EY Specialty Journal: Insights into a changing market ... · PDF fileWelcome to the 2016...

Specialty JournalInsights into a changing market

November 2016

2 Specialty Journal November 2016

WelcomeWelcome to the 2016 edition of the EY Specialty Journal. This publication shares EY’s insight on the Specialist Insurance and Reinsurance Market.

It has been an eventful year since the last edition. The UK has witnessed the vote to leave the European Union (EU). Contingency plans, which few expected to use, are being dusted off and put into action. The insurance market has seen Hurricane Matthew, the Louisiana floods, Canadian fires, the TalkTalk cyber breach and Hanjin Shipping being declared bankrupt. The market remains increasingly competitive and a number of initiatives are being undertaken both within companies and across the London Market to improve service and address expense ratios.

Commenting on many of these areas, I am delighted that our guest interview in this edition is Charles Philipps, CEO of MS Amlin. Charles shares his views on learning lessons from the past as well as taking advantage of the huge opportunities presented by technological changes, such as the advent of blockchain.

This edition also includes Ben Reid, the seconded CEO of the London Market Group (LMG), providing insights into life at the LMG and its key priorities to support the success of the London Market. We also have updates on capital optimisation and Brexit, cyber, portfolio segmentation, automation, M&A, and the regulatory agenda.

We hope you enjoy reading the publication and please don’t hesitate to contact any member of the team if you have any questions on items raised in this publication.

Andy WorthUK Specialty Market Lead [email protected]

3Specialty Journal November 2016

Contents4 Cyber insurance: a growing part of the

Specialty MarketCyber risk is ever changing.

7 Catching its breath: the 2016 M&A landscapeWhat is next for the Specialty M&A Market?

12 Interview with Charles Philipps, CEO, MS AmlinCharles shares his thoughts on the MS Amlin transaction, current market conditions, technology and disruption.

17 Capital allocation, industry structure and BrexitFactors influencing the optimal structure for specialty firms.

20 Raising the bar: how to adapt to the regulatory focus on delegated authoritiesDelegated authorities are a significant component of the global Specialty Market.

23 Life at the London Market GroupBen Reid shares his experience as CEO of the London Market Group.

25 Matching service to customer valueChallenging traditional approaches is a real opportunity for the London Market.

28 Automation and the Specialty Market: natural bedfellows?A vision of streamlined pre-bind, risk placement, post-bind and claims interactions.


Cyber insurance: a growing part of the Specialty MarketBy Cheryl Martin


“ Whether or not such attacks reach the public gaze, the fact remains that this is an important, and growing, part of the Specialty Market.”

By the end of 2018, the value of cyber insurance policies underwritten in the UK will be some £7b, according to Lloyd’s of London. And London could be — and should be — the centre for cyber insurance. Indeed, cyber seems to be the hot topic for a swathe of specialty insurers, and hardly a week goes by without news or speculation about perceived — or actual — cyber attacks on a range of businesses.

Incidents such as the Bangladesh Bank heist, the J.P. Morgan (JPM) data breach and TalkTalk’s cyber attack in autumn 2015 are some of the most high profile that have been reported in recent years with TalkTalk generating what is commonly understood to be one of the largest claims to hit the London Market to date (see page 6). However, it’s important to have a sense of perspective. Although these attacks have generated a substantive amount of media coverage, one must realise that these incidents also happen to a swathe of companies on a daily basis, albeit on a smaller scale and without necessarily making the headlines.

Whether or not such attacks reach the public gaze, the fact remains that this is an important, and growing, part of the Specialty Market — and, crucially, it’s one that is transforming as clients change their buying patterns and the wider sector attempts to move to a more portal-type view. Questions that our clients are now regularly asking relate not to what happens if, but when, they are compromised, while for customers, such questions include

to the extent of cover included. Do they only cover their laptop or smartphone and related data, or is there a broader concept of personal identity or reputational harm involved?

From the specialty underwriters’ point of view, however, it’s clear that there’s some work that still needs to be done here, especially with regard to truly understanding potential exposures. The crux of the matter is that the market is still fairly immature, with some underwriters on top of the risks they are exposed to, and others not. The insurance sector is starting to bring out packages offering cover for relatively low levels — cyber insurance for £40 per month for a customer is not uncommon — but in general, there’s still a way to go before the market is able to reach a mature and risk-accepted pricing point. The market will learn from a few more incidents such as JPM, the Bangladesh Bank and TalkTalk to work through the processes and implications of such attacks.

Part of the problem here is that cyber risk is ever changing. What hits one organisation today will not necessarily hit another in the future. And the problem is compounded because we don’t have the historic data sets for cyber attacks as we do for physical risks such as fire, theft and building damage. So a degree of maturity, in part founded on a historic claims experience, is needed. After all, cyber risks aren’t linear. Until they occur, we don’t know their size and implications.


TalkTalk: Cyber moves up the scaleIf cyber insurance underwriters in the Specialty Market had any reason for complacency in the run up to the TalkTalk attack last autumn, they would not have done so afterwards. Insurers across the London cyber sector received a clear wake-up call following the hacking attack on the company, and should also consider the lessons learned from other global events.

Although details have not been disclosed, there are suggestions that TalkTalk could generate one of the largest cyber claims to date under an errors and omissions policy that incorporated cyber and was placed into the London Market.

TalkTalk released official figures based on an internal investigation, revealing that some 20,000 bank account numbers and 28,000 partially obscured credit card details were accessed. The investigation also showed that 1.2m customer email addresses, names and phone numbers were accessed. TalkTalk has subsequently confirmed it lost 101,000 customers and suffered costs of £60m as a result of the incident.

Investigations into this and other high-profile cases will provide the basis for many future case studies of the cyber impact on overall business operational requirements.

Great expectationsManaging the expectations of clients is also important. In a recent EY survey of 1,755 global organisations, 55% said the biggest risk they faced related to staff, with malicious employees and the potential for cyber attacks a part of this picture. So the extent of the threat is understood, but do clients going to the Specialty Market for cyber cover actually understand the precise risks they are trying to mitigate? The regulators are becoming important here and beginning to demand that large firms or institutions take out some form of cyber insurance in order to offset losses in the event of an attack — but it’s vital that clients know what they are buying. After all, not all cyber policies were created equal.

Yes, the cyber insurance market is a difficult one for specialty writers at present, not least because it remains relatively uncharted and unpredictable. But that’s no reason to curb our enthusiasm. On the contrary, if we can become more intelligent in our assessment of potential risks and more accurate with regard to pricing points, we can not only better protect underwriters, but also the clients.

Cheryl MartinPartner, EY UK LLP [email protected]


Catching its breath: the 2016 M&A landscapeBy Robert Bruce and Richard Battersby


After the spate of mergers and acquisitions in the (re)insurance market last year, 2016 could really only go one way, so it’s hardly a surprise that we’ve seen fewer transactions taking place on quite the same scale. Indeed, while 2015 saw a significant number of large transactions, including the property and casualty (P&C) insurance market’s largest ever transaction in the form of ACE’s bill-topping US$28.3b acquisition of US group Chubb, 2016 has been relatively quiet.

