Industry the December 2020 issue

A Breakdown of Lloyd’s Blueprint Two Yields Some Hope

Here’s where it stands.
By Adrian Leonard Posted on November 30, 2020

Sound familiar? It should. The promise was made 20 years ago of the “London Market Principles,” a set of reform propositions officially called “LMP 2001” but known within a year or two as “LIMP.”

Two things caused LMP 2001 to suffer almost complete loss of traction. First was the onset of a hard market, just as work was getting under way. London’s business practices may indeed have been well recognized as inefficient, costly, far too complicated, and in need of reform, but when the soft market of the 1990s was finally halted, when everyone began to make money hand over fist, it no longer much mattered. The necessity was removed. When the wheel ceased to squeak, the oil was withdrawn.

The second reason millennial reforms failed was the fact, simply stated, that turkeys don’t vote for Christmas. At the time, the generals leading London’s broking and underwriting communities settled on the basic changes needed, but the troops refused to hold the line. As Bronek Masojada, current Hiscox CEO and Lloyd’s association leader 20 years ago, said this November, “We were able to agree, but the market did not.” Why mutiny? Mechanization means unemployment, and far fewer long lunches.

LMP 2001 promised “insulation of clients and their intermediaries from the complexities of the subscription market,” but when hard-market income returned, no one wanted to embrace the risk of change. Even the market leadership was too busy opportunity-spotting. So nothing much happened except, possibly, the reverse of LMP’s practical soft-market goal: anyone who has worked with Lloyd’s during the interceding decades is likely to say that the market has become an even more difficult (read: costly) place to do business.

Mandating standards not systems is far more achievable, since it creates neither in-house systems redundancies nor costly new systems requirements and is therefore much more likely to be favored by market participants (who no doubt instigated the about-face).

Flash forward to 2020. London’s current, much more ambitious round of market modernization has just taken another step forward. On the fifth of November, Lloyd’s published its “Blueprint Two,” the second installment of its “Future at Lloyd’s” reform plan. The document makes some bold promises. Those charged with execution should remember what impeded reform the last time and ensure Lloyd’s second chance isn’t just the chance to make the same mistake twice.

“Blueprint Two is a challenging two-year programme that will deliver profound change for the market,” Lloyd’s declares in the 104-page tome’s foreword. “We will establish new ways of doing business, underpinned by digital channels that enable advanced data collection and management. We will create solutions that will enable brokers, insurers and partners with delegated authorities to operate at a materially lower cost, which we estimate to be at least £800 million [more than $1 billion, or around 3% of current operating costs]. We will execute this within a two-year timeframe…” The result will be “the most advanced insurance marketplace in the world.”

Blueprint Two is notable for its inclusivity. Like LMP 2001, it is clearly intended for use by the company carriers in London as well as Lloyd’s managing agencies, which run the syndicates. Almost all of the latter have a company platform too, which cannot be compelled to follow Lloyd’s reformist rules (and have very often proved reluctant). Their involvement heightens execution risk, especially in the absence of the urgent necessity removed by the hardening market.

Nonetheless, Blueprint Two promises to deliver “a new platform with significant enhancements during 2021 and 2022,” but it will be an upgraded PPL (Placing Platform Limited) built by and for the entire London market. The existing, four-year-old PPL system saved the market from a COVID-19 grinding halt, but it is built on LMP-era technology (RI3K, for those with long memories). Masojada, now chairman of PPL, says that particular old-tech approach will be consigned to the dustbin.

To support its Blueprint Two promise of digital straight-through processing, Lloyd’s will develop data and procedural placement standards rather than building an entirely new complex risk exchange platform (as sketched in Blueprint One). It will instead use common risk language to facilitate the interconnection of PPL, third-party placement systems, and the proprietary platforms of brokers and underwriters. Risk data will reside in a central “Core Data Record” to provide an “immutable” reference for accounting, payment, endorsements, claims, renewals and reporting. Everything and everyone will be linked through a new “Digital Spine.”

The plans promise ease for intermediaries underwriting under delegated authority, who deliver nearly 40% of Lloyd’s business. A new system will populate the Core Data Record with “reliable facility and risk data” input by the originators directly or through their own systems or a Lloyd’s portal. A new platform to simplify coverholder onboarding and enable facility placement is promised “from H1 2021.” Coverholders’ primary access will come through the market’s existing risk placement and policy administration system, “Coverholder Workbench.”

Third-party risk and claims platforms linked to the Spine will have to input data in the prescribed format. The system will then automatically validate, record and distribute risk, premium and claims data through a new “Delegated Data Manager” solution (“DDM” is the new name for Lloyd’s “DA Sats” data standard). Claims notifications will be submitted directly through a simple portal or from broker systems connected via APIs for “instant” linkage to the relevant policy records and distribution by an “intelligent routing engine.”

Panelists of Insurance Insider’s London Market Liveevent—which took place the same day that Blueprint Two was released—offered useful, if unwitting, market commentary in support of the initiative’s extraordinary promises. While some praised the swift digital advances made as a result of the pandemic lockdown, others highlighted Lloyd’s costly distribution chain.

“There’s definitely an archaic structure around intermediation” in London, said Mark Gregory, CEO of the international division of Axis Capital, but he acknowledged the challenge of reducing costs by paring back acquisition costs (read: brokerage) given the fact that Lloyd’s distribution structure employs tens of thousands and no one wishes to be replaced by an algorithm.

But as David Croom-Johnson, managing director of the Lloyd’s carrier Aegis London, pointed out, without reform, “uberization” is a clear and present danger due to London’s high acquisition costs. “At some point somebody somewhere is going to cut out those costs,” he said. Effective implementation of Blueprint Two would make that achievement a win for the home team. Even so, Lloyd’s claims the billion-dollar savings will happen even if “the current distribution model does not change,” hinting that more savings could be realized if it does (and although a billion is a lot, 3% isn’t).

Heather Clarkson, divisional CEO for specialty at Ed Broking, said much of that money is now expended “duplicating and triplicating our work.” Removing such wasted effort looks like low-hanging, cost-saving fruit, but as Clarkson admitted, “We’ve been working towards that for 25 years.”

Lloyd’s has to get it right this time, and Blueprint Two has avoided some bear traps. The decision to step back from the originally proposed central risk exchange platforms has delighted London’s army of wholesale brokers. Mandating standards not systems is far more achievable, since it creates neither in-house systems redundancies nor costly new systems requirements and is therefore much more likely to be favored by market participants (who no doubt instigated the about-face).

Another good move is Lloyd’s new one-thing-at-a-time strategy. Much of Blueprint One, especially reform of traditional leading and following underwriting roles, appears to have been shoved to the back burner (to the delight of smaller syndicates). With the unavoidable interruption of COVID-19, something had to give, and since the pandemic forced all of Lime Street online, it’s very wise to focus on keeping the business there. To embrace straight-through processing is its natural corollary.

Last time reform came around, the work was derailed by a hard market that made all the effort and risk seem unnecessary. On this second visit to the Last Chance Saloon, Lloyd’s looks like it’s listening and able to avoid making the same mistakes twice.

Adrian Leonard Foreign Desk Chief Read More

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