the london insurance market - pwc

Driving performance forward

The London Insurance Market

A review of risk management, distribution and finance function effectiveness*

Driving performance forwardA review of risk management, distribution and finance function effectiveness

The London Insurance Market

Contents

Introduction: Companies face a challenging agenda

1-8

Executive summary 9-14

Securing business: Distribution and brokers’ remuneration

15-30

Risk management:From compliance to competitive imperative

31-42

Called to account: Finance function effectiveness

43-54

London Insurance Market 55-56

Contacts 57-58

Introduction: Companies facea challenging agenda

Are London Market insurers ready to face the challenges of mounting risk, tougher regulation and softening rates?

London Market insurers are underpressure to maintain underwritingdiscipline and deal with a possibleshake-up in distribution andbroker remuneration against the background of softeningrates and changing regulation.How confident are they that they can manage the difficultperiod ahead?

The four years since we begancarrying out the annual surveys of the drivers and direction of theLondon Insurance Market havebeen marked by some of the most far-reaching changes in theMarket’s history. New corporatecapital providers have insisted ona more structured approach tounderwriting in the light of lessonslearnt from previous downturns inthe rating cycle. For many, thisincludes the disciplines of technicalpricing, peer review and risk-basedcapital allocation. At the same time,the Market has undergone a rangeof important reforms including theadvent of the Lloyd’s Franchise

Board and Individual CapitalAssessments (ICA) as part of theFinancial Services Authority’s (FSA)Individual Capital AdequacyStandards (ICAS) regime.

These have also been years ofstrong rates that have made iteasier to make money and maysometimes have helped to maskany operational weaknesses. Now, as the market softens, we areabout to witness the acid test ofwhether these changes can helpto sustain profitability or whetherthe Market will repeat the mistakesof the past. Those organisationsthat have invested in robust riskmanagement frameworks, effectiverenewal rate monitoring systemsand cycle management tools arelikely to be well placed to take onthese challenges.

We asked participants to rate themost important issues on the CEO’sagenda in 2005 (see Figure 1overleaf). Achieving comparableunderwriting performance andinstitutionalising effective cyclemanagement was, as would beexpected, way out in front, andmany CEOs are confident thatthey are broadly on track to deliveranother strong set of results.2004’s returns were still generallyfavourable despite the catastrophicUS hurricane losses. The earlyindications from our survey arethat more disciplined underwritingand the targeted withdrawal ofcapacity from within the Markethave helped to ensure that

‘The London Marketis doing a better jobof managing the cyclethan in the past.Rates are comingdown more slowlythan we expected.’Survey respondent

Driving performance forward • PricewaterhouseCoopers • p2

Introduction continued

premiums in most classes of businesshave declined at a slower pace thanat comparable points in previouscycles. Do companies have the righttools and can they maintain the ironrule to sustain this performance at atime when investors may have nohesitation in repatriating their capitalif results dip markedly in 2005?

The next most important issues in 2005 are the effective monitoringof aggregations of exposure andoptimisation of reinsuranceexpenditure. London Market insurershave made huge strides in evaluatingand mitigating risk aggregations sincethe wake-up call of September 11.However, while property aggregationsare generally well-understood, theidentification and tracking of casualtyaggregations tend to be lessassured. Further concerns have beenraised by the growing reliance oncommercially available catastrophemodels. From the participants wehave spoken with, these models tend

to provide markedly different resultsand, it would appear, systematicallymis-estimated the cost of the 2004US hurricane season. As a result,some insurers found themselvesunable to access their reinsuranceprogrammes, while some othersexhausted their available cover. Manyinsurers have been looking closely at the reasons for these failures and are already developing, or areplanning to put in place, enhancedaggregation assessment frameworks.

Distribution, with a particularemphasis on accessing keygeographical markets, is the nexthighest rated challenge and is also a key focus of our survey. Brokerremuneration, transparency ofcharges and access to policyholdersmay face considerable restructuringin the wake of the investigations bythe New York District Attorney’sOffice. Could these changes add tothe costs and complexity of doingbusiness in a subscription market?

p3 • Driving performance forward • PricewaterhouseCoopers

0 1 2 3 4 5

Achieving underwriting performance comparable to 2004 and institutionalising effective cycle management

Effective monitoring of aggregations of exposure and optimised reinsurance spend

Creating/accessing new markets (geographical)

Improving claims service and claims cost management

Embedding capital and risk management within the day-to-day running of the business

4.17

3.5

2.83

2.71

2.44

Mean score

Figure 1: Top five most important issues on your CEO’s agenda for 2005

Source: PricewaterhouseCoopers 2005

Our survey suggests that thecompetition to secure the bestbusiness in a softening market has already led some insurers toaccept increases in brokerage.Some others have successfullyresisted these increases and, incertain cases, negotiated improvedcommission terms. In any event,there is still a marked degree of unease about the level ofefficiency of brokers’ post-placement processes and manyinsurers feel that various aspectsof intermediaries’ services couldbe unbundled and brought in-house. The developments havealso brought into sharp focus the Market’s reliance on a smallselection of powerful intermediaries.Our survey confirms that manyrespondents are seeking tobroaden their portfolios through the establishment of new overseasoperations and direct business-to-business distribution channels.

Improving claims service andclaims cost management are nowfirmly on the agenda. Effectiveprocurement programmes, pilotingof electronic claims repositories,more effective and judicious use of litigation, enhanced claimsmanagement information andmetrics, and the appointment ofsenior claims personnel at boardlevel are among the keydevelopments the interviewees inour survey highlighted as being

fundamental to deliveringdiscernible bottom-line benefits.Improving the level and quality of claims service will be critical in the London Market’s ability tocompete globally and ensuringthat the best risks continue to beplaced in London.

Close behind is embedding risk and capital management into the day-to-day running of the business. The FSA expectsbusiness planning and submittedICAs to reflect the way the insureris actually operated on a day-to-day basis and has been critical of what it believes is a lack ofmanagement buy-in to theprocess at some organisations.Clearly, the sheer scale andcomplexity of implementing ICAShave left many key personnelcomplaining that they have littletime to get on with their ‘day job’.However, instilling an awareness ofrisk into the DNA of the businesscan not only placate the regulatorbut also, more importantly, provideinsights into the threats andopportunities facing theorganisation. This could proveinvaluable in managing the cycledownturn ahead. Nevertheless,our survey raises concerns thatrisk management is still primarily seen as a compliance, rather than a business or competitive,imperative within many LondonMarket insurers.



Participants’ identification andranking of the risks they face areequally revealing (see Figure 2).Number one was the mismanagementof aggregations of risk, and stepshave been taken by many insurers to enhance the monitoring of overallexposures. One key lesson of the2004 hurricane season is that themore granular information availablewhen underwriting primary businessmakes aggregations much easier tocontrol compared with inwardsreinsurance or retrocessionalportfolios, and some insurers haverevisited the profile of their book ofbusiness as a consequence. Clearly,potential misunderstandings of thegross exposures can lead in turn to errors in the amount of reinsurancebeing purchased.

The next key risk was a substantialdeterioration in reserves. The LondonInsurance Market continues to beaffected by developments in legacyliabilities including September 11, US hurricanes and US casualty

claims emanating from the 1997 to2002 underwriting years. The shareprices of listed companies aresusceptible to any deterioration in reserves, and there could be a knock-on impact on the adequacyof current premium rates.

Inadequate reinsurance protections are another major risk cited byrespondents. The concentration ofproperty catastrophe business in theLondon Insurance Market means thatcompanies must monitor aggregationseffectively and then either seekappropriate levels of reinsurancecover or maintain a strong balancesheet to manage these exposures.Favourable rates over the last fewyears have encouraged manyinsurers to retain a considerableamount of risk. However, the 2004US hurricane season raisedquestions within some insurers aboutthe adequacy of purchased coverand how quickly it could beexhausted. Rates are also softeningat a slower pace in the reinsurance


0 1 2 3 4 5

Mismanagement of aggregations of risk

A substantial reserve deterioration

Inadequate reinsurance protections

A significant load on the submitted ICA in meeting the assigned ICG/ECA

A significant operational risk failure

4.08

3.57

2.86

2.8

2.8

Mean score

Figure 2: Top five risks that your organisation faces in 2005


sector than in most of the primarymarkets. This could compound theproblems highlighted by the recenthurricanes by forcing someinsurers to settle for potentiallyinadequate levels of reinsurance.

The advent of the ICAS regime has given rise to concerns that the FSA or Lloyd’s might applysignificant loadings to submittedICAs in order to meet the assignedIndividual Capital Guidance orEconomic Capital Assessments(ECA). Indeed, the Lloyd’sFranchise Performance Board hasalready issued guidelines on therange of loadings/discounts to RiskBased Capital (RBC) assessmentsto arrive at the corresponding ECA.Not only might these loadingsdilute returns on capital foradversely affected syndicates,they could also make London lessattractive to the associated capitalproviders in 2006, compared withother jurisdictions such asBermuda and Continental Europe.