Macroeconomic and political uncertaintyWhile broader market dynamics still present a significant challenge to specialty (re)insurers, there has been an undeniable shift in the political and economic landscape following the results of the UK’s referendum to leave the European Union (EU). Uncertainties surrounding Brexit in relation to both its implications and the timescale for implementation have increased financial markets’ volatility and are affecting the insurance market as a whole; in particular, the response of the Lloyd’s market and its ability to passport into the EU will have an impact on its relative strategic attractiveness for international acquirers. This situation is compounded by upcoming elections in the US, Germany and France, amongst others, which are creating a degree of uncertainty in both the European markets and in the US, forcing some potential acquirers to pause their strategic thinking while these events play out.

With this in mind, it’s not surprising that the volume of inbound M&A activity into the London Market has declined. One of the hallmarks of 2015 was the level of activity being driven out of the Asia-Pacific region, with Japanese insurance groups in particular accounting for 5 of the top 10 deals in the year. Deals such as Mitsui Sumitomo’s US$5.3b takeover of Amlin and Tokio Marine’s US$7.5b purchase of HCC were both transformational and examples of Japanese companies looking to invest in mature UK

Chart oneRecent specialty transaction multiples have averaged 1.4x — 1.5x, demonstrating the demand for Specialty insurers, particularly those with Lloyd’s platforms

History of selected transactions (price\tangible book value)

Source: SNL; EY analysis 2016. Ascot multiple as per Insurance Insider.

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and US markets. In fact, during 2015, Japanese insurers invested US$27.3b in acquiring North American and European insurers, signalling a clear mandate for international expansion, driven largely by the low cost of capital and a lack of opportunity to generate returns in a domestic market with few growth prospects. That phenomenon has not changed as demonstrated by the recent announcements of the proposed acquisition of Endurance by Sompo Holdings. Looking forward it is understandable in the short-term that the focus is on the integration and stabilisation of existing acquisitions, we can expect further activity generated from the Far East once the political situation stabilises.

Competitive pressures remainThe Specialty Market remains very competitive, with the ongoing rate softening across most commercial lines and regions, placing further pressure on margins. Furthermore, the continuing outlook for low investment yields has been compounded by the uncertain political environment and, consequently, insurers are being forced to look at every potential way to generate growth and improve returns on capital. Implementing an effective M&A strategy is one way of achieving this, and many boards will closely consider both acquisitions and divestments to navigate this stage of the cycle. This can be facilitated by surplus capital established after several years of relatively low CAT activity.

Deploying that capital into increasingly competitive existing lines of business is becoming harder to achieve while maintaining underwriting discipline. This is at a time when the need for scale is increasingly important in the specialty sector.

Through the acquisition of products and geographical capabilities, insurers are able to diversify their underwriting portfolio and establish immediate market share, which is equally important. There continues to be a drive to achieve growth in new areas of capability, such as distribution, wider insurance consulting and risk management, and technology.


With pressure on rates and investment return, insurers are naturally looking at their cost base and ways to reduce the expense ratio. A number of business models will not be sustainable unless management teams can find ways to achieve significant reductions in ongoing expenses. This is leading many groups to seek enhanced margins through merger synergies, which has been a significant component of a number of recent deals. Similarly, investments in technology should transform all areas of the insurance value chain, and will ultimately make insurers more efficient and nimble. Expense management and rationalisation are also driving groups to consider divestment as a tool to achieve overall simplification and expense efficiency. An example of this is the recent announcements coming out of AIG about the divestment of a number of its divisions, including its Lloyd’s platform Ascot which has just been sold to the Canada Pension Plan Investment Board (CPPIB) for a rumoured valuation multiple of 1.5x to 1.6x book value.

The ongoing focus on enhancing return on capital naturally leads insurers to examine ways to optimise their capital base. The abundance of third-party capital in the market has allowed management teams to reconsider their approach to risk transfer and protection through the use of cheaper, more innovative reinsurance, structured insurance solutions and other risk transfer mechanisms. Others recognise the opportunity to enhance their own reinsurance capabilities, and have either established or acquired insurance-linked securities managers.

It is the capital leverage of writing business on the Lloyd’s platform that makes them such attractive acquisition targets and why there has been so much M&A activity over the last five years. Indeed, while underwriting expertise and access to global insurance markets through its brand and licences are also attractive attributes of the Lloyd’s market, the ability to enhance returns by leveraging the Lloyd’s rating and capital base is the principal attraction.

As chart one demonstrates, this has also played out in terms of the valuations ascribed to operators with Lloyd’s platforms. Over the last few years, the average price paid for a specialty carrier has been 1.4x to 1.5x the tangible book value, while those with a Lloyd’s operation have generally commanded a premium to that. This was demonstrated by the 2.3x valuation placed on Amlin by Mitsui Sumitomo.

Higher sustained returnsThe public markets also recognise the relative attractions of writing business through Lloyd’s. UK-listed specialty insurers have traditionally traded at a premium to their US-listed peers; both Beazley and Hiscox are currently trading at multiples well in excess of 2x the historical tangible book value.

“ The Specialty Market remains very competitive, with the ongoing rate softening across most commercial lines and regions, placing further pressure on margins.”


Why is this the case? Principally, it’s because UK entities have consistently delivered better returns than their US counterparts. As chart three shows, UK players have delivered, on average, a 15% return on equity (ROE) from 2012 to 2015, which compares favourably with the 10% delivered by those listed in the US. There is a strong correlation between ROE and the value investors place on a stock.

But the quality of the earnings is also important. Breaking down this historical ROE in chart three, we can see that the capital and underwriting leverage discussed earlier makes up four percentage points of the difference. A further three percentage points is down to the underwriting margin; Lloyd’s insurers have generated a greater proportion of their profits from underwriting, while US-listed players rely more heavily on investment return. This can be put down, in part, to the relatively conservative investment management strategies of most Lloyd’s insurers and the fact that US investors are typically more accepting of management teams taking some risk on the asset side of the balance sheet.

What’s next for the Specialty M&A market?What this analysis shows is that, while conditions in the insurance markets continue to point towards further M&A activity, macroeconomic and political uncertainty may subdue activity for the remainder of 2016. Furthermore, the valuations currently being ascribed to specialty carriers restrict the number of realistic buyers — who can afford to pay close to three times the tangible book value that some investors may require? The list is limited.

Chart twoAverage ROE between UK-listed and US-listed entities

Source: SNL; EY analysis 2016

NB: returns based on comprehensive income, in order to include MTM movements on a more consistent basis

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“ There is potentially plenty of institutional capital ready to be redeployed into the sector by an educated investor base that understands the attractions of the market.”

This situation is exacerbated by the fact that while the interest rate environment remains as it is, institutions will take some convincing to receive cash in return for shares in the UK that are typically yielding in excess of five per cent after special dividends. More likely to happen are further mergers in the US and Bermuda markets, where carriers look to gain scale and relevance in increasingly competitive environments. Other Boards will be looking with interest at how the hurricane season transpires before making any other further strategic decisions.

There has been a clear uptick in the level of transaction activity among speciality insurers recently with announcements of the proposed acquisition of Endurance by Sompo Holdings and Ascot by the Canada Pension Plan Investment Board (CPPIB) as well as the aborted Markel and Allied World tie up, and rumours around potential suitors for Ariel Re. Following a relatively light period of M&A in the sector in recent months there are signs that activity is starting to pick up again.


