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Why brokers of the future will need to step aside...

The Insurance Insider met former Aon Global chairman and Aon Ltd CEO and chairman Dennis Mahoney earlier in the month and found the retired executive buzzing with enthusiasm from a keynote speech he had just made in London.

We thought that a potentially radical vision of intermediaries' future from such an important broking industry figure merited a wider platform and are glad that Mr Mahoney agreed to share his ideas with The Insurance Insider's readership...

I was recently asked to speak at an industry technology conference.

In preparation I did my homework on all the technological changes the market has gone through since 1996.

After careful consideration I concluded that all that has been achieved to date is simply automating the way we have done business for hundreds of years.

I cannot see a single substantive change, only creeping, incremental process amendments.

I am not ignoring the fact that we are at least getting our policies out much faster engendered, although a cynic might suggest by the Financial Services Authority piling on the pressure.

So now - once they can get them all loaded onto their iPads - there might be less poor souls struggling around the City with armfuls of files.

I therefore attempted to take a completely fresh look at the market - my market for 42 years - and take a stab at sparking a debate among today's practitioners.

Having been completely retired for at least 18 months I felt sufficiently refreshed and distanced from long-held prejudices, so here goes.

I came up with four very straightforward proposals:

1. All information should flow directly from buyer to seller

Information should flow from the industrial/commercial enterprise/insurer seeking to transfer risk. The risk information would go directly to the (re)insurers.

This would be achieved very efficiently by the buyer creating a website containing all the required information, be it values, gross revenues, number of employees, natural catastrophe exposures and so on.

The buyer would enlist the assistance of his broker to prepare this website, but the site would be owned by the buyer.

The buyer, with advice from the broker, would then send an email to those sellers either already underwriting the business in the case of renewals, or those sellers the buyer and broker wish to approach on new business.

The email would advise the seller of the website and give each seller a unique password in order to access that website.

It would invite the seller to review the information or use an intelligent search engine to interrogate the website for the information important to that particular seller.

In today's world the initial email could go directly to the underwriter at the seller as well as the seller's modellers, actuaries, risk controllers etc.

The email would advise the seller that the buyer's appointed broker would be coming to negotiate with the sellers within, say, the next 30 days.

I asked my audience if anyone thought it was difficult to create such a website - no one did.

Does anybody think for one moment that the buyer does not need to have that information? Or that to establish a contract in good faith he needs to have presented it to the seller?

I went on to say that if we utilised this approach I would immediately start an insurance entity specialising in brokers' E&O!

The cost saving to brokers would be enormous. If the law firms were publicly quoted I would short their stock.

On this point I also raised the problem of the underwriter who asks a question or point of clarification after other underwriters are already committed.

Should the broker have to ensure that both this particular question and its answer are shown to all the other underwriters even though they had not asked the question?

This was a much greater problem when we had over 400 Lloyd's syndicates perhaps, but with increasingly global markets it is an issue that can be dealt with simply by stating that ALL questions and answers or points of clarification will be shared with ALL sellers electronically by advising of an update to the website.

2. All fiduciary funds, premiums, claims etc should flow directly between buyer and seller.

No longer would the broker be in the loop. My good friend Rolf Tolle will immediately suggest that I am only proposing this because for the foreseeable future interest rates are likely to continue at an all-time low!

No doubt some member of the flat earth society will ask " what about premium taxes?" - for example as if such an issue were the insurance industry's equivalent of Fermat's last theorem or the meaning of life for Monty Python fans.

No doubt it is not beyond the wit of a technology provider to come up with an Apple type app for such issues.

I well remember my financial director at each board meeting telling us how much investment income we were enjoying from fiduciary funds without ever being terribly specific about the costs of thousands of accounting types beavering away at 30-year-old-plus adjustments of literally pennies!

3. A small group of interested parties might perhaps come together to consider 1 and 2 above.

As part of their deliberations they could agree exactly which functions - if any - the brokers are still required to carry out on the seller's behalf.

Once these functions are identified and agreed by all parties a scale of charges can be agreed and published in this age of transparency. It might be worthwhile for the sellers to mandate that the brokers would not be allowed to rebate or share these charges to or with the buyers.

