Headline: Where next for Lloyd’s post-Kinnect?
Kinnect was meant to usher in a new way for brokers, Lloyd’s syndicates and London market insurers to work together. Paper-based processes would be phased out, and the insurance market would be dragged into the 21st century. But, £70m later it is no more. As set out in its strategic plan, Lloyd’s now views its technological role as primarily being based around standards setting, not building infrastructure. So why did Kinnect fail to connect with end users?
With so many diverse working practices between and within brokers and underwriters, and every contract potentially creating a unique transaction, trying to centralise over 300 years of working practices was always going to present a major challenge.
Related to this, the changing nature of the technological landscape also played a role. The project took a long time to get to market. In the intervening period technology had moved on, not least the development of service oriented architectures and new collaboration technology. In recent years, great progress has been made in electronic data transfer, trading platforms and peer-to-peer (P2P) systems. Even Kinnect’s interim chairman, Michael Dawson, admitted more viable technology alternatives had emerged since Kinnect was established.
It was also a victim of confused agendas and the competing interests of participants in the Lloyd’s market. Brokers working in multiple markets were reluctant to use a separate procedure just to transact business in London. Kinnect never succeeded in doing enough to please any one party. This could explain why at its closure it had a user base of just 21 brokers, out of a possible 213.
Roadmap to maintain London’s reputation
Some argue that Lloyd’s didn’t need a centralised platform for instant decisions when the majority of brokers still prefer face-to-face discussions. While breaking traditions that have become embedded into the psyche of the market for over 300 years is certainly a challenge, if electronic trading and collaboration is done well, it can bring real efficiencies.
The FSA may have delayed plans over contract certainty, but the industry cannot afford to stand still. Kinnect was created out of a need to modernise the market. Has that need changed? Of course not.
The reputation of the London market must be preserved if global corporations and insurance buyers are to continue to transfer their risks there. They need to believe that they will get a decent return on their investment, in hard and soft market cycles. All of this points to the need for improved risk management techniques and better controls over underwriting.
What it doesn’t suggest is continuing to use manually-intensive, paper-based processes. If Lloyds is to remain a leader in today’s risk averse market it must continue to evolve and embrace technology. Research by Brit Insurance indicates that Lloyd’s is lagging behind its global rivals in operational efficiency. According to the research, processing and administration costs account for 26 percent of premiums written, against 19 percent across the London market as a whole and 17 percent in Bermuda.
The efforts started with Kinnect must not go to waste, and Lloyd’s should continue its efforts to improve efficiency and, therefore, reduce costs. London is exposed to competition like never before from the US, Bermuda, Europe and increasingly from Asian insurance capacity. These markets aren’t burdened with long-standing practices and can react quicker to evolving client needs.
If London wants to see more business, rather than stagnating, then it urgently needs to address the technology aspect to compete for business with other global insurance centres. The London market will not fail without new technology, but its attractiveness will be compromised.
Using today’s technology
The challenge is to find market-led solutions for the “deal now, detail later” paradigm that has resulted in a lack of contract certainty for generations. The market must take the opportunity presented by Kinnect’s failure to examine how it can move to lower the cost of doing business, improve efficiency and reduce operational risk.
Kinnect’s failure shouldn’t be viewed in too negative a light. An electronic platform that offers workflow processes and reduces the need for re-keying of information – and the associated risks of errors – can improve efficiency. But, this doesn’t mean trying to create Kinnect Version 2. Far from it.
Kinnect was unable to offer an acceptable solution at an acceptable price. If Lloyd’s is to truly take advantage of modern technology’s benefits, it is critical to find the right paths in today’s environment. However, there is a need to balance the market’s requirements with what is necessary in order to remain competitive.
To streamline processes, tailored peer to peer (P2P) collaboration can be used between smaller groups of specialists, when risks are being assessed and structured. Sharing unstructured data has traditionally been difficult, but there are solutions available today that can achieve this to speed up the negotiation stage.
But this doesn’t necessitate investing in new applications – a lot of the technology that could potentially be used to make the market more efficient is already sitting unused on the desktop and in operating systems.
Reducing the reliance on paper is paramount to increase efficiency. Much of the data already exists in unstructured form in word processing and spreadsheet programs used by Lloyd’s members. This has to move to the next level where data can be automatically processed electronically and transferred into a more structured form. This is an area where technology has moved on, allowing for unstructured data to be extracted into more conventional accounting and underwriting systems already used by market players.
By using technology in this way, brokers, particularly those transacting multiple deals at any one time, can ensure they’re in control of their business. It also provides the basis for greater use of business intelligence applications, with the opportunity to feed information into a data warehouse for analysis at a later date.
Key considerations in any solution include the ability to gather and exchange data in a secure, reliable, consistent and auditable manner. This effectively brings together all participants in the process into an efficiently managed and cohesive community. The market has made moves towards this with agreed stages in the core business processes and documents, but this must now be more widely adopted as the market standard and considered best practice.
This could create a situation where there are a number of different trading platforms being used in the market that adhere to a common set of agreed standards in terms of the information they provide back to Lloyd’s. In line with Lloyd’s strategic plan, it would also leave the market free to set these overall standards and ensure the integrity and orderliness of the market. The global financial services market has already shown this is possible with NASDAQ, which has several different trading platforms that link into the market via common standards.
Positioned for future growth
Lloyd’s and the London market can learn from the last few years to deliver greater efficiency through technology. A generational shift has occurred. There are a rising numbers of brokers and underwriters who are far more tech savvy than their predecessors. They use wireless technology, Instant Messaging and email on a daily basis. We’re getting past the point of people using technology when they’re not comfortable with it, which has previously held back the adoption of new systems.
Now is a time to reflect on lessons to be learnt from the failing of Kinnect, because it is becoming clear that a one-size-fits-all solution is not the answer. It is also a time to be positive because there is a range of technologies that can be used at different stages in the process. Some are better between small groups, such as P2P, while others can be utilised when there is a need for uniformity of processes across all players in the market.
Technology is no longer the hurdle it once was – it is reliable, secure and proven to work in complex financial trading situations. But, it is critical that if technology is to help Lloyd’s and the London market to it fullest extent and create tangible benefits, it has to be used widely and applied consistently.
Gordon Ejsmond-Frey, Industry Manager for Insurance, Microsoft EMEA
Entry Filed under: SUPPLIER AND TECHNOFIN®, Insurance
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