Richard BattersbyPartner, EY UK LLP [email protected]

Robert BruceExecutive Director, EY UK LLP [email protected]


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Chart three Result drivers: 2012-15 average ROE comparison between UK-listed insurers and US-listed insurers

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Current valuations have restricted the part that private equity can play. While private equity players and other non-traditional third-party capital have entered the market in a significant way, it has typically been through the less traditional routes presented by the capital markets. This could lead to further consolidation and diversification by players to ensure access to potentially ‘harder’ markets, if and when such an event occurs. Similarly, carriers are looking at alternative ways to access the Lloyd’s market; this year has seen a number of new syndicates backed by international insurers and the creation of partnerships between established Lloyd’s operations and ILS players. This results in access to the market without paying the goodwill.

While private equity will continue to be a source of capital for the Specialty Market, our analysis highlights that, in the UK in particular, the number of listed insurers has reduced considerably, with Beazley, Hiscox, Lancashire and Novae the only remaining listed Lloyd’s players. The non-life sector has traditionally been well supported by the public markets, especially given the historical returns it has delivered, combined with a track record of special dividend payments that have generated very attractive yields for investors. This can be seen in chart four, which shows that over the last five years listed Lloyd’s insurers have delivered a Total Shareholder Return (TSR) well in excess of both other listed international insurers and the broader FTSE 350. Furthermore, current opportunities in the reinsurance markets discussed above have allowed carriers to reduce, to some degree, the traditional volatility of earnings associated with non-life insurers, which enhances the investment proposition.

Given the recent capital returned to investors through the sales of Catlin, Brit and Amlin, there is potentially plenty of institutional capital ready to be redeployed into the sector by an educated investor base that understands the attractions of the market (even in current market conditions) and has traditionally reflected that in the valuation it ascribes. This should provide a credible alternative to both trade sale and private equity as we move into 2017.


Interview with Charles Philipps, CEO, MS AmlinBy Robert Bruce

Following its takeover by Mitsui Sumitomo (MS) in one of the biggest deals of 2015, Robert Bruce, Executive Director at EY, talks to Lloyd’s longest-standing CEO, Charles Philipps of MS Amlin, about life beyond the public markets, avoiding a return to the late 90s and the possibilities offered by blockchain technology for underwriters.


Does it feel any different working for MS Amlin? Of course it does. We have a single owner rather than a diversified shareholder register. But more importantly, I believe that what Mitsui Sumitomo Insurance (MSI) does to our future in terms of long-term security for all our stakeholders, and especially for employees and clients, is very powerful. There is no shortage of hard work that’s required, but the synergies that are possible with the wider MSI group are huge. The fact that we are integrating its Lloyd’s syndicate and its company, MS Frontier Re, is really very closely aligned with the old Amlin strategy in terms of where it was heading. It moves us on quite dramatically in that regard. I think it provides greater security and a more exciting future for the employees.

We’ve always had a very high regard for MSI; we’ve traded with the company as a reinsurer for many years, and it wants MS Amlin to assist it in becoming a leading global financial services company. That is a very exciting proposition for us. The Japanese are known for their long-term thinking, and I think that will be very good for MS Amlin, particularly given the amount of change that we expect to happen in our industry over the next 5 to 10 years.

MSI paid a very good price for the company, and I am determined to ensure it reaps the rewards and the deal turns out to be a very good investment.

Do you miss life as a UK-listed company?We enjoyed some good relationships with long-term shareholders, and they were helpful relationships in terms of the ability to discuss strategy, in as much as they were sourcing capital for the company. We’ve always maintained a very strong ethos of creating value for shareholders, and I think that matters more than simply being a listed company. So am I really missing it? I would say no, as we have more time to concentrate on our strategy and our business, and I believe it will give us a greater opportunity to think and invest for the long term … which is not always possible as a public company, as some investors tend to take a short-term view.

What does the future look like for MS Amlin and how do you intend to get there? Are you excited about it?Integrating the business will move us on two or possibly three years strategically. On top of that, we see the potential for meaningful synergies with other parts of the group. So, in Southeast Asia, for example, MSI is the number one non-life insurer, but it doesn’t really provide the market there with specialty products. It has very strong distribution links and know-how of the region, but we have the know-how in specialty lines. Our underwriting teams are currently in discussions on a selective basis with their teams in Malaysia and Singapore, working out where the biggest prizes are from the point of view of being able to provide specialty products through their distribution channels. That opens up a whole new set of opportunities which wouldn’t have been available previously.

The MS transaction

“ The whole area of ‘big data’ is going to be important in allowing people to price with greater granularity than they have done in the past.”


What do you see as the current market trends that are important to MS Amlin and the Lloyd’s market? You’ve got a combination of trends. You have the cycle, which is likely to be flatter than it has been historically. That’s all about capital availability and the speed with which it can enter the market — whether it’s from traditional investors or ILS/capital markets. What that means is that there is a real importance on technical pricing, so the insurers who will be successful in the future will focus more on client segmentation and access to data. The whole area of “big data” is going to be important in allowing people to price with greater granularity than they have done in the past.

Also, we’ve obviously got lower investment returns, and I think we all as an industry need to accept that it is likely to remain that way for an extended period of time. Additionally, I think there are some significant risks to the financial system and the geopolitical landscape that will result in continued uncertainty, and that in itself will potentially have an impact on investment volatility and returns.

We’ve always approached our investment management from a risk perspective, and I don’t see that changing … so often, people get suckered into something because it seems too good — but if it is, then there’s probably a downside to it somewhere!

Is the Lloyd’s market as a whole responding appropriately to current market conditions? Where should it focus its attentions? Does history suggest that getting a coordinated approach from the market may be too challenging?We’re clearly in a soft phase of the market; terms and conditions are widening, and there are thinner margins. From a Lloyd’s perspective, it needs to avoid a repeat of

the enormity of the losses suffered in the late 1990s and early 2000s, as that would be a huge setback to its reputation. Then, there could be quite a loss of confidence.

I was involved as a member of council at a time when the Franchise Performance Management Board was put in place, and that has stood Lloyd’s in great stead and been an absolute positive, (Editor’s note: Jon Hancock has been appointed into this role since the interview). The focus really does need to be on maintaining discipline, and sound and prudent underwriting in the marketplace, so that the Central Fund is not put at risk. Lower margins mean an enhanced risk of a series of natural catastrophes or underpriced attritional risk doing damage.

The cost of doing business at Lloyd’s is as high as ever, with an expense ratio pushing 40%. The Lloyd’s Target Operating Model (TOM) is definitely a step in the right direction. I think it’s imperative that Lloyd’s sees it through. However, I suspect that, within a fairly short period of time, there will be other technologies which will overtake it. Inga Beale, CEO of Lloyd’s of London is doing a good job of steering the TOM and keeping it focused, which is absolutely critical. Relative to the days of Kinnect, which are engraved on our minds, the major brokers do seem to be on side and in sync. For me, if you’re going to have a market solution, you absolutely need a critical mass of brokers to be with it in a concerted and joined-up way — otherwise, there is a risk of a lot of time, money and effort being expended, but nothing happening at the end of the day.

