Xchanging chief says antiquated practices could sink the London market unless e-connectivity is taken up. Jonanthan Russell and Elliot Lane report

London could lose its dominance of the world insurance market within three years if it does not embrace technology.

This was the warning given by Xchanging ins-sure Services (XIS) chairman Sir Laurie Magnus.

Wrapping up the Xchanging conference,Magnus painted a bleak picture of the future if insurers do not ditch the paper trail in favour of electronic solutions.

He blamed "endemic bad practice and endemic lack of professionalism" and called on the major players to plan for the future now, or perish.

He says: "There is a tendency to react only when there is a pistol pointing at your head. Business is doing incredibly well at the moment but the cycle will turn down.

"This hasn't been taken seriously enough. Within the next two to three years other areas will be challenging the London market."

His views come when times are a changing at Xchanging. Speculation still surrounds the eventual date of the proposed merger with insurance technology provider Rebus iS. It could be before Christmas, according to sources.

"The sticking point seems to be whether it will be a full merger or elements of Rebus integrated into Xchanging," says one industry source.

Xchanging was formed from the merger of LPSO (Lloyds policy signing office), the London Processing Centre (LPC) and Xchanging two years ago with a remit to streamline policy processing.

The success or failure of Xchanging in achieving this goal is, sometimes, hotly debated though Magnus sees some clear wins.

He says: "Three years ago the XIS cost base of £40m was equal to its revenue base. In the first full year of operation, by changing processes and laying off people XIS was able to move to a profit of about £8m."

The shift to profitability was achieved on a business activity processing £50bn of premiums, or 750,000 policies, per year.

The ownership split of Xchanging (plus the involvement of Lloyd's chief executive Nick Prettejohn) means that Lloyd's has an interest in its success and survival. The three vested interests are: Lloyd's (25%), IUA (25%) and Xchanging (50%).

Magnus is adamant though that the market will have to accept the new technology and eventually sign up to Xchanging or a similar solution.

He says: "Talking to people who are looking at moving business to London, what is very clear is that the way the processes work, at the moment, are regarded as extraordinarily antiquated. And frustrating because there is a lack of contractual clarity.

"But also there are always huge delays - delays in getting policy documents issued and delays in paying claims."

Urgency is needed, he says, to combat the threat of Bermuda. It is now a market regarded for its quality not quantity. "There is an endemic lack of professionalism in the London market," he adds.

"XIS will do everything it can to facilitate the market combining its forces. But if the key players in the market take the view that there is a better system than the one proposed - fine. But we have to get on with what we are doing.

"XIS has a business that is developing. A business outsourcing side where it has effectively established a back office for start-up insurance companies and brokers. There is a lot more it can do in this area."

The solution for the London market proposed by Xchanging involves two information channels feeding into, and off, a single bank of information.

The electronic accounting and settlement system would handle new policy administration, giving real time capability to underwriting risk, then storing that information in a central, secure database accessible to password enabled users.

£70m savings

A parallel arm, the claims repository, would handle the claims side of the business. Using information stored in the central database it should rapidly speed up the time it takes to process a claim and significantly reduce errors.

Magnus says: "If you have data entry once it significantly reduces errors and cost. I have heard of one broker who photocopied a policy document 40 times. This is just unbelievable."

The business model put together by Xchanging estimates a saving to the market of up to £70m per year spread across brokers, the Lloyds market and IUA companies.

If the Market Reform Group figures are correct the investment needed to make the idea a reality should be the same - £70m.

But for this to happen, explains Magnus, it is not so much Xchanging as some of the major players in the market who have to act.

He says: "There are a lot of wins to be had. Facilitating e-connectivity is not a huge money-spinner for us.

"If it was approved we would be looking at the end of 2004 for it all to come online.
"But there are one or two players in the London market who are holding this up and they need to jump on board as soon as possible."