The group should perhaps comprise not only sellers and brokers but also buyers!

4. The end of commissions

If 1,2, and 3 above can be agreed by all parties we would no longer see any commissions.

It was at this point of course that I prepared to leave the room in a hurry given the number of brokers in the room at the time.

I pressed on however and asked the audience the following question: "Is there anybody in this room that believes that the commission shown on the placing documentation is what the broker actually receives?" There were a few sniggers but no one raised their hand!

I went on to ask: "Are we all agreed then that actually the commission invariably becomes an agreed fee with the buyer?" There were lots of nods but no hands or voices raised in disagreement!

Now while I was saying all this in a light-hearted manner, it deals with some very serious issues; namely, is the broker the agent of the buyer or seller?

Through dint of history, custom and practice we can acknowledge a duality, a dichotomy, if not an actual conflict of interest (at least in the eyes of some outsiders).

Should we not address the issue and deal with it in the manner I have proposed above? I do believe the brokers would actually be much better off if they truly knew the "cost of goods sold".

R&R was very painful for Lloyds but at least they got to closure for the sins of the past; not so the brokers that continue in many cases to wrestle with prior-year claims going back for decades and for which they have no current income or reserves.

I suspect this will be a rich seam for the run-off professionals to tap in the years ahead.

My proposals would contemplate the broker agreeing a contract with the buyer for services that would not always include claims advocacy.

Perhaps the broker should unbundle his service offering in such a way that he charge the seller for advocacy as and when a claim arises, thus giving the brokers a better prospect of aligning income and expense on long-tail coverages or when a short-tail claim becomes a long running dispute?

For those who do not see the problem I refer them Martin South's excellent speech as incoming president of the Insurance Institute of London.

I also believe that there is quite a lot of cross-subsidisation occurring simply because the brokers do not truly know the cost of goods sold. If all premiums were quoted net by the sellers perhaps we would see a little more precise costing for each client?

I passionately believe the brokers add enormous value to buyers.

It is interesting to note that in the most professional buyer/seller market - the reinsurance market - the broker's share is predominant and consistently growing.

If we lower the costs at the front end of our product by changing the way we do business might we ultimately sell more product?

Additionally, this approach might assist our cause in defending the subscription market, which is obviously very competitive and efficient as a risk-spreading mechanism.

Such a move should also delight the regulators in today's consumer-friendly and competition-conscious environment.

Ever ready to put his head above the parapet, Dennis Mahoney has asked for us to publish his email address as he is keen to hear from industry practitioners on the ideas raised in his commentary: dmahoneybda@gmail.com

South blasts market service levels

Speaking a day before Dennis Mahoney's keynote 11 October appearance, Insurance Institute of London president and erstwhile broking rival Martin South used his inaugural lecture to call attention to the London market's shortcomings in paying claims.

The Marsh Ltd CEO said the broking house had been keeping track of the time between a loss

occurring and payment to the insured. The results were "quite scary", he said.

He told a meeting in the Lloyd's Old Library that the average end-to-end time for directors' and officers' claims was around 2,000 days, with business interruption claims taking 1,000 days.

Despite their relative straightforwardness, material damage claims were taking 663 days from occurrence to payment, according to Marsh's figures.

He pointed to the Royal Commission called in Australia on the flooding at the turn of the year.

This has been called to decide on the number of events that the recent floods constituted.

And he then flagged up the events in the Middle East over the last year that have spawned coverage disagreements of their own.

South said that the way this happens "every time" is "unseemly".

"We don't deliver the promises - we spend ages in court disputes."

He urged the industry to think innovatively about the way that it could speed up the process to offer greater value to insureds.

"What I would do is to look at some of the ways that we may be able to move away from contract certainty into a different world where we have claims certainty," he said.

He said that the industry was over-wedded to the "outdated concept" of insurable interest.

He argued that the industry should expand the use of "pay now argue later policies" with "smarter triggers" like the number of barrels of oil spilt.

"It is time to take a step back and think about triggers and financial instruments a little bit more like the much derided derivative-type insurance - because at least they do what they say on the tin," the Marsh Ltd CEO argued.

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