As an ILS manager, do you have a view on efforts by the Government and industry to attract more ILS capital to London?Our Leadenhall team is very supportive of the Government’s efforts in this regard. If you say to yourself that London has very meaningful position in the global

reinsurance market, then ILS sits so well beside it that it would be a huge shame for the management of ILS not to be attracted to London. What’s absolutely critical is clarity from the Government and HMRC around the exemption that is provided to other asset classes in terms of management of foreign assets and its applicability to ILS. It seems to me that this is quite a simple clarification to make.

Has the acquisition of Leadenhall achieved what you wanted?From the very start of 2008, what we wanted to achieve with Leadenhall was for it to focus on being regarded as a quality player within the ILS space. Our belief is that, if you focus on quality, that’s what is going to stand you in good stead in the long term. We increased our ownership of Leadenhall from 40% to 75% in 2014, and that really has given us new impetus with regards to synergies and cooperation between our traditional reinsurance business and Leadenhall. There’s a massive cooperation between the respective teams, and that’s helping MS Amlin in its overall reinsurance franchise, while bringing new opportunities to Leadenhall and its clients. We have an ambition for MS Amlin to become a global top 10 non-life reinsurer, and we see Leadenhall as a very important part of that.

I would say it’s been very successful to date; it’s working very well and I want it to continue to do so. We think that the whole question of third-party capital is extremely relevant, and have used sidecars in Lloyd’s ourselves as a flexible tool. Working with Leadenhall and our reinsurance team, there may well come a time when we look at a Lloyd’s solution, but it’s not top of our list.

Current market conditions


How is technology driving change across the industry? I think we’re at a massive inflection point. To date, the most meaningful changes have been around connectivity, whether direct to clients, or through brokers or aggregators, and that, in industry terms, has clearly impacted mostly personal lines, which isn’t where MS Amlin is dominant. It is increasingly impacting SMEs, which is where we are an insurer. At the same time, there’s been the advent of cyber risk, which is growing massively by the day, and is linked to that whole question of connectivity.

I think that is just the tip of the iceberg. You look at the future, and the whole question of big data, the internet of things, robotics, blockchain and artificial intelligence is highly significant and could impact the industry considerably.

Historically, it would be hard to say that the industry has been modernist and that it has maximised the use of technology to be as efficient as it could be. But these technologies could change that, allowing the companies that embrace them to improve both the economics of the insurance business and also their client

proposition. An example of that is data and the way in which it can be harnessed to provide better technical pricing and value-added services to help clients really understand the risk they are facing.

Look at blockchain technology, for example, and combine that with the internet of things from an insurance perspective. Look at a company that wants to track every single container it owns, so it knows what’s in them and where they are. Now look at Tianjin last year, where the trouble for underwriters was that they had no idea of accumulation risk because they had no idea of what was where or when — or what was in the containers! So if you could use blockchain to create an absolute version of the truth, and if the client was willing to feed this in, we could provide a far more attractive product which would probably be significantly cheaper. It would enable us to manage our risk a little better, which would drive the lower price.

But it’s early days. We, like many others, need to get our minds round these issues. I think one of the biggest challenges will be to get sufficient critical mass — of clients as well as insurer interests.

Technology and digital disruption in the insurance industry


How is MS Amlin embracing technology?For our SME, we have a number of initiatives going which are focused on improving our connectivity, whether that be with brokers or MGAs, and are aimed at making our trading relationships faster and more efficient.

We’ve also created an internal group called MS Amlin Edge, which is fairly young and has a team of eight people. What we’re doing with the help of the likes of EY is really trying to understand the landscape and trying to get our minds around the direction of travel and where we think this is going to take the industry over the next three to five years. It’s a think tank at the moment, but it will evolve into an experimentation tank, most likely. We’re currently contemplating a proof of concept on how robotics can be used to manage a number of processes within our business.

How will London remain competitive if technology isn’t embraced? Is London behind the rest of the global market?Whether London is behind or ahead is hard to say, as things are moving so fast. There is definitely a handful of companies that have been investing and looking at this space for longer than others, and there are some that haven’t even begun the thought process yet.

What are your thoughts on talent and what (re)insurers are doing to attract, retain and nurture the insurers of the future?We’re focused on making MS Amlin an insurer of choice, and critical to that is the question of modernisation. As much as you can have a strong talent pool today, tomorrow is about modernisation. When we get to the next generation, you won’t succeed in attracting them unless you are in sync with some of their thoughts about the future.

There has been a huge cultural shift in the Lloyd’s and London Market over the past 15 years. When I first entered into it in 1997, if you weren’t an underwriter, you were considered to be a complete underling. The only important thing was banging your line down on a risk. Forget collecting the premium; forget that regulation has gone through the roof … what’s been absolutely critical is to grow not only your underwriting talent, but also your general management talent.

Is the reliance on modelling suppressing underwriting skills?I think models are really important. You’ve got to use what modelling insight you have. We have developed our own distinct modelling capability in addition to using the likes of RMS. Our philosophy is that we do not over-rely on the models to the extent they make you blind to the real risk, or the accumulation of risk. They are there, but you still have to have the exercise of underwriting judgement.

How does the MS Amlin Academy fit in to the vision?We started it in 2000, initially as a training and development programme; more recently, we created a talent board — a group of senior people focused on what we’re doing about our talent pool.

The academy is absolutely critical to give us the ability to manage a larger business, ensuring that our underwriters remain at the cutting edge, and that we are the employer of choice.

Talent

Robert BruceExecutive Director, EY UK LLP [email protected]


Capital allocation, industry structure and BrexitBy Dan Beard and Simon Woods


The specialty insurance sector has fostered innovation in capital structures through insurance cycles, investment market shocks and catastrophic losses. In the current challenging market conditions, we see a number of factors which are driving the latest round of innovation and change. The outcome of the referendum for Britain to leave the European Union (EU) adds to the challenges for the sector as a whole and in particular, the London Market.

We review the factors which influence the optimal structure for specialty firms, with a focus on structural issues, and the optimal use and location of capital. We focus specifically on some of the implications of the vote to leave the EU and look ahead to how the current situation could play out.

A flood of hungry moneyAcross all asset classes, the extraordinary monetary policy actions of global central banks have motivated a hunt for higher-yielding investments. Traditional (re)insurance company operations, as well as securitisation structures, and collaboration between underwriters and financial sponsors, provide access to the specialty sector for capital. Alongside strong balance sheets for traditional participants, this new capital continues to drive down underwriting returns, albeit at a slowing pace in many segments of the market.

The flow of capital into ’hedge fund re‘ vehicles of underwriting long-tailed business to generate float to support higher-yielding investment strategies faces some headwinds, due to less impressive recent returns for potential sponsor funds and strategies, and concerns from investors that this could be an increasingly crowded market, particularly where IPOs are a key driver of ultimate returns.

Further regulatory changeRecovery and resolution plans are starting to trickle down from the very largest internationally active insurance groups, and the specialty sector will not be immune from this wave of regulation. The plans encourage simplicity and reparability of operations — cutting against the push towards the risk pooling and diversification which Solvency II and other economic capital standards reward. In a similar way, although the current specification is an early draft, the international capital standards which are currently being tested limit the credit available for diversification across products and geographies through a relatively simple formulaic approach to capital setting.

