Speaking exclusively to Insurance Insider after the launch of algorithmically driven follow syndicate Ki, Wilson said the venture was Brit’s starting contribution to giving Lloyd’s the “best chance of survival”.
“[Lloyd’s CEO] John Neal’s vision of having a truly global Lloyd’s that every insurance company in the world should want to join I think is in our grasp,” he said.
“The future is actually really exciting for Lloyd’s if they can get this right. And we [at Brit] are trying to do our bit.
“It is shame if other people bury their head in the sand and want to do it the same traditional way because that is unsustainable. We have all said it, but very few people are doing anything about it.”
Seven out of the top 10 businesses globally are platform businesses, and in fact Lloyd’s was the original platform business, created 330-plus years ago, Wilson explained.
“The only difference is it is not digital,” he said. “If we do digitise with a truly data-driven model, then we as a market have something extremely valuable.”
The Future at Lloyd’s strategy, which sets out a road map for a faster, more efficient and flexible market, has the potential to “catapult” Lloyd’s way ahead of any insurance market in the world, Wilson continued.
“We are on the cusp of it.”
‘Revolutionising’ the follow market
The Brit CEO said Lloyd’s had struggled with a circa 40 percent expense ratio for decades, yet no progress has been made in this time.
“I remember when I first started in Lloyd’s our CEO at the time stood up and said the expense ratio at Lloyds was 40 percent, and it was unsustainable." He went on to say in 32 years, this had not materially changed.
“It will be death by a thousand cuts unless we actually do something about it,” he added.
He noted that there is huge duplication of effort and cost in the Lloyd’s follow market, which Brit estimates to hold some $14.2bn of capacity.
With multiple syndicates under one managing agent at Brit, “it costs me no more to write 20 percent of a risk than 5 percent of a risk”, Wilson said.
“Actually, the more Lloyd’s allows one managing agent to write, the whole expense ratio at Lloyd’s will come down.”
However, one of the issues in tackling market expenses is that no-one is taking it upon themselves to address the challenge, the executive continued.
“What happens is we all look at the brokers and say their commissions are too high, they all look at us and say, your expenses are too high, and then collectively we all look at Lloyd’s and say this is ridiculous, your expenses are too high,” Wilson said.
“We decided that we have to start with what’s in our control and that’s looking at ourselves.”
Brit’s response in Ki, Wilson said, “doesn’t attempt to chip away at brokers' commission or reinvent the wheel for them”.
He said: “I think [Ki] completely revolutionises the follow market at Lloyd’s.”
About Ki
Ki will operate as a standalone business using Brit as its managing agent. It will operate with a team of around 10 for portfolio management and operations, with Brit CFO Mark Allan as executive chair.
Using a unique algorithm developed with support from University College London, Ki will be able to evaluate Lloyd’s policies and will automatically quote for business through its digital platform, which brokers can access directly.
The Ki platform is designed to be “broker-friendly”, and always offers brokers a line on every risk in selected classes led by either Brit or nominated lead markets. It is accessible 24 hours a day, seven days a week, from any location.
In the statement today, Wilson said Ki’s quantitative-based approach aims to do to insurance “what quantitative hedge funds did to capital markets in the 1990s”.
He told this publication that the digitisation of the placement process at Lloyd’s, which started with PPL and will eventually result in the complex risk platform and a data-first marketplace, will mean the Lloyd’s market will start to look more like an exchange – and underwriters will have to rethink turnaround times.
“In that trading environment, you can’t respond in two or three days, or a week, you have to respond in seconds,” he said. “I think the slip will fill in minutes rather than a day. The question is how do you best to set yourself up to operate in that way.”
Algorithms and human decisions
James Birch, head of innovation at Brit, said the set-up of Ki “feels more like an asset manager than a class Lloyd’s syndicate”.
The business takes a capital market’s view of risk, with the algorithm used for risk selection and setting the line size.
Ki will always follow risks led by Brit and by nominated syndicates by class, which Wilson explained would be a “dynamic” nomination process that would change depending on those lead markets’ performance.
Brit has been running a “ghost” portfolio for 2019 and 2020 in order to build the data set, which will inform Ki’s decision making when it launches in 2021.
However, Brit CEO Wilson stressed that human interaction still ultimately defines Ki’s risk appetite and setting of reinsurance.
“When it comes to risk selection, that is done by algorithm, but obviously there is human input into that algorithm,” he said.
The market gets too “hung up” on repricing risk as a following market, he said.
“An individual syndicate does not really price a risk, the market does so,” Wilson said. “The only question is, do you like that price, or do you not like that price”.
Ki is “more of a risk selection tool than a pricing tool”, but does price risk and has that capability built into the algorithm.
“It is not writing blind,” Wilson said.
The CEO concluded: “We are convinced this will revolutionise the follow market, and we believe other markets will eventually replicate the model in different forms, as it is the way forward for Lloyd’s.”
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