. For example, IVANS Index can use the data to measure the year-over-year premium difference for a single insurance policy.
Other opportunities that emanate from connectivity and data sharing also are being explored. “We have developed a new search tool called IVANS Markets, where agents and brokers can see which carriers have an appetite for a particular type of risk and carriers can see in real time when agents are searching for markets to assume a particular risk,” Bauer says. “Just by moving data back and forth, risks can be rated and policies can be issued in one, fast, comprehensive process.”
Five years ago, the sharing of data in the industry was disdained, he adds. “The various parties did not want their data touched for reasons of trust,” Bauer says. “By creating an exchange in the middle of these transactions, trust is no longer an issue. We’re helping carriers streamline their workflows and agencies receive client and policy information instantly. And we’re providing data-driven insights on the state of the industry, like premium renewal pricing, which benefits all parties. Now, no one disputes the value of sharing data.”
An Architecture Emerges
How might this new model look and operate? Instead of the customary linear progression, clients would share operating, financial and other data with brokers; the brokers would evaluate and package these data into discrete elements of risk; these elements would be submitted to the global insurance markets for their review; and insurers and reinsurers would decide whether to assume these risks based on their underwriting appetites and portfolio diversification objectives.
Prinn provided the example of how this might work in the commercial aviation insurance market, which is currently divided between one set of carriers that provide insurance to smaller courier-type aircraft and another set that services large commercial airlines.
“The reason for the split in the market is risk—smaller aircraft take off and land a lot to drop off freight, and the biggest risks in flying occur when landing and taking off,” he explains. “Consequently, the risks for the smaller air carriers are significantly higher.”
Assuming all aircraft owners provide their altitude, speed, turbulence and other data to a broker, cost theoretically would come down. “Airplanes produce an extraordinary amount of data coming off sensors that could be dropped into a blockchain or other type of distributed ledger technology,” Prinn says. “If the data from every airline was available in this platform, there would be many thousands of data items related to every step of the journey, fundamentally changing how insurance is structured.”
The job of the broker would be to gather and assess these granular levels of exposure data and present them to the insurance markets for consideration. Were this to occur, Prinn describes what might happen next: “An insurance carrier might say it will insure this many planes taking off to 1,000 feet in particular regions of the world; this many planes going from 10,000 feet to 20,000 feet across the Atlantic; and this many planes going from 25,000 feet to 35,000 feet across specific land masses.”
The carrier might also decide to insure similar elements as the plane makes its descent to the ultimate landing. “If this happened,” Prinn says, “the need to separate the aviation insurance market into two sectors would be eliminated.”
What he has just described is a far cry from the current model of providing commercial aviation insurance, in which a broker representing a specific airline submits that company’s breadth of risks to an insurer with which the broker often does business. The new model would democratize the process to offer pieces of risk to all aviation insurance carriers in a free marketplace.
Can the risks of other industries be similarly sliced and diced by brokers and offered to the insurance markets? “Absolutely,” says data scientist Henna Karna, chief data officer at global insurer XL Catlin. “We’re continually looking at data that exists in our environment and creating ways to measure it.”
These data are not limited to a company’s internal financial and operating data. “Exogenous credit data, political risk data, cyber risk data, and unstructured data can all be part of the picture,” Karna says. “The goal is to model the risk by considering every available and quantifiable factor that may affect it. We’re getting closer and closer to mining, analyzing, modeling and managing all this data for insurance purposes.”
Better Data, Better Risks
The sharing of detailed client exposure data in a digital platform provides the opportunity for insurers to diversify their risk portfolios by reducing exposure accumulations in specific areas. Karna provides the example of a global manufacturing plant that operates 9 a.m. to 5 p.m. Monday to Friday.
“Say the data coming from the sensors attached to factory equipment indicate the company makes most of its products on Tuesdays and Wednesdays, with the bulk of these items coming off the production line between 9 a.m. and 11 a.m.,” she says. “A blackout or machine glitch during this period on a Tuesday or Wednesday would cause a much bigger business interruption risk than other times of the day the rest of the week.”