A drive for efficiency and scaleAcross the market, the pressures of competition and regulatory scrutiny and cost have led to an increased focus on efficiency across the sector. Operating models are increasingly looking to robotic automation and resource optimisation to find efficiency gains. M&A transactions aimed at increasing scale provide a further platform to identify efficiencies, alongside offering brokers and customers larger lines to remain relevant in competitive syndicated placements.

BrexitThe referendum result adds uncertainty to the position of London as a specialty reinsurance centre. In our view, the risk of a seismic shift in the very near term is slim, but there are a number of considerations for the sector which influence capital and structuring.

Access to markets — the Lloyd’s market and London Market companies benefit from freedom of establishment and freedom of services provisions to trade in the EU. While there is a strong chance that these trade routes will remain open, restructuring operations to provide backup contingency arrangements and guarantee continuity of cover for demanding, sophisticated, international clients is already under way.

“ What is certain is that putting capital to best use will remain a core competency of successful specialty players — it is this expertise which will allow the sector to evolve to respond to new challenges, whichever way it turns.”


Regulatory change — while some aspects of Solvency II compliance for the sector have been a case of ’square peg, round hole’, the impact of Brexit on moving towards a regulatory environment which fits the Specialty Market better may be limited. The ‘Norwegian model’ would see UK firms subject to EU regulation with a much reduced capacity to influence it — without the Prudential Regulation Authority’s (PRA) voice at the table, the Solvency II compromise, which was implemented earlier this year, could have been significantly worse for specialty firms.

Impact on the wider UK economy — in the short term, the EY ITEM Club predicts a slowdown in the UK, alongside many other commentators. The lessons of the last financial crisis showed that the impact of a domestic recession on insurers has some tailwinds as well as headwinds. What is certain is that monetary easing will continue to compress returns on sterling assets.

Contagious referenda — a number of forward-looking executives in the sector have raised the possibility of other countries leaving the EU as a key consideration in preparing contingency plans. While this is certainly speculative, a broader EU break-up scenario would potentially have a greater impact on the Specialty Market, and the wider economy, than the eventual execution of the UK leaving the EU.

Outlook — some predictionsMany firms have set up Brexit governance and a number are developing plans to set up new entities and other structures to secure access to European business in an uncertain environment. Some firms will act in advance of formal triggers (for example, Article 50). We expect that the structures and financing will take advantage of an established structural toolkit to maintain capital efficiency.

As regards new entrants, the impact of loose monetary policy and plentiful capital is showing some signs of slowing, at least from the perspective of trading underwriters. We see a case for some continued capital coming into the sector, but this could slow rapidly if US monetary policy tightens. From a UK perspective, Brexit-related uncertainty has again loosened policy further, but this is less relevant to a US dollar-focused corner of the insurance landscape.

One growth area we have identified in our discussions with specialty firms where new capital could play a valuable role relates to structuring legacy blocks of reserves to manage any capital strain on ongoing business, including the potential for run-off deals.

ConclusionsFrom a structural perspective, the sector stands at a crossroads. Firms’ appetite to make the most of the insights and opportunities available from evermore comprehensive capital and risk models is tempered by the spectre of new regulatory requirements.

Some commentators have suggested that the industry has changed forever, while others will say that much of what drives the sector today is old strategies with new names. What is certain is that putting capital to best use will remain a core competency of successful specialty players — it is this expertise which will allow the sector to evolve to respond to new challenges, whichever way it turns.

Dan BeardDirector, EY UK LLP [email protected]

Simon WoodsPartner, EY UK LLP [email protected]


“The UK regulatory authorities have ramped up their focus on insurers’ distribution networks — in particular, delegated authorities.”

Delegated authorities (DA) are an important and increasingly significant component of the global Specialty Insurance Market, and the use of coverholders, MGAs, TPAs and other third parties continues to grow. Within Lloyd’s, there are over 4,000 coverholders worldwide, which produce one-third of all business coming into the market.

At the same time, the level of regulatory scrutiny on delegated authority arrangements has increased substantially over the last couple of years. In the UK market, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have focused on insurers’ oversight and control of their distribution networks, with a number of high-profile thematic reviews and regulatory interventions.

Raising the bar: how to adapt to the regulatory focus on delegated authoritiesBy David Sansom and Anthony Clapton


As this level of regulatory attention on delegated authority arrangements shows no signs of abating, the challenge for specialty firms is how to ensure they have in place a robust control framework over this significant part of their distribution strategy.

Ongoing regulatory scrutinyThe UK regulatory authorities have ramped up their focus on insurers’ distribution networks — in particular, delegated authorities. Last year, the FCA published findings from its thematic review of delegated authorities in the general insurance market, which found firms were not adequately managing the risks associated with delegating authority, including underwriting and claims handling. It also found weaknesses in due diligence procedures, audits and ongoing performance monitoring.

This review set a clear benchmark for how insurers should be judged by the FCA. Since its publication, the regulator has continued

to review and assess the adequacy of insurers’ delegated authority oversight and control frameworks. It has followed this up with the publication in July this year of a further review looking at principal firms and their appointed representatives in the general insurance sector. This builds on similar issues found in the delegated authority thematic review, finding further significant failings in the control and oversight of appointed representatives by their principal firms, and has resulted in the FCA taking significant action, including commissioning two section 166 Skilled Person Reviews.

Lloyd’s is also carrying out detailed reviews of managing agents against the conduct risk minimum standards which have been in place since January 2015; these have assessed whether managing agents have appropriate controls to ensure conduct risk from delegated authorities. Finally, the PRA has also looked at insurers’ governance and controls over the outsourcing of distribution and other critical business functions.

Across all of this activity is the clear expectation from regulators that insurers fully understand the products that are underwritten and distributed on their behalf by third parties. In light of this ongoing regulatory scrutiny, how should insurers respond?

Challenges for specialty insurers The length and complexity of distribution chains in the Specialty Market, and the widespread use of delegated authority arrangements, makes this a particular challenge for firms in this sector. Specialty insurers should consider the following challenges and how to address them:

► Is there an effective governance framework in place across our delegated authority framework for oversight and reporting of issues, including the Board and relevant committees?

► Is there a clear understanding in the business of who is accountable for managing the risks from our delegated portfolio?

► Do we have a robust due diligence process in place, and can we evidence that we have fully assessed all material risks — including conduct risk — when entering into a new arrangement (or renewing an existing one)?

► Do we collect the right management information (MI) from our third parties, and have we analysed and reported it in a way which enables sufficient oversight of our delegated authority business?

► Are the audits and other reviews we carry out on our coverholders and other third parties providing the right level of assurance on managing the risks, and do they add value to the business?

These challenges are not new to the industry. However, there is now a clear expectation that firms have the right processes and controls in place to address them — and can evidence this to the regulator.


Enhancing the delegated authority frameworkBased on our experience, specialty insurers should consider the following ways in which they can enhance delegated authority oversight:

► Clarify roles and responsibilities — to ensure effective governance of delegated authority arrangements, insurers should make sure there are clear accountabilities in the business and the control functions for who is responsible for delegated authority management and oversight.

► Improve the effectiveness of delegated authority teams — these teams provide the key business support required for overseeing third-party arrangements. Firms should look at the quantity and quality of their DA resources, and consider supplementing these with additional resources, including the use of managed services where appropriate.

