In every crisis, lessons must be learned, but opportunities also are revealed. And so it goes with the COVID-19, which has shown the need for contract certainty in the re/insurance industry, while at the same time providing an impetus toward digitalization of the value chain.
While the London market has done a lot of work over the past few years to improve contract clarity, the COVID-19 crisis has highlighted the fact that more work needs to be done, according to David Flandro, who is Managing Director, Analytics, at London-based Hyperion X, the data and technology-focused division of Hyperion Insurance Group.
He was specifically referring to the disputes that have arisen over non-damage business interruption exclusions for pandemic when there is a gap between what customers think they are buying as opposed to what the industry thinks it’s selling.
“Contract wording is very important. We need absolute clarity about what is being covered, what isn’t being covered and what you’re paying for. We need to make that as simple and accessible to the end buyer as we possibly can. And, of course, this [crisis] has only reinforced that,” he said. (Video clips of the interview with Flandro can be viewed by clicking on the images in this article. The full audio podcast is available below).
“Reputationally as an industry, if we’re selling a product that needs to be providing coverage, we have to be careful about that, and that’s absolutely clear,” Flandro added. “So that’s one thing we’ve relearned from COVID, is that contract certainty, wordings, and clarity of coverage are crucial, both for our own reputation and for our business, because ultimately we’re in the business of paying claims.”
Another pervasive lesson from the crisis – and perhaps one of the few silver linings – is that face-to-face trading was able to convert quickly to being conducted online.
Indeed, Flandro said, the way in which the sector transacts business has evolved rapidly. “There’s been a real growth in online trading and also digital marketplace trading,” he continued.
“We can do a lot of business virtually. We can maintain relationships virtually. Even for some of the big stuff and lumpy stuff, we can win new business and we can create new opportunities, virtually, using technology.”
However, Flandro did not think that face-to-face trading would disappear, “especially when large amounts are involved with complicated deals.” On the other hand, the standardized, homogenized risks will increasingly be handled digitally, he noted.
Hopefully, he said, the growth in online trading will have a positive effect on acquisition costs for clients because of lower expenses facilitated by digitalization. “That’s the hope. The sector’s certainly changing and COVID has expedited that in a number of different ways.”
Acquisition costs have been too high for too long – in the London market and worldwide, he emphasized.
In the London market, that acquisition cost ratio has gone from somewhere in the twenties percent in the mid-2000s, up into the low thirties, while Lloyd’s total expense ratio was at around 40% at year-end 2019, he said.
“Why are acquisition costs rising? I guess this is a dangerous question for a broker to ask, but why are you paying your broker more? Is it because you’re getting better service? Is it because the nature of the business has gone more towards programs?” he questioned.
“I’ve heard that excuse. It still doesn’t make sense to me. Is it because there’s a greater mix of specialty business? Fair enough. But then why is the trend the same worldwide? Or is it because there’s not enough competition? Is it because we are in a world where the broking market is relatively oligopolistic?”
Flandro said the lack of competition is a factor that needs to be considered. “I think that we need true innovation in the broking sector to lower those acquisition costs.”
When 30 cents on every dollar go to acquisition costs, it makes it harder to underwrite, he emphasized. “And that’s just the acquisition cost ratio – it doesn’t even include the expense ratio. When you include the expense ratio, you get up to around 40% in the London market. This has to be lowered.”
Flandro suggested that competition and technology will be part of the answer to lowering these costs.
Value-Added Broker Services
Some brokers say that the efforts to digitalize the value chain are really an attempt to disintermediate their services. However, Flandro said, digitalization will transform the industry, but that doesn’t mean that brokers will cease to be relevant.
“It’s just that brokers will have to add more value to the transaction. That comes with advisory; it comes with analytics; it comes with consulting; it comes with better market insight and research, and it comes with better data. I think that’s what clients really want to pay for.”
Listen to the full interview below: