Electronic dreams

After the Kinnect debacle, the London market is under threat, but it can survive and prosper by updating its business model in response to ongoing challenges. That is one of the conclusions to be drawn from a survey of senior executives from Lloyd's companies and brokers undertaken by Microsoft and SunGard.

Take a look at the figures for those who think Lloyd's is under threat. Asked: "Is the London market under threat?" 55% agreed. And probe a bit deeper, many of the 45% who disagree that the market is under threat still have strong concerns about the future.

About half of the interviewees - 52% - saw Bermuda as a current threat with 21% citing it as "strong". In addition, a further 36% saw it as an "emerging" threat. Overseas competition was cited as a threat by three quarters of the sample.

Steven Haasz, Lloyd's director of change management and human resources, says: "It is not surprising in a global marketplace that businesses are setting up new ventures in different places, but those Lloyd's players setting up in Bermuda are certainly not leaving the market - in fact they are increasing their Lloyd's presence."

It is when the survey covers operating costs in London that temperatures really start to rise. In all, 88% see them as a threat with half of the interviewees regarding them as "strong". Among the comments made by those interviewed were: "Archaic systems." "Lack of modernisation." "Inability to deliver technology solutions." "Failure of Lloyd's and the rest of the market to work as a combined market."

To quote one senior executive: "The London market distribution model is both a strength and a weakness. It needs updating in response to threats from Bermuda and other centres."

This section of the survey also contained positives. Fewer than a third of executives believe that a subscription market is inherently less efficient than conventional insurance.

The reason for undertaking the survey was to analyse how the Lloyd's market felt about reaching contact certainty requirements.

"We were keen to get a reality check on recent statistics used to show that the drive to achieve 85% contract certainty by the end of the year is well on track. On the whole, the community shares this optimism," says Bart Patrick, global reinsurance practice manager at SunGard iworks.

Sixty three percent of interviewees were either "totally" or "reasonably" confident that the market would achieve its target, with only 12% saying "very little chance". But when asked about their own operation, however, those interviewed became extremely optimistic, with 94% expressing confidence.

And how are they achieving contract certainty? "Surprisingly, perhaps, more than three quarters of executives thought IT had at least a 'substantial' role, of whom 20% considered it to be 'pivotal'," says Patrick.

A number of commentators and observers, including the FSA, have said that achieving certainty is mostly about business process and behaviour. "This may be true enough, but clearly technology is important too," says Patrick.

Regulation complaints
Some other findings were also surprising. There have been tumultuous complaints about the level of regulation in London. Yet 60% of the interviewed sample thought it "about right" with fewer than 5% disagreeing strongly with this proposition. One individual even thought there should be more regulation.

Having said that, the mood tended to be one of resigned acceptance rather than enthusiasm over regulation. "We must point out that there were many complaints about over-regulation and lack of flexibility. Even from one or two of those who supported the regime overall," says Patrick.

Among the comments received were: "We just have to deal with it." "Necessary evil." "Impacts on the efficiency of the broker."

Nearly half the sample - 47.5% - described the costs of compliance as "substantial".

Looking to the future, there can be no doubt that most senior market practitioners see electronic trading as a key issue (see box).

Patrick says: "It is important to stress that there is a range of attitudes in the market on this emotive subject, with one or two voices suggesting that electronic trading would be a retrograde step.

"As one broker pointed out, London's strength is in its face-to-face dealings. He considered it to be the most efficient way to do business. Another expressed a view, which some of us thought had disappeared in the previous century, that 'we've been trading without it perfectly well for 300 years'."

Many more people, nonetheless, spoke of London losing business - rapidly or slowly, depending on the individual - without electronic trading. The overwhelming view is that it is vital to the market's medium-term competitiveness and ability to do business efficiently and cost-effectively.

Achieving it will clearly be difficult. In many people's view, even those who are personally enthusiastic, the failure of initiatives such as Kinnect and EPS have clearly generated scepticism. "It should be a process of natural evolution," said one. "Let's not jump the gun and waste money as we have in the past," said another.

Others, though, were more forthright about the need to get action, with one suggesting that the FSA might have to intervene. "Whatever your view, electronic trading will be with us sooner or later if most of our panel are to be believed: 15% thought within two years; 49% within two to five years and 20% within five to 10 years," says Patrick.

Overall, these findings reinforce the view that there is no need to be despondent about the London market, but that complacency would be fatal.

Haasz says: "There is no room for complacency. The insurance industry is becoming increasingly competitive, people have greater choice of where to do business, and there is no God-given right for us to exist."

Patrick concurs: "The market's fate lies in its own hands. If it can adopt a new business model that delivers lower costs and a faster trading environment, then, in the view of the great majority of our senior executives, the future should be healthy.

"Furthermore, the contract certainty initiative suggests that, when it really pulls out the stops, the market can rectify apparently entrenched weaknesses." IT

Question: How important is electronic trading to the future of the London market?
Unimportant 4%
Moderately important 22%
Important 37%
Vital to survival 37%