► Enhance the delegated authority control framework — unless they have already done so, now is the time for insurers to review their delegated authority control frameworks to determine whether there are clear policies and procedures in place across the delegated authority life cycle. In particular, firms should be confident that they have a robust due diligence approach, including an effective risk assessment process for rating coverholders across the product value chain.

► Improve coverholder audits — these audits, often carried out by a panel of independent auditors, provide an essential tool for insurers to assess the process and controls in place at coverholders or other third parties. However, they may not provide sufficient assurance to principals, especially around conduct risk areas. Insurers should therefore look to improve the quality of their audits and consider the use of additional specialist audit resources to supplement their panels.

► Make better use of MI — the collection and analysis of data from coverholders, MGAs and other third parties is an ongoing challenge for the Specialty Market. As data quality continues to improve, it is important that firms consider how to make better use of the information, reporting the key metrics which the board and senior management need to oversee the delegated authority portfolio properly. As part of this, insurers should consider investing in tools and dashboards which make collating and analysing the MI more efficient.

As well as mitigating the increased regulatory risk, taking further action now to enhance the framework will also help firms to understand the potential issues in their delegated authority arrangements, which, ultimately, will lead to a more risk-based and streamlined portfolio of delegated business.

David SansomDirector, EY UK LLP [email protected]

Anthony ClaptonManager, EY UK LLP [email protected]

Managed ServicesIt’s difficult to focus on the future when you’re running to stand still.

Greater scrutiny and sweeping regulatory changes are forcing businesses to focus their attention on compliance and legacy issues rather than exploring new and exciting opportunities for investment and growth.

At the same time, the requirement to cut costs can be overwhelming. So we’ve developed Managed Services to take some of that pressure away, allowing you to concentrate on driving your business forward rather than spending time looking backwards. By teaming your existing systems with cutting-edge technology, knowledge and experience, Managed Services offers a credible way of handling many mandatory business processes efficiently and at a lower cost and sophisticated management information tools mean you can stay in control, meeting your regulatory legal requirements.

Managed Services provides the fast track while saving money and improving quality. We are experienced in a wide range of regulatory compliance areas including cover-holder due diligence reviews, independent suitability reviews and KYC compliance. We support clients with regulatory and financial reporting requirements and ongoing tax regulatory requirements.

Our professionals in our Managed Services on-shore hubs are all EY employees of graduate entry with a range of industry experience and many continue to work towards professional qualifications in relevant areas.


Life at the London Market GroupBy Benedict Reid

EY’s Benedict Reid shares his experience on his secondment as CEO of the LMG.

A key element of what I’m currently involved in is creating and promoting a growth and modernisation agenda for the London Market Group (LMG). Historically, the LMG has focused on technical issues related to market modernisation. However, with the publication of the London Matters report, which showed that the amount of business coming to London is static or shrinking, depending on the line of business, it shifted its focus to help the market respond to these wider challenges.

I’ve been here for 10 months, and my role has been to help the LMG to speak collectively for market practitioners on growth and modernisation issues. The LMG’s role is also to enhance London’s position and reputation as a centre of insurance excellence. There is no single remedy for the issues the market faces, so the LMG has created four clear work streams to address specific challenges faced by the market, each of which is mutually dependent on all the others. These are:

► Telling the London Market story

► Creating a better business environment

► Building a diverse and dynamic workforce

► Making London an easier place to do business

The first three are all about how we grow market share by attracting new buyers, developing new products and ensuring we have the right workforce for both. The last is about efficiency — there is no point in seeking growth if we can’t make doing business in London as simple and seamless as working with a local market.

This strand is the London Market Target Operating Model (TOM), a comprehensive programme of new and existing projects which has three essential aims: face-to-face negotiation supported and facilitated by electronic data capture for all steps in the process, including placing, signing, closing, claims and renewals; one-touch data capture — a global standard to allow re-use by all; and enhanced shared central services that provide common non-competitive services.

I appreciate that there have been various market-modernising initiatives over the years, some of which have failed, in part because there has perhaps not been a real urgency to deliver operational efficiency. But I really do think there is growing momentum that the TOM is a credible programme that looks across the whole insurance value chain and is already delivering improvements.

A key part of attracting new buyers is having a compelling proposition for them, so we are conducting research amongst buyers — across a spectrum of risk managers and overseas brokers — to understand what it is they think of us and want from us, so that we can build the London Market story.


BrexitThe decision to leave the European Union (EU) has some significant ramifications for the market. London has a very strong platform as the global pre-eminent insurance market, and there are a number of issues we will need to work through here. We want to maintain equivalency from a regulatory perspective, but we also want our regulators, the Financial Conduct Authority and the Prudential Regulation Authority, to be doing more. As it stands, neither of them has a role to promote the market, so lobbying by the LMG on behalf of the market in the wake of Brexit is crucial.

It should be emphasised that we appreciate that the Specialty Market is a global one, and we’re certainly not seeking to be negative about Bermuda or Switzerland in all of this. Instead, what we’re saying is that it’s great news if other specialty markets continue to grow, as it’s good for the health of the whole market.

I’m expecting to be at the LMG for about a year, in what is a very deliberate and specific investment in the market by EY. From a personal perspective, I’ve been privileged to work closely with Nicolas Aubert (Head of GB for Willis Towers Watson), Malcolm Newman (CEO of SCOR) and Inga Beale (CEO of Lloyd’s), amongst other market executives. Bringing about change in a market as large and complex as London is not without its challenges: trying to achieve consensus from so many senior people takes time and energy. But what we are doing is hugely worthwhile for the future success of the insurance market. The key aspect of the LMG’s role has been to demonstrate credibility, which we feel we have achieved. Now, we’re trying to build.

Chris Beazley will be taking over as the CEO in December and we wish him every success.

The LMG in briefThe LMG is a market-wide body, bringing together the specialist commercial (re)insurance broking and underwriting communities in London. It is supported by the International Underwriting Association of London (IUA), Lloyd’s of London, the Lloyd’s Market Association (LMA) and the London & International Insurance Brokers’ Association (LIIBA). It speaks collectively for market practitioners on growth and modernisation issues, and its aim is to build on London’s position and reputation as the global centre of insurance excellence.

Our aim is to help London retain and expand its position as a vibrant financial services sector that contributes significantly to the UK economy, and as the centre of insurance excellence with a high concentration of intellectual capital fostered by the close co-location of insurers, brokers and support services. It should be the fulcrum of insurance invention — where new solutions to meet new customer demands are developed, nurtured and delivered.

“ There is no single remedy for the issues the market faces, so the LMG has created four clear work streams to address specific challenges faced by the market, each of which is mutually dependent on all the others.”

Benedict ReidExecutive Director, EY UK LLP [email protected]


Matching service to customer valueBy Andy Worth and Douglas Plenty

The non-millennials among readers will remember how customers used to take their money out of banks. They would have to enter a building during office hours, stand in a queue and write out a cheque before being handed their notes. Banks introduced cash points to reduce the cost of this service.

The success of cashpoints is well known, but the reason for it was not predicted. While banks were focused on reducing costs, customers actually preferred this service — not only because it was available 24 hours a day, but because it removed the need to talk to anyone while taking out their money. Psychologically, customers had felt guilty about taking out their own money in front of a member of banking staff. In other words, the new service proposition was not only lower in cost, it was preferred by the customer. Now, in an increasingly digital world, customers don’t even need to go near their bank branch.

