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Franchise admits lack of progress on process reform

Business process reform in the Lloyd's market is still at a rudimentary stage and the situation is unlikely to improve within the next two to three years, the Franchise Board's Franchise Business Plan has admitted.

The plan, a copy of which has been obtained by The Insurance Insider, lays out a benchmark for the progress made by Kinnect and other business process reforms. It states: "A review of maturity models would indicate that Lloyd's business processes generally fall within the 'basic' category. Whilst significant reform is therefore critical, it is not realistic to expect substantial, simultaneous progress across all Lloyd's business processes over the next two to three years [emphasis added]."

For risk placement, the Franchise Board defines this "basic" level of business process as: "No electronic support for data exchange with trading partners; multiple re-keying of data to individual underwriters and brokers; time wasted in face-to-face meetings; contract data passed in paper form to settlement and claims."

For documentation, "basic" business process is defined as "contract certainty not common; little standardisation of contracts; risk disclosures on paper - no audit trial [sic] or proof of delivery", while on accounting it says: "policy production takes months; closing takes weeks - capital [is] tied up; premiums take months to arrive."

On claims, the assessment of the current status quo is similarly downbeat, with "paper based data on contract"; "little workflow management for underwriters" and "few standards for time and costs of claims process" among the norms outlined.

While on processes, firms "cling to historic processes to safeguard mystique", "refuse to work together on common process design" and have "no workflow management of processes", the report said. While on systems there is little internal integration or interaction with other systems externally and "cottage industry" suppliers provide "risky, inefficient" solutions.

The plan concludes that there are "no basic standards even for numeric data, few standardised naming conventions and no process to drive standardisation". There are "huge overruns on cost and time of new systems", it says.

The Franchise Board also examines the progress of initiatives such as Kinnect, noting that realising the benefits of Kinnect "will come at a significant cost to the franchise" and that the system is "unlikely" to be self-supporting before 2007.

It continues: "It is not possible to accurately estimate costs or forecast how quickly Kinnect will secure sufficient traction to generate significant revenues. Credible forecasts are only possible once Kinnect has commitment to detailed implementation for specific products from major brokers and franchisees."

All this despite what the report describes as a "significant repositioning" of the company, with a new CEO and a move towards user governance. More positively, however, the document identifies a number of one and three-year objectives for Kinnect. Over one year, the aim is to "secure full continuing commitment from leading brokers"; to have 18 firms committed to using Kinnect by the end of 2004 and to implement professional indemnity as a new class of risk.

At the end of three years, says the report, the aim is to meet ACORD standards for electronic interoperability; to be able to place risks across all Lloyd's risk classes and to have 50 percent of the market placing business through the platform.

Nonetheless, the report's conclusions may provide ammunition to critics of Lloyd's and the various reform processes taking place in the London market.

Costly venture
According to Lloyd's own figures, the cost of Kinnect alone will be £15mn in 2004. This against £17.9mn in 2003 and £19.9mn in 2002.

Of this total, systems and communications costs came to £7.9mn, against £10.7mn in 2002, with employment being the second largest cost at £7.581mn.

Notwithstanding these sums and more than three years of development, the company only placed its first risk in December 2003 and has yet to build up a significant number of subscribers.

Despite the prognosis in the Franchise Board document, Kinnect CEO Toby Davies gave an upbeat assessment of the electronic risk placing system's outlook for the coming year.

In an interview with The Insurance Insider at the beginning of June, he said that seven more underwriters and three more brokers would begin exchanging information using Kinnect later this year as part of the firm's expansion.

And he confirmed the move to broaden the involvement of Kinnect users in the company's board of directors within a matter of months. At present, because of its status as a wholly owned subsidiary of Lloyd's, Kinnect is governed by an advisory panel made up of members of the Corporation.

He explained: "We want to reform Kinnect's governing body to create a more formalised, more independent structure with more customers represented. Like any board it would be the forum for setting strategy and it would have a representative spread of companies invited to the forum through nominations."

As an extension of this, Lloyd's was also planning to divest itself of its 100 percent shareholding in Kinnect with the aim of broadening ownership of the company to the system's users, Davies said.

Although the exact details of how the share divestment would work were still under consideration, the transfer would happen over time to "customers who have made a commitment".

"We've said for some time that Lloyd's will begin to divest itself of its 100 percent shareholding in Kinnect," he commented. "Ultimately users should be able to own the system. It's a logical extension of user governance."

On funding, Davies said Lloyd's expected to fund Kinnect for a further two to three years until the programme can fund itself through user subscriptions. "The ultimate aim is for the system to be self-sustaining through tariff revenues," he commented. "It won't be next year, but it won't be 10 years either. Lloyd's funding will diminish going forward."

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