Today, the company’s insurance policy from a single carrier does not distinguish these risk factors. By breaking up the risk into difference pieces, and bringing in other quantifiable data like seasonal weather and machine maintenance, other carriers have the opportunity to choose which exposure elements they may want to bear. In turn, this helps the insurers balance their risk portfolios with exposures that are uncorrelated, Karna says.
Burns agrees. “By modeling and sharing risks, carriers can avoid aggregating too much of a single risk,” he says. “Insurers have a finite amount of exposure they can take. Their balance sheets are only so big.”
The new model would present a way for brokers to spread risks among different insurers to their clients’ benefit. “If we have a system where brokers share client risks with all the insurance markets in a centralized shared services model,” Burns says, “this would be a far more efficient way for insurers to spread their risks and for clients to receive more competitive premiums.”
Current expenses up and down the insurance value chain would wither, Garratt says. “If clients share their data with brokers, and brokers share this data with insurance markets, it will result in reduced costs for all parties,” he explains. “All those inputs, calculations and equations that each broker and carrier must do on their own would be removed from the process. There would be no more need for rekeying all this data as it’s passed along the value chain. Instead, the exposure data would move seamlessly and transparently from the client to all potential risk bearers, dramatically reducing acquisition and operating costs.”
This would certainly be a positive development for business clients. “If a broker presents a good commercial risk to all the insurance markets—which is apparent in the client’s exposure data—carriers can compete to charge less in assuming this risk, based on their respective underwriting appetites,” Garratt says.
Although the new model would produce less traditional income for brokers, the loss of revenue would be offset by heightened efficiencies. “Brokers have significant operating expenses that are a reflection of the current inefficiencies in the market,” Garratt explains. “If you remove these inefficiencies, brokers can reduce their costs to maintain current profit margins.”
Moreover, the broker’s enhanced knowledge of clients’ exposures presents the opportunity to become more involved in mitigating clients’ risks. “If a broker comes to us with a client whose exposure data indicates is risky, we would charge more to assume the risk or not take it at all,” Garratt says. “But crucially for the client, the broker and the underwriter now have the ability to help the client manage these exposures, working to reduce the activities and behaviors that resulted in the company being perceived as a higher risk.”
This creates value for the client and possibly a new revenue stream for the broker, while furthering the closeness of the relationship brokers enjoy with clients. “Less money is consumed by process and transaction, and more is used to pay claims, provide value-added services and develop new products,” he adds. “The outcome in all cases is better, quicker and cheaper service for our clients, which is what we all must focus on.”
In the United Kingdom, roughly 3,000 independent insurance brokers place about 90% of the country’s commercial insurance risks. Brokers tend to dominate the commercial market, since complex commercial risks typically require professional advice. To write the risks, U.K. insurance markets conduct most of their business through these intermediaries.
Broker Insights is about to change this dynamic, solving a problem that has long daunted the London insurance market—the inability of insurers and reinsurers that would love to interact with the regional brokers but cannot get their attention.
“All these insurers are running around prospecting for opportunities and knocking on broker doors, but brokers tend to have their favored markets—even though these insurers may not be the best option for their commercial clients,” says Fraser Edmond, Broker Insights’ CEO and co-founder. “It’s just so inefficient. We figured there had to be a better way.”
Broker Insights was designed to be just that: brokers share data on their clients’ exposures on the platform, and insurers cull through these exposures to determine whether or not to insure them.
“The platform has a unique searchable database for insurers to look for business,” says Edmond. “Because it is searchable, insurers can look for criteria on risks that suit their underwriting appetites. We’re pulling data from many different sources to provide this information.”
In addition to the exposure, these data include the type of business, where it is located, number of employees, and financial information—to scratch the surface. “Say a carrier wants to write marine insurance for a particular client during certain months of the year in a specific geography within a particular premium band,” Edmond says. “For the first time, the carrier can search these words in the database to find which brokers have this type of business available. This creates tremendous efficiencies from a sales and marketing standpoint.”
Broker Insights flips the traditional model of insurance on its head. Instead of a broker reaching out to insurance markets, the insurers reach out to the broker. In doing so, the platform creates competition among carriers to provide optimal coverage and higher financial limits of protection at the best rate. “We’re promoting more choice, which is great for the broker’s customers,” Edmond says.