One key aspect of the introductionof the ICAS regime is the focus on operational risk, and manyinsurers have cited a significantoperational failure as being amajor risk faced during 2005.Such failures could relate to ITsystems crashes, infrastructuredamage as a result of natural orother perils, key underwriting orclaims controls failures, defectionsof key teams of underwriters tocompetitors, central bureaux orother market-wide operationalfailures, the inability to achievecontract certainty on substantialcontracts in a timely manner, orineffective disaster recovery andbusiness continuity programmes.Although the quantification ofoperational risks in the context ofan ICA assessment is a complexissue that is made more difficult bythe lack of relevant data, LondonMarket insurers have nonethelessbecome increasingly proficient atidentifying and mitigating majorsources of potential operational risk.

‘The ICA is a real unknown.’Survey respondent




Driving performance forward

Key attributes include:

• The pursuit of new geographical distribution channels and directtrading platforms to broaden the portfolio of business;

• The ability to leverage scale and expertise to ensure that high quality business is still being presented by brokers;

• Creating competitive advantage through the early adoption ofelectronic trading platforms to enhance end-to-end business processes;

• The implementation of an effective risk management function, whose role is well understood across the organisation and whichworks proactively with each functional area of the business to bringabout tangible risk mitigation benefits;

• A positive culture that seeks to embed risk and capital management in the business to drive enhanced decision-making and returns, ratherthan viewing risk and capital management as regulatory burdens;

• A culture of continuous improvement in the finance function toshorten external reporting timescales and provide more effectivemanagement information to the business; and

• Outsourcing of certain back-office finance functions, most notably in relation to transaction processing, to allow the in-house financeteam to focus on being a strategic partner to the business.

The findings of this survey offerinteresting insights into how LondonMarket insurers are addressingdistribution, risk management andfinance function effectiveness. Our research and work with insurers

have enabled us to identify theattributes in these areas that webelieve will drive performanceforward in the tough marketenvironment ahead (see box).

About the survey

The annual London InsuranceMarket survey examines thestrategic and operational driversthat will shape the future directionand performance of the Market.

This year’s survey exploreddevelopments in distributionagainst the background of whatmany believe is set to be a far-reaching overhaul of how businessis acquired, remunerated, managedand administered. It also examinedrisk management and financefunction effectiveness, issues thatare likely to prove increasinglycritical in today’s complex anduncertain commercial, regulatoryand geopolitical environment.

The research is based on in-depthquestionnaires and face-to-faceinterviews with executives fromLloyd’s and Company Marketbusinesses, representing 43% ofLloyd’s capacity and combinedestimated gross written premiumof some £8 billion in 2005. Asbefore, the respondents wereselected to reflect a broadspectrum of entity sizes, productclasses, independent businessesand subsidiary organisations.

Our thanks go to all theorganisations and executives whokindly gave their time to the surveyand made this report possible.


Executive summary

Distribution, risk management and finance function effectivenessare under the spotlight in a softening market.

Distribution

London Market insurers arefacing what has been describedas a ‘seismic shift’ in the waybusiness is secured, brokers are remunerated and in thetransparency with whichinformation is conveyed to policyholders.

Respondents’ top five brokersaccount for over 60% of theirbusiness at present. Some 40% ofrespondents expect their relianceon their top five intermediaries todecrease over the next three years,though around half believe it willstay the same and the rest actuallyincrease. ‘The big players are theones that give us the bestbusiness,’ said an interviewee.Many participants feel that theimpact of new regulations facingbrokers in the UK and theheightened competition for the bestbusiness in a softening marketcould actually strengthen the powerbase of the larger intermediaries.

While the questionnaire andinterviews primarily focused on the views of insurers, we alsointerviewed some London Marketbrokers to help cross-check andshed more light on the findings of our survey. It is interesting thatsome of the smaller intermediariesbelieve that the dominance of theleading brokers could diminish asmore corporations look to reviewtheir insurance procurement in the wake of investigations carriedout by the New York DistrictAttorney’s office.

Many participants are seeking todevelop a broader portfolio bycreating/accessing new overseasand direct business-to-businesschannels. For some, this is astrategic decision, though formany it is a way of securingprofitable sources of new businessin the face of softening rates intheir core markets. While use ofelectronic platforms such asKinnect is set to increase over thecoming years, most expect themto continue to be used primarilyfor data exchange rather than asfull trading systems.

Mr Spitzer’s investigations have led most wholesale brokers towithdraw the business volume-based commissions paid byinsurers under placement serviceagreements (PSAs). Ourrespondents reported that theyhave now all but eliminated PSAsto the extent that these existed.The loss of revenue from these

‘The brokers are stillgetting the revenues,which doesn’tnecessarily facilitate a wholesale rethink ofthe business model.’Survey respondent


Executive summary continued

contingent commissions has spurredsome intermediaries to review howthey conduct business and chargefor their services. Most participantsappear to be prepared to agree tohigher commissions, though someare still notably reluctant. There is afeeling that the inconsistency acrossthe Market in the application of theextra charges could reintroduce PSAsby the back door, albeit withincreased disclosure to policyholders.This is all taking place against thebackdrop of continued FSA scrutinyand the European Commission’scompetition enquiry into commercialinsurance, which may involve furtherreviews of the London InsuranceMarket business model.

Some brokers are also seeking to extend the practice of chargingfees for specific services such asmarketing or processing. However,60% of respondents would notfavour a move to a fee-basedapproach. Many cited what theybelieve will be an increase in costs.Others doubt whether brokers havethe necessary capabilities orcommitment to move to a fee-basedsystem in the near future, thoughmany accept that changes will comeeventually. Indeed, pressure from theFSA, including the drive to improvecontract certainty, may acceleratethe pace of change in the LondonMarket. If services were unbundled,some participants said they wouldopt to take on the creation of

policy wordings and much greaterresponsibility for claims-associatedactivities, believing that they couldimprove customer service and gain a competitive advantage.

Respondents see the London MarketPrinciples (LMP) as a valuable boostto improved processing efficiencyand contract certainty. However, whilearound 60% believe the principles havebeen embraced in their organisation,barely 20% feel this is true of theMarket as a whole. Only 20% ofrespondents anticipate that the LMPwill lead to a reduction in brokerageover the next three years, and noneto a significant extent.

Risk management

Risk management continues to bean important item on the boardroomagenda of our survey respondents,in line with the insurance industryas a whole.

Risk is regularly discussed by theboard of more than 90% of thosesurveyed. More than 80% ofrespondents have developed fullydefined and documented policiesand procedures for risk-takingactivities. Nearly 70% believe theroles and responsibilities for their riskmanagement programme are wellunderstood within the company. A high proportion also believe thattheir documentation is up to standard.

‘Brokers arecreatures of habit;

although manycommentators have

talked about aseismic shift in the

way brokers dobusiness, this is

unlikely to happen.’ Survey respondent


However, while the process-orientated aspects of riskmanagement, such asdocumentation of policies andprocedures, are often very strong,integration with business planning,management information and theday-to-day operations of theorganisation is generally morelimited. When asked at what leveltheir risk management programmeis operating, only a half ofrespondents reported that their riskcommittee is managing risks aseffectively as intended. A significantproportion acknowledged that therewere aspects of the set up oroperation that could be improved.There is also some confusion aboutroles, including overlaps withinternal audit and compliance,which can make risk managementharder to embed.

Indeed, risk management is stillcommonly seen as primarilycompliance-related, rather than as a competitive, priority. Barely10% of respondents have fullyintegrated risk management withbusiness planning and strategicbusiness decision-making. Only a quarter view risk managementprocess improvements asbusiness enablers rather than acost to be controlled. Perhapsmost telling of all, while allrespondents identified regulationas a driver in their decision toimplement their operational riskmanagement programme, only a quarter cited competitive

advantage and less than 10%good business practice asdeciding factors.

However, while compliance is theprimary consideration for most,some participants are seeking tointegrate their risk managementprogrammes into the business andrealise the benefits of an improvedbasis for decision-making andgreater strategic assurance.

One particular benefit as themarket softens is in helping to enforce tighter underwritingdiscipline. It is significant thatwhen the findings of this surveywere compared with a study ofrisk management in the insuranceindustry worldwide, many LondonMarket insurers were ahead oftheir competitors, especially inrelation to some of the moreadvanced techniques such asescalation triggers. To someextent, this may reflect the morestraightforward nature ofmanaging stand-alone LondonMarket companies compared with global insurers with diversebusinesses. It may also reflect the more rigorous requirements of the UK regulatory regime whencompared with the operations ofnon-UK and non-US insurers.However, the London InsuranceMarket is perhaps lagging behindin the embedding of riskmanagement, which may reflectthe difficulty of driving throughchange in the Market.

‘A disciplined andsystematic approachto risk management isa great way to controlthe underwriting side.You can raise pointswith underwriters a lot easier withoutthe politics.’Survey respondent


Executive summary continued

Finance functioneffectiveness

The contribution of the financefunction will be critical in providingthe forecasting, analysis anddecision support that LondonMarket insurers need to sustainprofitability and steer a safe coursethrough the softening market ahead.

