Anthony Hilton says the value in placing risks relies on the knowledge of a few middlemen, but the internet has the power and access to change all that
It has become quite commonplace to predict that the growing use of the internet will ultimately mean the end of brokers. The suggestion is that just as travel agents are being squeezed by people buying their airline tickets direct from the airline carrier, so will brokers be squeezed by customers going direct to the insurance carrier.
To some extent, of course, it is already happening in personal lines and motor, but just as travel agents can still make a good living from planning bespoke travel arrangements for discerning customers, so too can brokers once they move away from the commoditised lines of business.
They really just have to make sure that the service they offer adds easily discernible value which the client can appreciate.
What is much more unusual however is the thesis that the insurance underwriter could be disintermediated so that the insured would go direct to those willing to risk capital by providing cover.
It seems far fetched but just how this could happen was outlined at a conference a few weeks ago by Tim Jones, one of the most able and experienced people in London in the field of banking technology, who has now joined the highly respected Centre for the Study of Financial Innovation (CSFI) think tank.
He took as his starting point a book called The Wealth of Networks written by a Yale professor and meant as a deliberate echo of The Wealth of Nations.
For just as Adam Smith's work created an intellectual framework for capitalism and the rise of the modern company, so this book seeks to show how the internet is making it possible for informal networks to create such economic power that they replace or displace companies.
Wikipedia is the most obvious example. It is a development which has basically wiped out that branch of the publishing industry which produces encyclopaedias but which in essence just happened. It has no shareholders, no capital, no board of directors but a huge economic impact.
The parallel, as far as insurance is concerned, is Betfair, the online gambling site where participants bet against each other. Some people ask for odds on, for example, the result of a football match while it is in progress, or the chances of an England cricketer in full flow getting to his century.
Others supply the odds and take the bet. there is no bookmaker in the middle to price the trade and bring both sides of the bet together. The only issue is secure payment between counter-parties who do not know each other and in this case it is solved by credit cards and deposits.
The insurance model would simply require the owner of a risk offering it on the net, probably with a suggested price to see if there were any takers, or with a request that someone out there makes an offer.
The probability is that like-minded individuals interested in this business would form sub networks specialising in different categories of risk – motor, cargo, property – sliced and diced to as much specialism as the market could bear, and probably make an offer as a team.
Agreed it does sound far fetched and ignoring the complexity and asymmetry of information of most insurance contracts, but what makes the analysis intriguing is that the model existed before the internet age in the form of Lloyd's syndicates.
What were these but groups of individuals with capital willing to risk it on insurance. The syndicate was the social network of the pre-internet age.
Who knows whether or not this will happen in anything like the form described. The bigger point is that one can forward similar theories about other areas of the financial markets – why for example should not all stocks and bonds be put on eBay rather than go through a stock exchange?
The picture which emerges is one of an industry which is potentially very exposed to disruptive technologies because so much of what happens in financial services is centred around middle men who have the knowledge to know whom to access for what deal.
If the internet makes its access available to all the industry, potentially this has serious consequences. This is doubly the case because while financial services spend a fortune on technology and IT they do so without embracing re-engineering.
Though it is loathe to admit it, the industry does well out of inefficiencies – it allows the practitioners to charge more for their services, whether they be fund managers, stock brokers, investment bankers or insurance professionals. So the financial shock to many participants from these disruptive technologies will be very serious indeed.
In short, the near future will be much like now only a bit more so; but a decade or more ahead it may well be a totally different business world. IT
Anthony Hilton is financial editor of the London Evening Standard
