an interview with Lloyd’s PMD Jon Hancock
Jon Hancock joined Lloyd’s as Performance Management Director in December 2016 where he has responsibility for performance management, capital setting and risk management in the Market. He joined Lloyd’s from RSA where he had enjoyed a career of over 25 years with the insurance company.
Willis Towers Watson (WTW): Jon, I’m sure you would agree that the London insurance market must embrace technology to remain competitive. What measures has Lloyd’s taken in this regard, and what is on the horizon?
Jon Hancock (JH): Yes indeed, we have to embrace technology, both as an industry and as a major player in the London market, not just to manage expense ratios but also to ensure the safety and efficiency of moving data, premium and claims payments around.
I’d like to highlight five key areas where we are doing just that. One, Lloyd’s is a big supporter and driver of the London Market Target Operating Model (TOM); the collaboration between LIBA, IUA and Lloyd’s is very powerful. I know that Willis Towers Watson is also a big supporter - your Head of GB Nicolas Aubert is actively involved in this. Two, we are mandating electronic placement through PPL, a move to really accelerate adoption of this crucial way of doing business. Three, we are experimenting with artificial intelligence – we have run a specific test on Lloyd’s international access around the world. Four, we are running blockchain proof of concepts involving real time risk aggregation and risk location data on marine risks. And five, we are launching a new innovation lab in the second half of this year, to help the Lloyd’s market innovate more.
WTW: Will these initiatives get some underwriters out of their “silo” mentality of always relying on tried and tested products?
JH: Yes, I’m sure they will. If you look around our industry, we are not renowned for embracing technology, more for having to catch up with it. We want to be renowned for getting ahead of technology. Let’s not forget that Lloyd’s has built its reputation as the most innovative insurance marketplace over the past 300 years. These initiatives are the next logical step in our evolution, and we will make sure we continue to innovate and provide the products our customers need.
WTW: Regarding the innovation lab, do you let the technical specialists have free reign? Are there any restrictions?
JH: We acknowledge we are not experts in insuretech but we are in insurance! We need to build our expertise with the help of technical pioneers. The lab will enable new concepts and ideas to be tested in a fast-track, fast-fail environment with the support and active involvement of the Lloyd’s market.
To facilitate this the Corporation is providing space on the fourth floor in the Lloyd’s Building, giving access to the market to start-ups, and potentially investing capital in businesses which can improve the competitiveness of the market.
WTW: Turning to how Lloyds’s conducts its business in the future, can you see the end of the “walk in” model? In today’s technologically advanced world, is “face to face” really still that important for the majority of transactions within Lloyd’s?
JH: Most market practitioners acknowledge that the world has changed, but it’s the sheer pace of change that is so noticeable. When I look back 30 years to the beginning of my career I was doing things completely differently. The difference is that my 30-year journey would probably happen in three years now! Some will resist change, others will rush ahead, and I think it’s those that move early that will be in the best position. When it comes to the “walk in” business model you must remember that face-to-face trading and placing is very efficient in some circumstances where you have really high value complex risks such as Energy.
We also need to work out what “face to face” actually means; it could in some instances mean Facetime or Skype which may be more efficient, or it could mean a physical walk in. But I can’t see any time soon where there will be no need to hold any face-to-face negotiations whatsoever. Some of it is human nature – you want the security or comfort of looking someone in the eye – but often it’s simply about efficiency where face- to-face discussion, negotiation and decision making is the best way to do business.
WTW: Will electronic trading change the current model?
JH: Yes it will. The London market Placing Platform Limited (PPL) initiative15 will enable much more business to be traded entirely electronically, with all the benefit that brings, and this will make the London market a better place to trade.
WTW: So the broker can have a face-to-face meeting with an underwriter but he doesn’t have to have a bunch of documents in his slipcase with him?
JH: Correct, where face to face is required. And walking around with a really good tablet and having that data on that tablet saves the back, it saves the arms and it saves the shoe leather. And it’s much safer too. If a broker loses the tablet, the data within it is encrypted and it’s safe.
WTW: Data security must be a big issue on your agenda, with the new European Directive coming in?
JH: Data security is as relevant for paper as it is for electronic material. Generally it’s safer to have data in electronic format because you can protect it in different ways – a padlock on a briefcase is nowhere near as secure as an electronic padlock. Both from an insuring and operational perspective, data security should be on everybody’s radar. If we are going to get more efficient at moving data around, we have to make sure that it is in a really safe environment.
WTW: The Energy portfolio offers significant premium income to Lloyd’s syndicates, but has a reputation for volatility. How committed is Lloyd’s to the Energy sector? Can you envisage circumstances in which Lloyd’s might deem the sector to be inherently unprofitable?
JH: Yes, we are very committed to the Energy sector. If you think about where Lloyd’s has come from, we have built our business on a specialty business model. Now what we regard as speciality business has changed over the years - it’s not just catastrophe or ‘’unusual’’ business but it includes specialty lines such as Energy. Specialty remains at the heart of Lloyd’s business and by its very nature brings with it additional volatility. Because it’s volatile, it is written more carefully or thoughtfully by underwriters with a different set of skills to Bordereaux-based portfolio underwriters. So the returns demanded by investors are higher because of this volatility. It’s all about understanding it; our commitment to writing volatile lines remains very high, as long as the underwriters writing it understand it and the capital providers understand that this is what they do.