Our respondents’ finance teamsmake up an average of around 10% of overall staff and cost theequivalent of an average of 0.8% of gross earned premiums. Most oftheir time is taken up with back-officefunctions including budgeting,compliance, transaction processingand, perhaps most onerous of all,reporting. The deluge of externalreporting means that finance teamscan, on average, devote theequivalent of less than a day perweek to strategic assistance. Largely as a result, less than half of respondents regard the financefunction as a full business partnerrather than as a ‘scorekeeper’.

Even when finance teams cancontribute to business planning, the survey highlighted potentialweaknesses. Only a quarter ofrespondents have fully established a formal framework that documentsthe key issues that need to beconsidered while developing thebusiness plan, including scope,

objectives, extent of scenarioanalysis, potential issues and reviewprocedures. Nearly 40% have noformal feedback programme tomeasure the effectiveness of theplanning and forecasting processesand reports. The integration ofbusiness planning and budgetingalso appeared to lack the necessarysystematic control.

Most respondents appear to bemeeting external reporting deadlines,though this may be requiring adisproportionate amount of effort andovertime. Many participants facedproblems with data, manualprocessing and often incompatiblemultiple systems during their lastannual reporting cycle. The demandsof International Financial ReportingStandards and Sarbanes-Oxley,where applicable, have stretchedfinance teams even further. However, more sophisticated datamanagement systems, including datawarehouses, are helping some firmsto improve the process and cut thetime needed to produce what areoften overlapping reports.

Some participants are looking tostreamline internal reporting toimprove the quality and usefulness of management information. Nearly a third of respondents use abalanced scorecard and more than40% deploy external benchmarks toassess and manage performance.

‘We are boggeddown with

regulatory work.’Survey respondent


Participants reported resultingimprovements in a number of keyareas including working capitaland credit control. The availabilityof non-financial data, however,remains limited.

As the demands on the financeteam increase, so will the pressureon recruitment and retention.

Staff turnover in finance iscurrently around 10% per year onaverage. Many respondents arelooking to implement trainingprogrammes and careerdevelopment to improve staffretention though, for most, trainingis limited to fewer than five days per year.

‘The finance functionhas always been anarea that has drivenimportant change.’Survey respondent


Securing business

Distribution and brokers’ remuneration

Security of distribution

Broker remuneration

Business processes

London Market insurers often relyon a small number of brokers forthe bulk of their business. Will ashake-up in the brokers’ revenueand operating models change the way insurers secure businessand, if so, how?

Distribution emerged as both a significant opportunity and riskfor the insurers taking part in oursurvey. Access to the bestbusiness will clearly be critical in meeting respondents’ keyobjective to sustain underwritingperformance. This includescreating and accessing newmarkets or distribution channels.

Yet, as the market environmenttoughens and competitionintensifies, the survey highlightedthe inherent risks of LondonMarket insurers’ continuingreliance on a relatively small groupof powerful global brokers.

Will the premier brokers remain aspowerful in the future? How mightthe way they conduct and chargefor business change in the wake ofthe investigations by the New YorkDistrict Attorney’s Office? Oursurvey revealed marked contrastsin the views and expectations of London Market insurers. One participant went so far as todescribe the impact of brokers’proposed new business models as potentially ‘brutal’. Most othersare less immediately concerned,believing that if change does comeit will demand careful thought andmanagement and therefore not beachieved overnight.

How much time will be available to reach a ‘satisfactory’ solutionremains to be seen. While thequestionnaire and interviewsprimarily focused on the views of insurers, we also interviewedsome London Market brokers tohelp cross-check and shed morelight on some of the findings ofour survey. It is interesting thatsome brokers suggested thatwhile the momentum for changemight appear to be stalling, thiscould be a temporary lull. The FSApressure to tighten up contractcertainty and treat customersfairly, along with the continuingcompetition investigation beingcarried out by the EuropeanCommission, could provide astrong spur or at least a catalyst

‘I don’t think there willbe a seismic changein the way business is done over the next12 months. It willhave to happeneventually, but it isdifficult to see who is going to lead thecharge and who willmake it happen.’Survey respondent


Securing business continued

for more significant and imminentchanges than some of ourparticipants might believe.

Nonetheless, despite some pressurefrom insurers, policyholders andregulators, the overriding conclusionof the survey is that the leading tierof brokers will largely sustain theirrevenues and maintain their powerfulcommercial position, even if someelements of their business andincome model may eventually change.

Security of distribution

The consolidation and concentrationof the broker market, especiallyamong those with global reach,mean that London Market insurerstend to depend on a small number of placing intermediaries.

Respondents expect an average ofover 60% of their premium income to be generated by their five leadingbrokers in 2005; some more than90%. The very largest brokers areespecially important sources ofbusiness. Indeed, one participant

cited withdrawal from a leadingbroker’s panel as the biggest dangerthe organisation faces.

Respondents are naturally consciousof the power of their mainintermediaries, though quite a fewhave come to regard this as the pricethey pay to gain access to businessfrom the world’s leading corporations.‘If you developed a business modelfrom scratch with such a concentrateddistribution network, you wouldprobably say the model was flawed,but that’s how it is and is likely toremain,’ said an interviewee.

Some 40% of respondents expecttheir reliance on their top fiveintermediaries to decrease by 2008, though around half believe it will stay the same and the restactually increase (see Figure 1). Many participants believe that theconsolidation of the intermediarymarket and dominance of its leadingplayers may also increase. ‘Size willbe a significant advantage forbrokers in dealing with all thedevelopments in the Market, including

‘We need topersuade globalbrokers to bringbusiness to us.’

Survey respondent


Increase

Stay the same

Decrease

13%

47%

40%

0 100%

Figure 1: How do you expect the proportion of inwards business by premium volume, produced by your topfive brokers, to change by 2008?


new regulation. They haven’t evenbegun to milk their economies of scale,’ said an interviewee.More than a third of respondentsreckoned that the application ofthe EU Intermediation Directivewould reduce the number ofLondon Market brokers. ‘Theability to invest in developmentssuch as Kinnect could alsoreinforce the grip of the bigplayers,’ said an interviewee.

Commenting on these findings,one of the brokers we interviewedcountered that the increasingpressure of due diligence and therecent publicity generated by theUS investigations are encouragingmany leading corporations to review their insurancearrangements and oftenlongstanding relationships with

their brokers. As a result, somecustomers have switched to other,possibly smaller, intermediaries.

As Figure 2 highlights,respondents regard access to key geographical markets,customers and sectors as themost crucial criteria for selectingan intermediary. Price and servicewere also seen as important,though less so. It is interestingthat the size of the broker’s marketshare actually came out near thebottom of the list, though it ispossible that some may simplytake the size as a given.

While almost all participantsaccept that the business theyreceive through the LondonInsurance Market will remain the bedrock of their enterprise,


Very unimportant Unimportant Important Very important

53% 20%

33%

26%

53%

40%

Access: Key geographical markets,sectors and customers

Neutral

Specialism: Specialisms/expertise

Size: Broker’s market share

Service: E.g. early risk presentation, quality ofrisk packaging, accuracy of slip production

Price: Level of commission/brokerage

0 100%-40%

27%

47% 20%

27% 7%

20% 27%

-13% -27%

40% 13%-7%

Mean scores 1 = Very unimportant 5 = Very important

Figure 2: What are your key criteria in selecting your producing brokers?



many appeared keen to balance their portfolio through access to abroader range of high quality risks.For instance, around two-thirds ofrespondents have established or acquired UK operations outsidethe London Market, such as aregional retail or small/medium-sizeenterprise commercial lines operation(see Figure 3).

Others are looking to expandoverseas, either by targeting newterritories or more commonly bydeveloping new/existing operations.As Figure 4 reveals, the coming years could see an increase in theproportion of respondents’ businesscoming from Continental Europe andthe Far East, including China.Although these are tentative‘footsteps’ at present, the cumulativestrategic impact could eventuallyprove significant.

Figure 5 outlines some of themotivations for adjusting thegeographical mix of business. For some, diversification is a tacticaldecision, for example balancingbusiness between the Lloyd’s andnon-Lloyd’s platforms or targeting

alternative sources of profit as ratessoften. ‘If we want to grow in asoftening market, we can eitherexpose ourselves to more potentiallosses in the London Market or goelsewhere. That’s why developingnew markets is so important,’ said an interviewee. For others,expansion is part of a longer-termstrategy to bring their expertise tobear on a wider stage. ‘If we want to grow, we need to look at how to apply our existing products andskill sets in different situations,’ said an interviewee.

The routes to market range fromrepresentative offices and managinggeneral agents (MGAs) to e-tradingor fully-licensed subsidiaries. What they have in common is adetermination to open up sources of business that have not traditionallyfound their way to London. Clearlythe Lloyd’s global licence gives it an important advantage over theCompany Market. In some cases,however, even Lloyd’s operations are looking to move beyond theirexisting authorised business, such asexcess and surplus lines in the US,to exploit larger and potentially more


33%

67%

Yes

No

Figure 3: Have you already established or acquired UK operations outsidethe London Market to provide a different distribution channel?


‘Lloyd’s is a goodplace to trade,but you can’t putall of your eggs inone basket.’ Survey respondent


lucrative opportunities such as the ‘admitted’ property & casualtymarket in the US. Overcoming the logistical, licensing and otherregulatory hurdles is often easierfor operations that are already partof multinational groups than forindependent players.