Understanding what clients really valueIn the same way, there has been an assumption in the London Market that clients demand the traditional high-touch service models which are applied across carrier’s portfolios. In fact, these approaches may no longer be appropriate or affordable for clients and carriers in the modern insurance market. Going forward, underwriters will have to understand clearly what each client segment actually values, to allow them to tailor their service proposition appropriately. This will require an extensive knowledge of their clients, the profitability of the book and the cost of providing each level of service.

“ Going forward, underwriters will have to understand clearly what each client segment actually values, to allow them to tailor their service proposition appropriately.”


There are a number of assumptions about London Market portfolios which are being challenged through fact-based portfolio analysis, the main one being that the London Market only underwrites large, complex risks with high-value premiums. The truth is, most portfolios are made up of large numbers of clients with small to mid-sized policies, with only a few high-value premium policies. The ongoing pressures of the marketplace, for both brokers and carriers, have brought an ever-increasing focus on optimising the service provided to every segment within these broad portfolios.

Impact on the key profit leversThe pressures being put on underwriting results, investment income and expense are well documented. The continued low interest rate environment means that cheap capital continues to enter the market, seeking a level of return below traditional thresholds. This has put considerable pressure on two out of the three key profit levers: underwriting result and investment income. Acting on this pressure, underwriters are leveraging portfolio analytics skills to optimise their portfolios and improve their underwriting returns. The low interest rate environment means that investment returns remain marginal. The third lever — operating expense — is being addressed at both a market-wide level, with the London Market Target Operating Model (TOM)

initiative, and within companies, which are looking at all aspects of operational expense. For example, brokers are trying to address their margin squeeze by maintaining client focus while reducing the cost of placement by standardising processes and using portfolio deals where these make sense.

Within this context, carriers have to reassess their service models. The traditional, high-touch service models mean that, in many cases, simple low-value policies are being serviced via the same processes and systems designed for complex risks, with the high cost of service that this entails. Looking at this issue just based on premium size is too simplistic; many smaller policies may be very profitable. Size is also not necessarily an accurate indicator of the complexity of the risk and the underwriting skill that needs to be applied. Few carriers really understand the cost of service, and the related profitability, of each part of their portfolios.

Tailoring service propositions to client segmentsThe route to addressing this challenge for many carriers is rigorous portfolio segmentation to allow the service to be better tailored to client needs. Figure 1 provides a simple breakdown of the segments that a London Market carrier may have to address and the trends in service propositions offered to each client type.

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Customersegment by

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carrier

Underwriting risk segment

Multi-territory risks

Wholesale risks

Large and complex risks

Multinationalprogrammes

Full service underwriting

Lower-touchunderwriting

Structured deals andportfolio facilities

Low complexity and niche risks

Delegated authorities– MGAs, cover

holders, schemes

Mid-complexity risks

Underwriting proposition Proposition features and value

High level of customer, broker and carrier co-operation with cross-border service management

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Investment in planning and obtaining accurate risk information at the start of process. Also value add services e.g., captives

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Broker driven proposition, with medium level of customer engagement

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Underwriting judgment still required but more limited than for large, complex and wholesale risks

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Broker driven proposition, with high level of customer engagement and high level of underwriter judgment

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Carriers differentiate value to customers and brokers through:►

Underwriting excellence and access to technicalunderwriters with authority

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Access to high value and innovative technical services,such as risk engineers

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Intermediary and agent driven proposition with no direct customer engagement for carriers

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Original design and governance of binders is critical given high cost of set up and impact of low quality design

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Increasing focus from regulators and requirement to demonstrate effective governance

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Value driven by niche areas to differentiate and create margin►

Broker driven proposition, with limited level of customer engagement

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Aligning customer to appropriate structured deal or portfolio (E.g., AON Client Treaty facility)

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Brokers and carriers differentiate value to customers through: ►

Portfolio underwriting skills and portfolio management expertise – similar to reinsurance

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Balance sheet scale to participate in structured portfolio►

Data and analytics to price and manage portfolio effectively ►

Figure 1: Portfolio segmentation


Andy WorthUK Specialty Insurance Lead, EY UK LLP [email protected]

Douglas PlentyDirector, EY UK LLP [email protected]

At the top end, carriers may need to provide for the requirements of large clients with risks in multiple jurisdictions, referred to as multinational clients. The cost of servicing is often ‘opaque,’ and the operational complexity across multiple teams very high, making the profitability hard to determine. The cost of service for multinational business is driven by high levels of manual data processing and avoidable basic errors. These include entering incorrect risk information at the front end of the process, leading to considerable re-work by all parties when these issues are later revealed. Leading carriers and brokers have started to address these challenges through partnering together, and with clients, to co-develop common, robust end-to-end processes and checks which deliver optimal service levels that are in the interests of all parties.

Also at the top end are the large, complex and wholesale risks at which the London Market excels when it comes to underwriting. These require technical underwriting skills and experience to meet the client’s risk requirements. Many carriers are transferring all of the admin and data entry activity away from the underwriters to allow them to focus solely on the value-added activity which is important to the customers and brokers.

The middle segment consists of risks which still require underwriting judgement, but where this must be kept to a level which balances providing appropriate capabilities for the client with a lower cost of service, reflecting the value of these policies. This is the main segment where the cost of service is proving a challenge to carriers and a new approach is needed.

The most significant trend for this level of risk complexity in recent years has been the move to portfolio placement, large facilities and structured finance deals, such as the AON Client Treaty. The impact on carriers has been a shift in servicing requirements to meet this demand. These deals require portfolio underwriting skills, similar to reinsurers, with experienced individuals who can design and manage these placement structures. As part of this design activity, there is an increasing need to leverage analytics skills to gain as much insight into the proposed portfolios as possible to support pricing. Ceded reinsurance also plays a key role in shaping the retained portfolio to support the carrier’s interests.

The deals are often placed at short notice and require carriers to mobilise appropriate portfolio pursuit teams to provide them with the best chances of success. The increasing size of these deals means that only carriers with a balance sheet of a certain scale can participate. There are some mixed views on the profitability of these deals and placement structures. One trend that most do agree on is that there will be more of them.

At the lower end, many of the smaller policies written within the market are traded through delegated authority deals. These may be MGAs, coverholder or other schemes. Typically, these arrangements focus on niche areas in order to try to differentiate and make a margin. Most of the underwriter focus is on the original deal design, structure, pricing and governance arrangements, followed by ongoing monitoring. Following new interest from the regulator, these deals are becoming increasingly costly to service after their initial inception, due to the more demanding and high servicing costs that are now involved. A new approach will be needed to deliver the right customer value with these policies, while maintaining acceptable margins.

ConclusionsEY continues to work with carriers and brokers to understand their own situation better, and to develop appropriate distribution and operating models for each of their client segments. Portfolio analysis and segmentation is crucial to inform companies how best to provide service propositions which will support the delivery of those objectives. The key driver for all of this work is to create a solution which meets business priorities, offers outcomes for every customer that meet their needs and delivers a cost-effective outcome for all parties.