WTW: But if rates get to the point where the premium income stream is insufficient to pay for operating and reinsurance treaty costs, would Lloyd’s PMD ever consider ordering a withdrawal, if only on a temporary basis? Is your commitment to the point where the market would be free to make year on year losses?
15 Placing Platform Limited (PPL) – a new electronic platform to support a more flexible negotiation and faster placement.
JH: I have to make the point that of course I don’t set the price, although I do see and approve individual syndicate business plans and we have a responsibility to ensure they are realistic and sustainable plans. But do I see a point in the future where I would say: “You have to stop writing Energy”? No, I don’t. I think in any sector there are good risks and bad risks, and there are good underwriters and bad underwriters. I do see a point - it happens already of course - where the best are enabled to do more and others are reigned in! With regard to the operating costs, if it is a pure commoditised product and you can’t add specialised underwriter costs onto that, you should focus your time on specialty business. The approach changes: the syndicates will continue to identify those areas where they continue to trade as specialists and which demand specialist skills, and if a particular portfolio becomes commoditised, the syndicate should either transact on that basis or not trade at all. The key is having the right expertise.
WTW: So how should Lloyd’s underwriters manage the underwriting cycle in an era of chronic over-capacity?
JH: It’s interesting to remember we haven’t had a truly hard market for nearly 20 years. We need to figure out where the specialists write specialist business with the right underwriting and risk management skills and are they backing the right policyholders who also have the right risk management skills? If some of the business now falls away because it’s become uncompetitive and too risky to continue to provide the breadth of cover required at the price demanded, then that is OK. In fact it’s a good thing. That is a fact of life. If there is too much capacity, then in some areas we must choose not to play. Instead, we should identify the areas where we can play.
WTW: There has been a great deal of comment recently about the withdrawal of certain insurers from sectors such as Coal Mining, citing moral hazard etc. Can you see Lloyd’s adopting a similar outlook for environmentally sensitive sectors such as Energy?
JH: Lloyd’s Corporation recently announced its coal exclusion investment policy, as applies to segregated assets within the Central Fund (approximately 75% of funds). This will come into force from 1 April 2018. In terms of underwriting certain classes, these are decisions for the syndicates in the market to make.
WTW: In the new world order governed by increasing technological efficiency, how can Lloyd’s continue to differentiate itself, not only from other London insurers but from insurers from other markets such as Dubai, Singapore and New York?
JH: Firstly what should we be doing that’s new? That would be technology and innovation, which we covered earlier - enabling us to do business better. Secondly, what are we doing well? We need to trade on our well-earned reputation for technical expertise, innovation, security - we have such a strong brand. One of the things that has really blown me away since joining Lloyd’s is seeing the power of the Lloyd’s brand from the inside. Thirdly, in terms of competing against the rest the world, that’s rather different from competing against the rest of the London market which in my view is still the only true insurance hub in the world - as we need to develop different ways of servicing policyholders. Generally the things that we are renowned for is having that expertise and that professionalism so let’s make sure we direct it at the business where we really need to be specialist and expert, and do that all around the world even where there is insurance expertise and where there are growing centres. As the specialist hub, Lloyd’s has a huge amount to offer.
WTW: Are you confident that Lloyd’s can continue to be successful and trade profitably in an era of continual over- capitalisation?
JH: Yes I’m confident we can. There are some things we just need to carry on doing because we do them well but there are also some things that we need to change. Where we are commoditising business, we must make sure we have a model that responds to that and where the business is specialist, we must make sure we respond to that differently. Where specialist underwriting is required, let’s make sure Lloyd’s remains the market of choice.
WTW: Do you see Lloyd’s insurance products continuing to be offered in traditional silos, or can a package approach (Property, Liability, Terrorism, D&O, EL etc.) be more attractive to clients and help differentiate the Lloyd’s market?
JH: I think packaged policies are perfectly right and proper, and something we should do more of. In the specialty markets in which we operate, there is still a need for single line policies in many circumstances but policyholders often prefer the packaged approach for a variety of reasons: simplicity, continuity, coverage, price, etc. And if you look at the way the market has evolved, rarely are there single line specialist syndicates any more. If you go back 25 years or so, we had a series of single line syndicates at Lloyd’s – now there are less of these and most are more general. All the syndicates have got better at working between different underwriting teams; in any case, many are already multi-class. We have improved naturally but there is definitely an opportunity to be braver on specialist products and to package them better – however, we must always understand that if it is a specialist risk we must have specialist underwriters who understand the component parts, so the package can be fitted together to give the right cover at the right price.
WTW: Finally with regard to Brexit, how does Lloyd’s envisage trading after March 2019?
JH: It’s a challenge that I and Lloyd’s wish we were not dealing with, but our response to it is as good as it possibly could be. We are establishing a subsidiary in Brussels, an insurance company which will be regulated and supervised by the Belgian regulator. This means brokers and clients will be able to access Lloyd’s after the UK leaves the EU. Our subsidiary will be open for business from 1 January 2019. There is a lot of work to do between now and then, but the team managing this have done a great job engaging with the market, including with brokers and coverholders, to make sure we continue doing business in Europe after Brexit, as efficiently as possible.