MGAs remain an important source of business, providing access tocustomers outside the traditionalretail and wholesale broker chain. An average of around a quarter ofrespondents’ premium income will be generated through MGAs ordelegated underwriting authorities

UK

North America

Central and South America

Continental Europe

Japan

China

Rest of Far East

Australasia

34%

32%

36%

32%

3%

3%

18%

15%

3%

3%

2%1%

4%

5%

3%3%

0 40%

Written Premium Gross of RI (£m) 2005

Written Premium Gross of RI (£m) 2008

Figure 4: What is your anticipated mix of business by geographical region in 2005 and 2008?


Future potential business growth

Do not rely heavily on one class or geographical area

Spread of acquisition capacity

To continue to diversify our book

40%

20%

20%

20%

0 100%

Figure 5: What are your key motivations in changing your aspirational geographical mix of business between 2005 and 2008?


‘We’re now seeingbusiness we never

used to see in London.’Survey respondent



in 2005, though for some it is up to a half. Around 20% expect theproportion to increase by 2008and very few foresee a decrease(see Figure 6). Although concernsabout the effectiveness of controlsremain, some participants havebeen able to streamline theirMGAs into a more manageablepanel, while still maintaining acomparable level of business.

Although the importance ofbusiness being produced outsidethe London Insurance Marketappears to be growing among our participants, London is likelyto remain the primary source ofrevenue for the foreseeable future.The ‘franchise’ between brokersand insurers that is the linchpin of the London Market hasdemonstrated its resilience andcommercial viability in the face of considerable competitive andregulatory pressures. It looksequally solid going forward.However, certain aspects of thebusiness model are under review.For example, one of the brokerswe spoke to suggested that therecould be more strategic alliances

between London Market brokersand insurers as companies seek to cut costs and improve processefficiency. Many others believethat the foundations of therelationship between broker andinsurer could be about to undergoa far more fundamentaltransformation as a result of apossible shake-up in the basis of broker remuneration.

Broker remuneration

The relationship between brokersand insurers has been brought into sharp focus as a result ofinvestigations in the US into thelack of disclosure and allegedmanipulation of placement serviceagreements (PSAs). The PSAs inquestion give rise to ‘contingentcommissions’ being paid tobrokers by insurers in return for a particular volume of business.Although almost all theparticipants in our survey hadbeen prepared to accept suchPSAs in the past, they claimedthat these contingent paymentshave now been virtually eliminated.

Increase

Stay the same

Decrease

20%

67%

13%

0 100%

Figure 6: How do you expect the proportion of your inwards business to be derived from Managing GeneralAgents or Delegated Underwriting Authorities to change by 2008?


However, nearly half ofrespondents still typically acceptprofit commission clauses (seeFigure 7) and few of these saidthey would be removing thesetypes of clauses in the near future.All respondents agreed thatcommissions/brokerage paid to brokers should be explicitlydisclosed to policyholders. As Figure 8 highlights, most, butnot all, would include contingentcommissions in the disclosure to policyholders.

Further controversy has centredon whether brokers have beenfavouring insurers that placereinsurance through them. If suchfavourable treatment does exist, it does not appear to be reflected

in different remuneration levels. Our survey found no noticeabledifference between the averagelevel of commissions paid by thevast majority of respondents toLondon Market intermediariesproviding both inwards businessand broking of outwardsreinsurance on the one hand, andthose solely placing reinsuranceon the other (see Figure 9). It alsorevealed no significant disparitybetween the commission levelspaid to respondents’ leading andlesser brokers.

Although contingent commissionsaccounted for a relatively smallproportion of brokers’ overallincome, the impact of their loss on profits was more significant.


Basic commission/brokerage

Profit commission

Commission on reinstatement premiums

Contingent commission

100%

100%

86%

86%

0 100%

Figure 8: Which components of commissions/brokerage do you consider should be disclosed explicitly to the policyholder?


53% 47%

Yes

No

Figure 7: Does your organisationtypically accept profit commissionclauses within policy wordings?


Yes, commission rates are higher

Yes, varies by class

No difference exists

7%

7%

86%

0 100%

Figure 9: Do you have different remuneration arrangements for your top producing brokers on your inwards business?



Affected brokers are thereforestriving to cut costs to help make up for the shortfall. Many are alsoseeking to raise their basic levels of brokerage. In response, manyparticipants said they were willing to accept a limited increase incommissions to help brokers toreplace the revenue from PSAs. This includes some of the larger,well-established insurers in oursurvey. ‘As the market softens, we will have to accept highercommissions,’ said an interviewee.

However, there appears to be someinconsistencies in the additionalcharges that are being levied bybrokers. Indeed, one of the brokerswe interviewed argued that oncesome insurers are paying morecommission than others to attract the same business, then these are‘contingent commissions by any other name’. The Market is ‘in danger of playing a game ofhypocrisy,’ he said, though it isquestionable whether the increasinglevel and quality of disclosure withinthe Market would permit this.

Brokers are currently remunerated ona fee rather than commission basisfor placing less than 40% ofrespondents’ inwards business (bygross written premium). A furtherdevelopment would be to extend thepractice of levying fees for specificservices over and above charges forplacement. Many brokers argue that

this could help to reduce overheadsand improve the fairness andtransparency of charges for bothinsurer and policyholder, especiallywhen aligned to activity-basedcosting. However, our surveyindicated that many insurers remainsceptical. Three out of fiverespondents would not favour theunbundling of services and chargingof associated fees (see Figure 10).

Concern about ‘increasing costs’was clearly a significant factor in thelukewarm response to the extensionof the fee-based approach, especiallyas payments to brokers are alreadyLondon Market insurers’ biggestexpense after claims. ‘Unbundlingmight be used as a pretext to hike up charges,’ said a participant. Thismay present insurers with a choice of reducing their own margins orpassing on the costs to policyholdersthrough higher premiums.


60% 40%

Yes

No

Figure 10: Do you favour brokersunbundling their services andcharging on a fee-paying basis?


Further opposition to feesappeared to stem from concernsabout whether the system is viableand how it would work in practice.Indeed, even some of thesupporters could see a range ofobstacles to change. ‘We believethat individual brokers may bereluctant to be isolated from therest of the market by moving to a fee-based system of chargesahead of their competitors,’ said a participant. ‘It is not always clearwhether the services beingcharged for are being conductedfor the client or the insurer,’ saidanother. Others wondered whetherbrokers currently have the required‘skills’, ‘systems’ or ‘culture’ tomove to a predominantly fee-charging basis.

There appears to be someconcern that intermediaries areseeking to achieve increases inbrokerage rates by nominallylabelling them as fees. There couldcertainly be transitional issues toconsider, including how insurersmight avoid creating an agencyrelationship with their brokers.

Certain leading figures within theLondon Market have joined theAssociation of Insurance and RiskManagers in calling for a move to‘net pricing’. Under this system, the intermediary would chargepolicyholders a variable rate ofcommission over and above thelevel of premium rates set by the

insurer to achieve its hurdle returnon capital. Many of the participantsin our survey are yet to beconvinced, however, especially asthere could be potential VAT andInsurance Premium Tax issues.Others fear they may lose theirability to influence the negotiationswith the client. In particular, by notbeing party to the gross premiumrate ultimately charged, insurerswould miss out on an extremelyvaluable element of theinformation they need to knowabout what pricing levels themarket will bear.

So is change coming and if sowhen and to what extent? Quite afew participants argued that ‘nowbrokers are managing to restoretheir margins, the pressure to doanything radical is beginning toease off.’ Others accepted thatremuneration practices will evolve,though this may take several years and developments are likelyto be spearheaded by individualfirms rather than being Market-wide initiatives.

It is interesting that the brokers we interviewed argued that thedevelopment of Market initiativesto strengthen contract certaintycould help to pave the way forwider changes including a morestreamlined, consistent andtransparent system of charges. ‘It will be a struggle, but the Marketwill get there,’ said a broker.

‘It is not necessarilygoing to benefit us ifour suppliers’ profitscome down.’Survey respondent



Business processes

The services most commonlyprovided by brokers includepolicyholder relationship management,wordings creation, marketing andclaims broking (see Figure 11). Thekey role that brokers continue to playin the distribution and claims chain is evident from the fact that fewrespondents receive more than 10%of their insurance or reinsurancepremiums directly (see Figure 12) andonly just over a quarter settle morethan 30% of claims directly (seeFigure 13).

If there is a significant overhaul ofbroker remuneration, how might thisaffect the operations and cost-baseof London Market insurers?According to our survey, ifintermediaries were to unbundleservices and seek to charge insurersfees, two thirds of respondents

would opt to take on the creation of policy wordings and around halfassume much greater responsibilityfor claims-associated activities (seeFigure 14). Many of the largerorganisations believe that these areareas where they can develop acompetitive advantage that wouldnot only help to attract policyholdersbut also provide a ‘unique sellingpoint’ to brokers as well. Some alsobelieve that greater control overpolicy wordings would enhance theachievement of contract certaintyand therefore provide importantregulatory and risk management, as well as business, benefits.