Challenging traditional approaches and achieving this goal of matching service to value at every customer touchpoint is now a real opportunity for the London Market.


Automation and the Specialty Market: natural bedfellows? By Richard Archer


“ Insurers are not entirely convinced that automation and specialty insurance are natural bedfellows.”

Automation is an important topic for the Specialty Market. The vision of streamlined pre-bind, risk placement, post-bind and claims interactions across customers, intermediaries and carriers presents massive opportunities.

The topic is not new however, and when you mention the word to many of those involved in day-to-day transactional business in the market, they can recoil somewhat, as they’re not entirely convinced that automation and specialty insurance are natural bedfellows. Initiatives in the past have seen varying levels of success, and at its heart, specialty business is still a people and paper-based market.

The problem is compounded further by the underlying IT systems landscape which remains fragmented and outdated in some parts. Intermediaries and carriers have their own IT platforms which interact with centralised bureau platforms with varying levels of effectiveness.

Post-merger consolidation is also a common theme within the speciality market given the spate of recent M&A activity (ACE/Chubb, XL/Catlin, Mitsui/Amlin and Tokio Marine/Kiln). Consolidating and standardising processes and capabilities takes time.

Invariably we see a resulting set of processes that have become manually intensive. High-volume, repeatable, low-value tasks representing significant work-arounds.

A reinvigorated focus on automationNaturally, when we talk about automation we need to be specific. After all, automation comes in many different forms. Robotic Process Automation (RPA), cognitive machine-based learning and blockchain all represent investment areas in the form of proof of concepts and pilots.

Other ‘enabling’ technologies are also key — improved optical character recognition (OCR) and string-based text search help to deal with the unstructured email and paper-based world, although training takes time and still pushes out a number of manual exceptions. Other initiatives seek to learn from the retail insurance and banking sectors, and cut paper from the process altogether, providing a digital front-end that captures structured data from the outset.

When combined these investments promote a much greater level of automation, allowing ‘knowledge workers’ to focus on the important, high-value tasks. Everyone benefits, as well as the customer.

Benefits being targeted:Increased efficiency: Much has been made recently of the need to drive down expense ratios, with the consensus seeming to be that the London Market in particular is a place where the cost of doing business is still too high. Benefits can materialise through FTE reduction, print and fulfilment efficiencies, but also capacity uplift — taking lower value, high volume activities away from teams and enabling increased focus elsewhere.

Increased confidence: Automated reporting reduces the level of manual interaction and errors, which in turn will improve confidence to regulators, a subject which has become especially important given the introduction of more rigorous and detailed regulatory reporting requirements.

Improved customer engagement: Optimising the way in which transactions are documented, stored and shared across participants has always been a priority for the market, increasing the speed by which risks can be placed or claims fulfilled.


Key considerations:Investments in this area should be considered carefully. It’s about achieving a balance between important, market-wide process, and those aspects of a transaction which are specific to your business.

Although market initiatives do provide impetus for participants by driving process improvements using structured data, participants should not just wait for the market. They can drive their own process improvements in parallel across middle-office and back-office functions. Intermediaries (brokers and cover holders) here will play an important role

in driving automation and, in many ways, the intermediary channel will dictate the future direction, after all, intermediaries are trying to drive efficiency just as much as the carriers are.

However, addressing the problem of unstructured data is critical. A first step can focus on risk data for low-value, high-volume business placed via brokers and cover holders by laying out uniform data capture standards which need to be adhered to by all intermediaries.

The second step can focus on building an automation layer on top of market initiatives such as PPL, for medium-value and high-value risks. A pragmatic set of steps must be taken by all.

Figure 1: The automation radar

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1► Data capture and cleansing to support automated generation or regulatory reports► Automating real-time capture of customer complaints and MI

Lloyd’s and regulatory reporting► Automating manual and paper-based processing of risk proposal forms► Automating the process for issuing quote documents for both Lloyd’s and companies market

Quote request

► Automating end to end claims processing for low value, high volume claims (investigation to settlement)

Claims processing► Automating the capture of structured risk placement data ► Automating premium payment and reconciliation process for multinational business

Risk placement

► Automating issuing of policy documents to the insured immediately after binding, endorsements and renewals

Contract certainty

► Automating the manual inputting of information to catastrophic models

Catastrophe modelling► Automating the process of generating, validating and processing of Bordereaux which is currently a manual and labour intensive process

Bordereaux processing

► Automating the collating of risk information from various sources and calculating aggregate exposures and flagging risks for reinsurance, if needed

Exposure management

► Automating the claims FNOL for low-value/high-volume claims (especially at claim registration and verification)

Claims First Notification of Loss (FNOL)

► Automating fraud claim validation, in line with both internal and external rules, also covering validating information in third party systems

Claims fraud and sanctions

Automation hotspots

So what processes represent the biggest opportunity?The automation radar highlights a number of ‘hotspots’ across the value chain, although most traction is being gained in the post-bind world, where the level of structured data is greater.


Rise of the Specialty ‘Robot’RPA is a software application that can be trained to carry out a process in the same way a human does. It interfaces directly with application user interfaces, and emulates human interactions on systems. Rapidly performing repetitive tasks otherwise done by staff to reduce cost, accelerate timing, improve reliability and quality of data being processed. Sounds technical, but the practical applications can drive genuine operational efficiency. For example, Xchanging helped to integrate robotics into the Lloyd’s market’s framework in 2013, and claims that since doing so some processing times have been reduced by up to 90 percent.

Blockchain technologyBlockchain is the technology that underpins a number of innovative technologies in the financial services arena. A blockchain is a data structure that makes it possible to create a digital ledger of transactions and share it among a distributed network of computers. It uses cryptography to allow each participant on the network to manipulate the ledger in a secure way without the need for a central authority.

We could see forward-thinking (re)insurers in the Specialty Market begin to innovate with blockchain because they believe that the system may provide genuine long-term strategic benefits, placing as it does such faith in the client or cedant. For example, using blockchain technology for high-value risk placements could provide improved basis for non-repudiation, governance, fraud prevention, and financial data and reporting. Blockchain also has huge potential to transform the way the premium and claim settlements are handled across multiple parties.

Optical character recognition (OCR) softwareOCR software has been around for a while, but is still evolving and promises to eliminate a vast swathe of manual processing of paper documentation across a placement. OCR can play a pivotal role in capturing risk data from paper documentation such as Market Reform Contract (MRC), Policy schedules for downstream processing such as Endorsements. As soon as forms are scanned into a suitable digital format, processing with OCR software uses technology to extract specific data or text strings that can be leveraged in downstream processing. intelligent character recognition (ICR) promises to deal with handwriting more efficiently.

Richard ArcherDirector, EY UK LLP [email protected]


Key contacts

Rodney Bonnard UK Head of Insurance, EY UK LLP [email protected]

Simon BurtwellUK Insurance Advisory Lead, EY UK LLP [email protected]

Andy WorthUK Specialty Market Lead, EY UK LLP [email protected]

EY's specialty cost benchmarking results for 2016 will be published to participating organisations in quarter four. This is a free survey covering over US$60b of market premium, and is in its fifth year. All participants receive a full copy of the benchmark data and organisation-specific analysis.

We'd also be pleased to meet other clients to share an executive summary and discuss whether they would like to participate in the 2017 survey.

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