The worlds of insurance and banking operate within parallel universes, despite both being part of the Financial Services industry. Each world strives to implement the common three pillars of regulatory change (effective capital, risk management and transparency) whilst remaining resolutely independent from one another. Business practices, tried and tested through centuries of experience, are being dragged reluctantly towards revolutionary change. Information, historically filed safely away deep within paper documents, is being released by digital technology into the brave new world of real time trading, reporting and transparency. Both sectors are facing fundamental changes to their business models. Rather than tackling this increase in regulatory oversight independently they should work closer together to share their experiences, lessons and potential solutions.
The LMG (London Market Group) is the senior body helping to create and articulate the future vision for the way insurance is transacted between members of the IUA (International Underwriting Association), the LMA (Lloyds Market association) and LIIBA (London and International Insurance Brokers Association). The LMG oversees all elements of the market mechanism and identifies areas where proactive action can improve London’s competitive position. The LMG is driving change in the name of efficiency and customer service, with the aim of maintaining London’s lead in an increasingly competitive global market.
Wherever there is change there are innovations, conflicts of interest and some natural resistance from established players reluctant to adapt. Banks are seeing whole sectors of profitable business fall to specialist newcomers who are unsaddled by the drag of legacy problems. Traditionally profitable businesses including commodity trading, wealth management, foreign exchange and even lending are falling to more efficient newcomers.
The newly empowered bank regulators have been able to force change in the derivatives market – banking’s closest relative to insurance – despite considerable establishment resistance. The derivatives market, once dominated by an over-the-counter culture of client relationships, has been pushed to trade electronically and through exchanges. Venues have been established to transform opaque trading methods into transparent, digital and openly reported markets. It is highly unlikely this could have been achieved had the regulators not been empowered to force change due to the aftermath of 2008 and the financial crisis.
For the insurance market, established insurers face the dilemma of whether to resist or lead change. On the one hand, a failure to adapt in time could lead to huge shifts in the balance of power, whether to newcomers or to quicker and more efficient existing players, as the bankers have found out. On the other hand, current insurance market leaders have already invested heavily in current existing technology and processes. But has this been the right investment for the entire insurance market?
Unlike banking where sales and risk management are combined and managed under the same roof, insurance broking and underwriting are managed separately by different organizations across the insurance market. This separation inevitably causes friction between these two parts of the market as each independently grapple with the uncertainty around future revenue split and profitability. There would be little resistance to modernisation if costs could be shared; benefits of change could be quantified; and the benefits could be passed directly to clients. Brokers and underwriters, while agreeing with the LMG’s competitive rationale, need to understand the commercial impacts of the changes being demanded by regulators and work together to implement the right changes.
It is difficult to compare the outcome of modernisation directly between insurance and banking. However, one thing is certain. Following the demise of Lehman Brothers and the other investment bank casualties of 2008, regulators were empowered to force industry change, whether or not the banks understood or accepted the costs and commercial conflicts of interest. Insurers could reduce the costs of essential modernisation by leveraging the technology and process investments already made by the banking market. Insurers could also learn from the efficiency benefits brought by these changes. While there will always be some conflict between organizations operating in the insurance market, there is no question that the London market needs to embrace modernisation collectively in order to maintain international competitiveness. Moreover, insurers are in the fortunate position to be able to observe and learn from the banking industry without needing a crisis to force their hand.