Indeed, some of the participantswonder whether brokers really wantto retain some of the more labour-intensive aspects of administration,especially as they are likely to find itdifficult to pass on the costs toclients. ‘Policyholders aren’t


Policyholder relationship management

Wordings creation/resolution/advice

Claims broking

Marketing of organisation to policyholders

Creation of accounting records

Creation of claims records where you are the lead underwriter

Instruction of loss adjusters

Creation of underwriting system entries where you are the lead underwriter

Captive management

Risk engineering services

93%

93%

87%

87%

73%

47%

27%

20%

7%

7%

0 100%

Figure 11: Which of the following services do your producing brokers carry out?



interested in processing. All theywant is the right coverage at the price they want to pay.Underwriters will therefore have totake on more of the processing,’said an interviewee.

As a result, some believe that the brokers’ existingrevenue/operational model is‘unlikely to survive’. How far thiswill benefit insurers’ bottom line is another question, however.

Substantially (30%-100%)

Partially (10%-30%)

Minimally (up to 10%)

Not at all

0%

13%

67%

20%

0 100%

Figure 12: To what extent do you receive insureds’/reinsureds’ premiums directly?


Substantially (30%-100%)

Partially (10%-30%)

Minimally (up to 10%)

Not at all

27%

0%

53%

20%

0 100%

Figure 13: To what extent do you pay claims directly?


Wordings: Creation, resolution and advice

Creation of claims records

Instruction of loss adjusters

Claims broking

Policyholder relationship management

67%

53%

47%

40%

33%

0 100%

Figure 14: If your brokers wanted to unbundle their various services and charge fees for each of theseseparately, which services would you take back in-house? (Only top five displayed)



‘You may find that we take on thework and the costs and the brokersmaintain the commission. There is no guarantee that we can actuallyuse this as a lever,’ said aninterviewee. In turn, one of thebrokers we interviewed did questionwhether insurers had reallyconsidered all the practicalities of taking on more processing.

The London Insurance Market isalready taking steps to improve theefficiency and cost-effectiveness ofits business processes. The LondonMarket Principles (LMP) aim tofacilitate the achievement of contractcertainty and speed up the issuing ofpolicies, payment of premiums andsettlement of claims. Around 60% of respondents believe that their ownorganisations have embraced theprinciples reasonably well, thoughonly around 20% feel this is true of the Market as a whole.

There seemed to be a certain amountof scepticism about the practicalitiesof moving all the many differententerprises along at the same pace.Indeed, this is one reason why anumber of firms are keen to takemore of the processing in-house,rather than trusting this to brokers or centralised institutions. ‘We can’tafford to move at the speed of theslowest,’ said an interviewee. It is equally telling that only 20% of respondents anticipate that theLMP will lead to a reduction inbrokerage/commission levels

over the next three years, and none to a significant extent (see Figure 15).

Recent years have also seen thelaunch of a number of electronictrading and data exchange platforms.These include Kinnect, which notonly seeks to provide a fast andcost-effective route to market, butalso reduces the re-keying of dataand provides an audit trail of risks.However, usage remains patchy atpresent. Respondents expect to useKinnect or other electronic platformsas a means to transfer data for anaverage of around 5% of theirbusiness in 2005, possibly rising toaround a quarter in 2008. ‘If we’regoing to attract custom in the future,we have to be able to put lines downefficiently and have the electronicprocessing capabilities to back thatup,’ said an interviewee.

‘The key question isto what extent the

brokers will want to offer the

processing servicesthey currentlyprovide in the

subscription market.’Survey respondent


67%

13%20%

Yes, to some extent

No

Undecided

Yes, to a significant extent (0%)

Figure 15: Do you anticipate thatthe full implementation of LondonMarket Principles will lead to areduction in brokerage/commissionlevels over the next three years?


The actual placement of businessover the internet is still relativelyuncommon, though somerespondents expect electronictrading to increase to theequivalent of around 12% of their premium income by 2008.According to the survey, theaverage proportion of outwardsreinsurance placed in this waycould grow to around 30% by2008, and up to 50% in someorganisations. Around 90% ofrespondents feel that the amountof business they place usingKinnect or other electronicplatforms is likely to grow as moreof their peers use such systemsover the coming years. Nearly60% also believe that take-up willincrease once a wider choice ofclasses of business can be placedin this way (see Figure 16).‘Placement through Kinnect willtake off once it gains critical massin the Market’, said an interviewee.

Others doubt whether Kinnect has the ‘required functionality tobe anything more than a dataexchange mechanism’. ‘I don’tbelieve that electronic placing is

going to replace face-to-facecontact,’ said another interviewee.It is telling that only around aquarter of respondents believethat full implementation ofenabling technology/electronictrading platforms will lead to areduction in brokerage over the next three years, and none to asignificant extent.

Although much of the impetus forimprovements in businessprocesses and practices is clearlydriven by a desire to achievecompetitive advantage, regulatorsare also applying increasingpressure. As Figure 17 overleafreveals, over three-quarters ofrespondents believe that theIntermediation Directive couldimprove controls at brokers andmore than half lead to increasedlevels of intervention from the FSA.

The movement/holding of funds isone area of the process chain thathas already been overhauled andmay therefore offer some indicationabout the course of other changesahead. New FSA rules on howbrokers hold money on behalf of


Wider take-up/use of such platforms across the market

More extensive implementation of such platforms within the organisation

Wider choice of classes for which business can be placed in this way

Other

93%

57%

57%

14%

0 100%

Figure 16: What are the main reasons for your expected changes by 2008, if any, in the amount of businessto be placed using Kinnect/other electronic platforms in some way?



insurers and policyholders aim toensure that funds are segregated andprotected in the event of insolvency.One main option is to hold the fundsas ‘client money’ in either a statutoryor non-statutory trust account.Although the trust account optionallows the broker to use the money topay insurers up front (funding), it canbe costly and complex to set up andrun. The principal alternative is forthe insurer to grant risk transfer tothe broker, which avoids the brokerhaving to deal with regulated clientmoney, though in practice mostbrokers are co-mingling the risktransfer funds. Most respondentshave granted risk transfer (as definedby the FSA) to at least some of their

brokers. Many, though by no meansall, have sought to tighten up agencyterms in return (see Figure 18). 50%are using it as an opportunity toensure that the broker’s commissionis only paid when the premium isreceived, 30% to reduce credit termsand 10% to take ownership of interestfrom money held by the broker.

The wrangling over the client moneyrules, their subsequent complexityand the tortuous nature of theirapplication would suggest that any attempt to transform otheraspects of business processing on a Market-wide basis may require agreat deal of care, compromise andco-ordination.


Improved internal controls at brokers

Increased levels of intervention from the FSA

A reduction in the number of brokers

Reduced periods of time for which brokers hold client monies

79%

57%

36%

36%

Enhanced technology being employed by brokers

Enhanced service levels from brokers 29%

29%

0 100%

Figure 17: What do you anticipate to be the main impacts of the Intermediation Directive on LondonMarket brokers?



Restrictions on withdrawal of brokerage

Reduction in credit terms

Other agency terms

Ownership of interest accruing on money held by the broker

50%

30%

10%

10%

N/A 10%

0 100%

Figure 18: Where you have granted Risk Transfer to brokers, have you sought to tighten any of the followingagency terms?


Risk management

From compliance to competitive imperative

Governance and organisation

Vision and objectives

Making it happen

Risk is continuing to rise up the London Insurance Marketagenda. Yet could a narrow focus on box-ticking compliancebe missing risk management’spotential to strengthen thebusiness and improve the basisfor decision-making?

Embedding risk and capitalmanagement into the day-to-dayrunning of the business emergedas one of the key priorities forLondon Market insurers in 2005. In turn, the mismanagement of riskaggregations was identified as thenumber one risk in our survey.

The closer focus on risk reflectsthe increasing complexities anduncertainties facing insurancebusinesses dealing with the falloutfrom terrorism, climate changeand other extreme andunpredictable forces. The way risk is managed has also beenstrongly influenced by tougherregulatory demands. In particular,the move to risk-based capitalmanagement under the FSA’s

ICAS regime has ushered in amore formal framework of riskidentification, measurement,assessment and control thatincludes group and operationalrisks for the first time.

The FSA expects organisations toembed risk and capital controlsinto the management of thebusiness as part of its prudentialregime. While some mightcomplain about the cost andburden of compliance, thesewould appear modest whencompared with the sums that canbe wiped off share values if lapsesin probity, underwriting or financialreporting come to light. However,regarding compliance as the only or main objective of riskmanagement may miss anopportunity to enhance the qualityof decision-making through betterinformation about the balance ofrisk and reward, and gain greaterassurance that the business canmove forward without the threat of unforeseen losses.

Governance andorganisation

Risk management is now a toplevel priority in the LondonInsurance Market. Risk isdiscussed by the board at leastmonthly in nearly 90% of theorganisations we surveyed. Almostall have some form of risk function,with the CEO/Chairman havingoverall responsibility for risk inmore than half of respondents’

‘The key to riskmanagement is veryclear ownership ofrisks and controls,underpinned bytransparency and a proactive process of review.’Survey respondent


Risk management continued

organisations. A chief risk officer(CRO) reports regularly to executivesin more than 60% of those surveyed.