For insurers, Broker Insights offers a way to achieve more balanced risk portfolios. “Instead of wasting resources, brokers and insurers each achieve endless efficiencies through a simple data-sharing experience,” Edmond says.
What’s in it for brokers? Broker Insights will pay brokers an undisclosed fee to share their information with carriers on the platform, although this is not the main attraction, says Edmond, former head of broking at Aviva, a large U.K.-based global insurance company with 33 million customers in 16 countries. “The platform puts a far wider range of brokers on the insurers’ radar, enabling more informed and timely sales,” he explains.
The platform, which went live in June, has lined up 30 brokers accounting for nearly $203 million of regional commercial business. The company recently signed its first contract with Hiscox, a large U.K.-based insurer. “We’re also in advanced discussions with Zurich, Axa and Allianz and are going through the contract phase at the moment,” Edmond says. “The demand has been nothing short of fantastic. We’re bridging the customer information gap between insurers and brokers.”
Customized, Complex Products
By participating in the proposed data-sharing model, brokerages and insurers will be in a more opportune position to create bespoke insurance products. “All that exposure data in the hands of a carrier or a broker can be an engine of innovation,” Karna says.
She provided the example of a large retail chain caught in the crosshairs of a reputational disaster. By mining social media data, the company’s broker may learn that flash mobs are forming to protest the business in a variety of store locations.
“For the sake of argument, let’s assume the organization has comprehensive property insurance absorbing losses caused by vandalism that occur in its stores’ parking lots, which generally have 300 to 400 cars parked per lot,” Karna says. “Now let’s assume the financial limits on this insurance policy are $1 million. Would this amount cover the potential vandalism of cars in the aggregate?”
Possibly not. Even if it did, how much of the total limit would be left over to absorb additional property losses throughout the remainder of the policy duration? “The opportunity now exists for the broker to craft a bespoke insurance policy absorbing the one-time property damage losses caused by vandalism and present it to carriers for their consideration,” Karna says.
Prinn cites similar value. “Brokers and carriers have the ability to take a very complex commercial insurance program like one sees in the oil and gas sector and ferret out comparisons across different oil and gas companies,” he says. “You now can take a common look at these risks, which wasn’t possible before, allowing complex (insurance) products to be packaged.”
There is even the opportunity for brokers and carriers to share customer data with other industries, assuming the owners of the data opt in for this use to avoid privacy regulations.
“Wouldn’t it be great if I bought travel insurance and the carrier shared this data with a rental car agency to set up a vehicle for me when I landed?” Prinn says. “Or the pension side of my insurance company knows I have children and recommends setting up a college plan at a local bank? The future broker or carrier might well be able to help with these things, which is very exciting. And we’re still really at the beginning of all this.”
Nevertheless, he is confident the current model of insurance will be relegated to the trash bin of history. “I was a street broker at Marsh placing Fortune 500 risks for 20 years with carriers that I knew from pure personal experience alone could take on these risks,” he says. “I can tell you unequivocally that this art form is dying. The broker of the future will know how to use data and analytics to find the right insurance markets for their clients, as opposed to relying on experience alone. The model of tomorrow will be a blend of art and science.”
Whenever he talks on the subject, Prinn frequently mentions his 10-year-old daughter’s interest in playing the online game Minecraft. She listens to the YouTube videos of a young man in his 20s named Daniel Middleton, a professional gamer who plays Minecraft and comments about the game’s intricacies to his online listeners.
“I mention Dan because last year he made something like $16 million,” Prinn says. “If you told me five years ago that some guy who sat in his home commenting to kids on a video game would make this kind of money, I would have fallen over laughing. In no way could this have been predicted.”
He feels the same way about the new model of insurance. “Ten years ago, if you told me the traditional model would change so the customary parties to the transaction could share data, I would have dismissed it out of hand,” he says. “And now it is upon us.”
The Tools Are Here
The industry grew and prospered, with little change in the underlying model. Now, an entirely new structure is taking shape.
