The ‘Big Bang’ for the UK stock market arrived on the morning of October the 28th 1986 when deregulation of the financial markets led to a move to electronic screen based trading. The effect was overnight—and dramatic; some would argue this even cemented London as the financial capital of the world.
Looking back over a quarter of a century later, nobody could have imagined that this would also be the seed that led to a fundamental change in the way shares are traded: removing human input. With algorithms or high frequency trading (HFT) now accounting for approximately 40% of global share transactions, the complexities of these trading systems have now reached almost mythical levels, capturing the public imagination with fictional stories of trading systems “taking over” becoming the subject of bestselling books and films.
Why eTrading is so Behind in Insurance
The insurance industry has invested heavily to try and move to electronic trading in the past 15 years. Success so far has been limited, to say the least. This failure has been driven by two factors:
- Firstly, brokers feel like data entry clerks filling in online screens to “trade.” The perception is that they are filling in forms to save the Underwriters from doing so.
- Secondly, insurance products are not commodities. It’s easy to electronically trade a barrel of oil because barrels of oil are all the same—all that is left to agree on for a trade is the price.
Not so to compare, price and trade a customized insurance policy. The oil barrel analogy works for car insurance, but try applying it to a $600 million product liability risk with unique client needs and bespoke coverage requirements! So if eTrading does not work, surely one follows the other and therefore algorithms have little use for the insurance industry, right?
Wrong. Insurance buying habits are certainly unique, as one client differs from another. But clients like to benchmark, perhaps asking, “Is my limit of liability similar to others in my field?” Carriers like to differentiate—it’s not all about price. The type of wording that a client receives when he or she acquires insurance is also important. Brokers give advice—but advice from understanding local markets, even markets like London consisting of hundreds of companies and Lloyd’s syndicates, is trumped by knowing 2,000 global insurance carriers. And finally with a market that is global and can change daily, someone needs to keep track of those changes to be able to deliver advice to a client in real time.
Algorithms are the Answer
Add all of these issues up and it soon becomes clear that far from having little use, algorithms might be the only way forward for the insurance industry. That said, as with any computer-based system, data has to be inputted into it first (and now we return to the data entry clerk feeling …). But if brokers input data to an algorithm that helps sort, slice and dice and then recommend the best carriers (which in turn helps their discussions with their clients…) then suddenly the broker can see the point of the system—and so inputting data is OK. Better still, the data that went into the algorithm is now online, so could be used to help carriers identify opportunities and improve their service to clients.
Algorithm first—eTrading later? It’s not the way the stock market did it, but this is the insurance broking industry, not the stock market.
The Insurance Industry’s Big Bang
We recently unveiled what we believe is the “big bang” of the insurance industry at the Willis Building on Lime Street when we launched Willis’ proprietary placement system WillPLACE. Through WillPLACE and its core component, Market Match, we take a blend of client requirements and preferences and use an algorithm to potentially match the best carrier. Our keynote speaker at the event, The Rt. Hon. David Willetts MP, UK Minister of State for Universities and Science, believes that systems like WillPLACE are the way forward for our industry, saying,
Through a market match algorithm, [WillPLACE] can harness new technology to deliver a modern version of the classic broker function. The customer wins thanks to better information about the market, which drives competition. Business wins thanks to better access to more customers.
Feedback from the market and our clients so far suggests that this is a very welcome development for all concerned in the industry. Once the system is fully launched within Willis, we will be able to assess interesting trends like whether US carriers pay claims faster than UK carriers or who has the greatest appetite for which line of business, letting us better serve clients of course, but also indicating areas of opportunity for the industry. Stay tuned.
Jonathan Prinn is the Chief Operating Officer of Willis Global Placement. Based at the Group’s London Headquarters, Jonathan is responsible for the WillPLACE and Market Match design, roll out and implementation.