The strength of risk governance and theexecutive sponsorship that underpins itis reflected in the fact that more than80% of respondents have developedfully defined and documentedpolicies and procedures for risk-takingactivities. Nearly 70% also believe theroles and responsibilities for their riskmanagement programme are wellunderstood within the company.

It appears from our survey, however,that the direction and organisation ofrisk management may not be quiteas assured. Less than 40% ofrespondents were confident that theirrisk management strategy was fullyunderstood and little more than 30% stated that the benefits ofimplementing the risk managementprocess had been fully articulatedand communicated within theorganisation (see Figure 1).


Strongly disagree Slightly disagree Slightly agree Strongly agree

19%

12%

6%

6%

Our organisation has clearly defined and documented policies and procedures for risk-taking activities

Neutral

6%

25%

19%

6%

25%

6%

N/A

Roles and responsibilities for risk management have been defined, documented and communicated throughout the organisation

We have a common terminology for the risk management process that is well understood throughout the organisation

A comprehensive risk categorisation and assessment model has been defined and communicated to the organisation

Our organisation has progressed from risk identification and measurement to active risk mitigation and management

0 100%-20%

81%

38% 56%

62% 19%

50%-6% 44%

-13%

56% 31%-13%

Management information supports the risk framework objectives

Mean: 4.81

Mean scores 1 = Strongly disagree 5 = Strongly agree

Mean: 4.50

Mean: 3.88

Mean: 4.31

Mean: 4.06

Mean: 3.88

Risk management is fully integrated with business planning and strategic business decisions

Our organisation has articulated and communicated the benefits of implementing the risk management process

The data and reporting environment is flexible enough to accommodate changing views of risk and customer relationships

The ICA process is integrated with the risk management framework

The ICA model output is considered during strategic planning and business decision-making

Mean: 3.75

Mean: 3.88

Mean: 3.75

Mean: 4.47

Mean: 4.33

69% 13%-6%

56% 13%-6%

38% 31%-12%

56% 13%-6%

50% 44%

32% 50%-6%

Figure 1: To what extent do you agree or disagree with each of these statements about your organisation?


When asked at what level their risk management programme is operating, only half therespondents reported that theirrisk committee is managing risks

as effectively as intended (seeFigure 2). A significant proportionacknowledged that there wereaspects of the set up or operationthat could be improved.

Although most participantsseemed confident about theallocation of responsibilities,separate audit, executive andboard committees all appeared to


Risk indicators are available to management at any time during the month

N/A

Practice is not in place or is not followedLimited progress made toward implementing and following the practice

Practice is somewhat in place and followed on an ad-hoc basisPractice is in place however certain aspects are not operating effectively or as intended

Practice is in place and operating effectively

Mean: 3.13

A clear vision and goals have been established for risk management Mean: 4.31

Business units are involved in defining the risk management initiatives Mean: 4.19

A risk committee is established and actively managing risks Mean: 4.13

The risk management function/team is responsible for setting organisation-wide standards

for risk managementMean: 3.94

The company utilises an effective self-assessment process annually as part of the strategic

planning processMean: 3.56

Internal audit and other oversight functions review risk events based on predetermined criteria Mean: 3.69

A risk management training programme is established and operating effectively Mean: 2.47

Risk management process improvement efforts are viewed as long-run business enablers and

not as a cost to be controlledMean: 3.81

All risk management processes and controls are evaluated according to frequency, completeness,

timeliness, consistency and sophisticationMean: 3.88

Escalation triggers are tiered through the organisation up to the CEO Mean: 3.56

Correlations between indicators and losses are understood and leading indicators are

utilised for predictive analysisMean: 2.56

Process improvements or additional mitigation based on analysis of risk events are developed and implemented

Mean: 4.00

Mean scores1 = Practice is not in place or is not followed5 = Practice is in place and operating effectively

0 100%

13% 44% 43%

6% 13% 31% 50%

6% 6% 6% 32% 50%

13% 6% 12% 50% 19%

13% 6%12% 31% 19%

19% 31% 25% 25%

25% 50% 25%

13% 31%31% 25%

19%

25% 19%6% 31% 19%

25%6% 44% 25%

19% 19% 31% 31%

13% 19% 31% 37%

25% 63% 12%

Figure 2: For each of the issues listed below, please indicate at what level your organisation’s risk managementprogramme is operating.



have some say in risk managementin at least two-thirds of thosesurveyed, which could give rise tosome confusion.

The survey also raised questionsabout the level of risk-related skillsand understanding, especially as lessthan 20% of respondents confirmedthat risk management training isavailable on anything more than alimited ad-hoc basis. One potentialbenefit of systematic risk-relatedtraining is in instilling a common‘language’ of risk throughout theorganisation. It is therefore lesssurprising that fewer than 20% ofrespondents reported that a commonterminology of risk is fully understoodwithin their companies.

The particular objectives andexpertise of the CRO are clearlycritical in ensuring that riskmanagement is understood, valuedand instilled within the business. TheCRO is also emerging as a pivotallink between risk and the business in many organisations. However, asignificant proportion of participantssee the CRO’s primary function ascompliance or internal audit.Similarly, while our respondents’CROs are drawn from a variety ofprofessions, around a third of themhave a background in compliance.

Clearly, some organisations are notlarge enough to justify a full-timeCRO post, so staff will be engaged inother activities. However, blurring thelines between risk management,

compliance and internal audit couldnot only raise regulatory hackles, butalso make it harder to embed riskmanagement into the business.Seeing risk through a complianceperspective may also encourage a ‘can’t do’ rather than a ‘can do’ethic that concentrates on lossavoidance, rather than improving the organisation’s capacity to takerisks and capitalise on opportunities.Some participants believe thatimprovements in risk management in areas such as pricing andaggregation monitoring are the keydifference between this and theprevious cycle downturn, in particularby helping them to offer competitive,technically-driven prices that are stillprofitable or to walk away frombusiness that is no longer viable.

Vision and objectives

The scale and complexity of ICASimplementation have been verysignificant and clearly it may besome time before companies areable to move beyond compliance torealise the potential business benefitsof a more informed and systematicapproach to risk/capital management.

For some, however, the ‘bestpractice’ being promoted by the FSAwill always be little more than acostly regulatory distraction. Only a quarter of respondents view riskmanagement process improvementsas business enablers rather than acost to be controlled. Barely 40% are

‘I don’t think we’rethrough the pain of

ICA yet, I think it willbe another year orso before we see

the benefits.’Survey respondent


Response to regulatory activity

Request of risk management function or senior leadership

Control/reduction of operational losses

Following an industry trend

Response to franchise requirements

Developing a competitive advantage

Audit recommendations

Investor or capital provider pressure

Note: Totals >100% due to multiple response

100%

75%

69%

50%

50%

25%

19%

13%

0 100%

Figure 3: Which of the following were drivers for your organisation in deciding to implement your operationalrisk management programme?


confident that a clear vision andgoals have been established forrisk management within theirorganisations. Only half haveconsidered their ICA model outputduring strategic planning andbusiness decision-making.

The tendency to see riskmanagement as primarily acompliance, rather than a business,issue is especially evident inrelation to operational risk, a keyfocus of the ICA. All respondentsidentified regulation as one of thekey drivers for implementing theiroperational risk managementprogramme, many of them as theprimary impetus (see Figure 3).However, only a quarter citedcompetitive advantage and lessthan 20% audit recommendationsas deciding factors.

This scepticism appears to stemfrom what many regard as thearbitrary nature of operational riskevaluation. ‘Operational risk is justa bucket for all the risks that don’tfit anywhere else,’ said aninterviewee. The apparent lack ofconviction can be seen in the factthat around 20% of respondentshave yet to develop methodologiesfor operational risk quantificationand only a quarter have so farsought to embed it in theorganisation (see Figure 4overleaf). This challenge is, it should be stressed, commonacross banks and insurers.

Certain aspects of operational risk,as defined by the FSA, may not beas relevant to the London Marketas others. For example, a rogueunderwriter would probably

require multiple collusion tosucceed in a subscription market.‘The individual’s company wouldhave to write 100% of the risk andhe or she would have to knowsomeone in both the centralbureaux and the broker,’ said aninterviewee. A more tangibleexample of how and where failureto manage operational risk mightaffect the business is outsourcing, which could cover both directcontracts and the provision ofservices by brokers. It is tellingthat less than 40% of respondentscarry out any more than partial or ad-hoc performance reviews, or have business resumption andcontingency plans in the event of disruptive incidents atoutsourced services providers that are regularly tested (seeFigure 5 overleaf).



The survey also raised questionsabout the translation of risk appetiteinto business parameters andtangible strategic and operationalobjectives. Although more than 60%of respondents had considered theirrisk appetite in relation to all riskcategories, less than 40% had fullyaligned the results of this work withtheir authority limits or communicatedit to the organisation (see Figure 6).Less than half are confident that theirrisk appetite has been clearly definedor that they fully assess theirindividual and aggregate riskexposures against their stated riskappetite on an ongoing basis.