Change is tough for any industry, but the alternative is stark. Just look at the many industries that failed to heed the disruption caused by a technology interloper. “If a broker believes its future value remains as a middleman, where it is being paid merely to access an insurance market, it is dead before it knows it,” Prinn says. “The entire industry is under siege by technology companies that will create better models unless we do it first.”
Down the line, as the internet of things becomes ever more mainstream, millions of sensors will produce an abundance of data, sharpening the ability of brokers to analyze complex risk exposures to a fine point—if they take pains to make this happen.
Yes, there are obstacles to be overcome, including the need to structure data into common formats. But these are relatively easy hurdles to surmount, and organizations like ACORD are already tackling the problem. “Once we have structured data, the entire ecosystem can move in sync to share information and bring down costs,” Burns says. “There’s no going back to the ways things have been.”
Others agree. “We now have the tools to do things we’d only dreamed about before,” Karna says. “Much of our work here now with data is focused on seizing these opportunities.”
The future is as bright as the industry allows. “There’s a tremendous amount of excitement now why the traditional insurance market must change and how this can occur,” Garratt says. “And that can be a catalyst for needed change to occur at a really fast speed—to the benefit of the insurance market and our clients.”
A Capital Idea
The interest in developing a new model for insurance based on data sharing is not confined to brokers and carriers. Institutional investors like pension funds and hedge funds that have long invested in catastrophe bonds will soon have the ability to make similar investments in a range of other property and liability exposures, trading insurance risks much like they currently trade stocks.
This opportunity will be available when a new and completely novel reinsurer launches a one-of-a-kind trading platform this summer for capital markets investors. Will Dove, chairman and CEO of Extraordinary Re, the reinsurer behind the platform, says it creates the means to free up more than $20 trillion of liabilities currently held on insurance company balance sheets, which would be available to investors interested in diversifying their portfolios with an uncorrelated asset class.
“Why should a single insurer handle underwriting, marketing, distribution and servicing, given the costs this eats up,” Dove says. “A trading platform offers risk-bearing capital in a vastly more flexible, efficient and less costly way, especially one like ours using blockchain technology.”
Unlike a catastrophe bond that investors acquire and must hold until the bond’s multi-year duration has elapsed, the trading platform markets so-called liquid insurance contracts (LICs), which enable investors to trade in and out of the insurance liabilities. The absence of liquidity was a problem with catastrophe bonds. Dove says the opportunity to sell an investment in one insurance risk to buy an investment in another insurance risk will be of great interest to the capital markets.
Here’s how this unique facility, which uses technology created and hosted by Nasdaq, works: a broker, insurer or reinsurer electronically submits a particular risk or different elements and tranches of a risk to the platform; underwriters at Extraordinary Re review the submission to make sure it suits its guidelines; and investors review the exposure-related details of the submission with an eye toward a return and portfolio diversification objectives. If interested, they invest in the risk.
The risks are priced much the way insurers currently underwrite exposures. “The market value of each LIC is set by the collective opinions of the market participants, who take into account the loss activity observed to date, plus expectations about future loss activity,” Dove explains.
In return for taking a share in an LIC, an investor would receive a premium and be obligated to participate in the payment of losses up to a set amount—much like traditional insurance. “When loss payments plus market expectations of future losses exceed premium received and the investment income, the investor would be in a loss position,” Dove says. “At any time, investors can sell their LIC shares to other investors to eliminate their exposure to future adverse developments.”
Good news for the capital markets, but what’s in it for traditional insurers and reinsurers? “We’re offering a way for insurers and reinsurers to spread their risks more widely at less cost overall,” he replies. “These risks include marine, workers compensation, cyber, terrorism, aviation, product liability, and life and health exposures in addition to both long-tail and short-tail liabilities.”
With regard to the impact on brokers, Dove says Extraordinary Re provides another way for reinsurance brokers to access capital markets capacity for their clients. “Because risk comes into our market in reinsurance contract form, we will depend on brokers for distribution and getting access to the types of insurance risk that Extraordinary Re’s investors are looking for,” he explains.
Bottom line: Remarkable innovations are underway disrupting the traditional model of insurance, requiring all parties to rethink how they will transact business in the future.