It does appear from our survey,however, that attitudes may bebeginning to change. ‘I think westarted the process of riskmanagement and other regulatoryissues because we knew we had to. However, we’ve actually seenbenefits through the course ofactually devising it and implementingit and it’s becoming a very usefulmanagement tool,’ said aninterviewee.

A number of participants identifiedimprovements in the transparency of their operating targets andunderwriting discipline as important


Phase 1: Identifying operational risk types

Phase 2: Creating primarily qualitative metrics

Phase 3: Developing methodologies for risk quantification

Phase 4: Embedding the measurement, monitoring and management

6%

13%

56%

25%

0 100%

Figure 4: What stage is your organisation at with regards to implementing your operational riskmanagement framework?


Strongly disagree Partially disagree Partially agree Strongly agree

56%

6%

19%

Service levels and performance standards have been formally agreed with all our service providers and provider

performance is monitored against them

Neutral

6%

6%

12% 6%

6%

N/A

Internal audit and/or other assurance reviews of the service provider in relation to functions undertaken on behalf

of your organisation are periodically carried out

Problem and performance reporting mechanisms are contractually agreed and in operation

Business resumption and contingency plans in the event of disruptive incidents are in place and periodically tested

0 100%-20

38%

50% 38%

25% 50%

44% 38%

-13%

Mean: 4.40


Mean: 4.33

Mean: 4.33

Mean: 4.27

Figure 5: In relation to third party supplier management, please indicate which of the following bestdescribes your organisation.


benefits. ‘We now have enoughmanagement information to lookat what an underwriter is doingand compare it against thetechnical price, movements inrates and our overall profitabilitytargets. At the very least, theinformation is convincing enoughto be able to raise points and ifnecessary get the underwriter to change course without all the politics of before,’ said aninterviewee. However, even in thisorganisation it appears that oldattitudes die hard. ‘We’ve got ourunderwriters to look at every riskmore carefully. Yet they still call it administration rather thanregarding it as an underwritingprocess or technique. Once we’ve addressed that, I think it will become more of an integralpart of how they work.’

Making it happen

Although risk management ismoving up the agenda, it appearsthat many organisations are stillfinding it difficult to bring theirvision of risk out of the boardroomand into the underwriting, claimsand back-office functions. Inparticular, while the documentationof policies and procedures is oftenvery strong, their practicalimplementation and integration withbusiness planning, managementinformation and the day-to-dayoperations of the organisation aregenerally more limited.

While the majority of respondentsreplied that overall responsibilityfor risk management lies with theCEO/Chairman and the board,

‘The developmentsin risk managementhave made it easierfor us to control theunderwriting side.’Survey respondent


Overall risk appetite has been clearly defined and documented

Board has considered and agreed the risk appetite

The risk appetite for all risk categories has been considered

Risk appetite of the organisation has been assessed using quantitative as well as qualitative measures

The above tolerances are subject to scenario testing to assess robustness

Individual and aggregate risk exposures are assessed against risk appetite on an ongoing basis

Risk appetite has been aligned with the authoritylimits structure and communicated to the organisation

44%

44%

56%0%

0%

0%

0%

0%

50%50%

63%

63%

31%

31%

6%

6%

38%56%

56%

69%

37%

0 100%

Mean: 2.44

Mean: 2.50

Mean: 2.56

Mean: 2.31

Mean: 2.31

Mean: 2.44

Mean: 2.38

Yes, fully

Yes, partiallyNo

Mean scores 1 = No 3 = Yes, fully

Figure 6: Please indicate how each of the following statements regarding risk appetite best describes your organisation.



barely 10% of respondents have fullyintegrated risk management withbusiness planning and strategicbusiness decision-making. Onlyaround 30% have been able totranslate risk identification andmeasurement into active riskmitigation and management. Even fewer routinely develop andimplement process improvementsand risk mitigation measures inresponse to analysis of risk events.

A similar picture emerges in relation tospecific risks. As Figure 7 highlights,the procedures for limits monitoringand exceptions approvals for insurance,credit and liquidity risks weregenerally fully or partially developedand implemented. However, thecomparable procedures for other risks,namely, market, operational andgroup risks, were far less advanced.

The management of credit risk isrevealing. The risk function has arange of important responsibilities inrelation to credit risk, including theannual review of credit policy (75%),monitoring of concentration limits(63%) and approval of reinsurancestrategy (50%) (see Figure 8). As Figure 9 highlights, themethodologies for managing creditrisk exposure are reasonably welldefined and documented. Analysis isoften quite extensive, with more thantwo-thirds augmenting external creditratings with their own financialanalysis of the credit risk associatedwith their reinsurance partners (seeFigure 10 on page 41).

However, many respondentsappeared less confident that thesepolicies and procedures are wellunderstood or embedded into thefabric of the business. Training is


Fully developed and implementedPartially developed and implementedPartially developed, not implementedNot at all developed or implemented

Insurance Market Credit Liquidity Operational Group0

100%

82%

Procedures for limits monitoring and exception approvals by risk category as defined by the FSA

50% 50% 50%

21%

43%

15%21%

56%

32% 31%25%

19%13%

26%

12%12%6% 6% 6% 6% 6% 6% 6%

Figure 7: To what degree have procedures for limits monitoring and exceptions approvals been developedand implemented within your organisation?


limited, as may be the tools andavailable data. Only around 30%of respondents have a suitablyrobust and comprehensive creditrisk loss database (see Figure 11on page 42). Little more than 30%were confident that their credit riskreports can help management tomake proactive decisions.

Nonetheless, the findings of oursurvey indicate that business andrisk management are becomingincreasingly integrated within anumber of London Market insurersand this trend is set to continue.For example, most reported thatrisk management is at leastpartially aligned with strategic


Annual review of credit policy

Concentration limits monitoring

Approval of reinsurance strategy

New counterparty approvals

New classes of business approvals

Review/adjudication of internal credit ratings

Industry and/or portfolio reviews

Country risk reviews

Other


63%

75%

31%

31%

50%

44%

19%

25%

6%

None of the above

6%

0 100%

Figure 8: From the list provided below, please highlight the responsibilities of the risk function in relationto credit risk.


Strongly disagree Partially disagree Partially agree Strongly agree

50%

6%

20%

Clearly defined

Neutral

0%

Thoroughly documented

Well understood

0 100%-20

44%

50%-13% 31%

37% 37%-6%

-6%Mean: 4.31


Mean: 4.00

Mean: 4.06

Figure 9: To what extent does your organisation have in place methodologies for credit risk exposure aggregationthat are clearly defined, thoroughly documented and well understood by line managers and credit professionals?



planning. Similarly, while only aquarter of those surveyed currentlyuse escalation triggers to facilitatethe identification, assessment andproactive control of operational risk,more than two-thirds plan to havethem in place within the next year(see Figure 12).

It would appear that many insurersoutside the London Market have alsobeen facing equally significantdifficulties in implementing their riskmanagement programmes andrealising the benefits. A worldwidesurvey of enterprise-wide riskmanagement in the insuranceindustry*, published byPricewaterhouseCoopers in 2004,found that even some of the largestinsurers have been finding it hard to make headway in the face ofuncertain direction and understanding.

Many of those questions wererepeated in this survey. A comparisonof the findings revealed thatLondon’s attainments andexpectations are as good, if notbetter, than many of its globalcounterparts, though some of thedevelopments in the LondonInsurance Market may have takenplace since the global survey wascarried out.

It is interesting that only around 20%of global insurers had fully definedtheir policies and procedures for risktaking activities, compared to morethan 80% in the London Market.Around 40% of London Marketinsurers have access to most, if notall, key risk indicators at any time inthe month, compared to just 14% ofrespondents in the global survey.This stems, in part, from the fact that


S&P ratings

AM Best ratings

Your own financial analysis is performed

Fitch ratings

Moody’s ratings

Other


88%

94%

25%

36%

69%

25%

0 100%

Figure 10: How does your organisation actively measure and monitor the credit risk associated with doingbusiness with your reinsurance partners either as a cedant or as a retrocessionaire?


* Enterprise-wide Risk Management for the Insurance Industry: a study published by PricewaterhouseCoopers in 2004. Free copies are available for order or download from www.pwc.com/financialservices

the UK as a whole is often aheadof many territories in the way itmanages risk. It may also reflect,however, the more straightforwardoperational environment within theLondon Insurance Market, whichcan make it easier to establish keyrisk indicators.

It is also interesting that therelative sophistication of theLondon Market’s risk managementcapabilities is most noticeable in relation to what many wouldregard as the most advancedaspects. For example, more than60% of London Market insurershave at least partially (31%) or

fully (31%) developed and put inplace escalation triggers that aretiered through the organisation upto the CEO. The comparable figurein the industry as a whole is just40%, of which only 7% are inplace and operating effectively.

Ultimately, both studies underlinedthe extent of the hard work ahead.For example, barely a quarter ofrespondents in either surveyreported that correlations betweenindicators and losses are evenpartially understood or that leadingindicators are utilised for predictiveanalysis on any more than arudimentary or ad-hoc basis.


94%

13%

12%

0%

0%

69%19%

19%

19%

19%19%

56%

56%

75%

44%

6%

6%

6%

25%

25%

69%

56%

62%

31%

0 100%

Currently in place

Plan to have in place in <1 yrNo plans to put in place

Self-assessment

Risk maps/process flows

Risk indicators

Escalation triggers

Loss event database

Balanced scorecards

Standardised risk categorisation

Risk management policies for individual operational risk classes

Figure 12: For each of the following tools or procedures to help facilitate the identification, assessment,control and management of operational risk, please indicate their status.


50%

21%29%

Yes

NoNo, but we are currently compiling such a database

Figure 11: Does your organisationhave in place a robust andcomprehensive database ofdefault and loss experience?


Called to account

Finance function effectiveness

Drowning in paper

Objectives for improvement

Dealing with regulation

Retention and development

The finance team can too oftenbe seen as a ‘scorekeeper’ ratherthan as an important source ofexpertise and information thatcan proactively add value to thebusiness. Despite having a clearvision for the future, could thedemands of external reportingmake it difficult for the financefunction to take on a morestrategic role?

Finance teams have helped tospearhead many of the mostimportant developments in theLondon Insurance Market in recentyears in areas ranging from newcapital structures to technicalpricing and dynamic financialanalysis. Their input will be crucialin enabling companies to managethe cycle. In particular, they canhelp to identify and target the bestperforming business and ensurethat strategy and operations aregeared to meeting investorexpectations for risk and return.

However, most find themselvesincreasingly weighed down by awelter of often multiple financialstatements, regulatory returns and other external reports.Preparations for the first full set of statements under the newInternational Financial ReportingStandards (IFRS) can only add tothe strain for many. The newregime is also likely to intensify the spotlight of transparencythrough new and enhanceddisclosures in areas ranging fromrisk to acquisitions, though in themedium term IFRS should easesome of the reporting burden.

Drowning in paper

Finance teams make up anaverage of around 10% of ourrespondents’ headcount, thoughin some firms it is more than 20%. An average of around 40% are professionally qualifiedaccountants. The average cost of maintaining the finance functionis 0.8% of gross earned premium,though in some cases this rangedup to 2.1%. An average of around60% of finance costs relate topersonnel, with the remaindergoing to pay for IT, premises andother such non-staff expenses.

Nearly 50% of staff time, and in some case up to 80%, is takenup with back office functionsincluding budgeting, transactionprocessing and, perhaps most

‘The finance functionhas driven changewithin the LondonInsurance Market.’Survey respondent


Called to account continued

onerous of all, reporting. Externaldemands range from financialstatements to FSA returns, which in some cases may need to beproduced at a syndicate, subsidiaryand/or holding company level. Somestructures are even more complex,requiring yet more work. It is tellingthat while the average number ofdays required for full ledger close is16, some participants can achievethis in three days while others needup to 40. Similarly, while the averagenumber of days taken to produceaccounts for the UK holdingcompany is roughly 45, some takeup to 120 days.

Other routine middle-office functionssuch as the management of tax andworking capital take up around aquarter of staff time. However, manyCFOs also have a range of otherfunctions reporting to them. Aroundtwo-thirds oversee the actuarialdepartment, around a half IT,compliance and internal audit and athird risk management. Nearly 20%are also responsible for claims andhuman resources. In short, manyCFOs are forced to keep a lot ofplates spinning at the same time andmay even find themselves effectivelydoubling up as chief operating orchief risk officers.

Our survey revealed that respondentsbelieve they are generally on top ofthis workload. More than two-thirdsreported no slippage from theoriginal timetable in the delivery of all

external reporting in the last annualdisclosure cycle. The remainderexperienced delays of no more thanfive days.

However, the findings on transactionprocessing suggest that meetingtargets and timelines could bestretching resources and potentiallyundermining the quality of theoutput. While nearly 90% ofrespondents had consistently beenable to meet their month-end closedeadline over the previous sixmonths, nearly 40% reported thatthis had required disproportionateeffort and overtime (see Figure 1).

More than 90% maintain anorganisation plan outlining therequirements in areas such as reportgeneration, dependencies, timelines,roles and responsibilities. Tellingly,however, fewer plans tend to cover

‘Finance can’tassist the business

when there is somuch reporting.’

Survey respondent


38%

62%

Yes

No

Figure 1: Is there disproportionateeffort and overtime required to meet the existing monthlyclose timetable?


standards for quality, accuracy,completeness and compliance (see Figure 2). Moreover, mostrespondents do not use externalbenchmarks to assess theirperformance on a continual basis.‘We would if we could find suitabledata and benchmarks to compareourselves against,’ said aninterviewee.

These processing and reportingresponsibilities leave little time forfront-office support, including theprovision of effective managementinformation, forecasting,performance management andinvestor relations that generallyadd most value to the business.An average of around 15% offinance time is spent on thesetasks, though some respondentshave found that they can devoteas little as 10% or even 5%.

It is little wonder, therefore, thatbarely 40% of respondents viewtheir finance team as a strategicpartner capable of playing aproactive role in the managementof the organisation (see Figure 3overleaf). However, the fact thatmost of the rest believe this ispartially the case suggests that thepotential is there. Less than 10%viewed the finance function assimply a production line ofaccounting and statutoryinformation (see Figure 4 overleaf).

The reporting burden is onerous,yet is unlikely to ease, in the short-term at least. The changingaccounting requirements andenhanced disclosure under IFRScould leave finance teams evenmore stretched. Some may findthat they have to rely more onoutside help or ‘quick fix’


Sequence of events and their dependencies

Targeted timelines for the completion of each activity

Clearly identified roles and responsibilities

Generation of all reports

Standards for quality, accuracy, completeness and compliance


Yes

100%

100%

94%

94%

87%

0 100%

Figure 2: Is there a detailed organisation-wide plan containing all of the activities to be completed for theperiod-end close which includes:



spreadsheet solutions. Companiesmay find themselves in the samecostly cul-de-sac when the next set of accounts fall due, unless thenecessary skills and systems areavailable in-house and they are ableto look beyond immediate deadlinesat how to develop sustainable IFRS-compliant procedures.Although IFRS is currently confinedto listed companies, the accountingprinciples covering other entities inthe UK are being brought into linewith the new standards.

For many, the problem is notnecessarily the workload, but theoften inadequate and incompatiblepatchwork of systems that are used to accomplish it. As Figure 5highlights, nearly half of respondentscomplained about problems withmanual processes during the lastreporting cycle. One in fiveexperienced difficulties with poorquality data and delays from systemsinterfaces not operating properly. It is also noticeable that some of thelate delivery is caused by information


0 100-20

Strongly disagree (1) Partially disagree (2) Partially agree (4) Strongly agree (5)

-6% 44% 44%

Mean score1 = strongly disagree5 = strongly agree

4.25%

Neutral (3)

6%

Figure 3: ‘Finance is seen as a strategic business partner to the organisation, not just as producingaccounting and statutory information.’ To what extent do you agree with this statement?


0 100-20

Strongly disagree (1) Partially disagree (2) Partially agree (4) Strongly agree (5)

-6% 50% 44%

Mean score1 = strongly disagree5 = strongly agree

4.31%

Figure 4: ‘Finance plays a proactive role in helping to manage the organisation rather than just deliveringmanagement accounts from the previous month.’ To what extent do you agree with this statement?


Actuarial

Reinsurance balances

System interfaces not operating properly

Investments

External bureaux

Group

Late delivery from:

27%

20%

20%

13%

7%

7%

0 100%

Manual processes

Late adjustments

Compliance with multiple accounting rules

Multi-GAAP reconciliations

Poor data quality

Other


47%

40%

20%

20%

20%

14%

Lack of experienced staff 7%

0 100%

Figure 5: At the last annual reporting cycle, what areas were the most problematic in the reporting process?



not being supplied on time byother internal functions. Better co-ordination or even a dedicatedproject manager may help toresolve some of these difficulties.

In the long run, IFRS could help tosimplify disclosure through morecomparable and compatiblereporting systems. We are alreadyseeing moves to align financialand regulatory capital reporting in

preparation for the EU’s Solvency IIregime, which could providevaluable synergies in some of themost taxing areas of work such as risk modelling and scenarioanalysis. Growing co-operationbetween the InternationalAccounting Standards Board andthe US Financial AccountingStandards Board also holds outthe prospect of harmonised global reporting.


Objectives forimprovement

Nearly two-thirds of respondentssaid that they have a clearlyarticulated forward-looking vision for the finance function that isunderstood within the organisationand integrated into the overallcorporate mission. In most cases,this includes formalised delegation of authorities and defined roles andresponsibilities.

A number of companies are lookingto improve the speed and efficiencyof disclosure through the deploymentof more sophisticated datamanagement systems including datawarehouses. This can help toeliminate data processing errors, cutdown on the time taken to producemultiple reports and ensure greaterconsistency in source data. It could

also help to streamline managementinformation, including thedevelopment of exception reportsand corporate dashboards. Nearly a third of respondents use abalanced scorecard and more than40% use external benchmarks toassess and manage performance.Participants reported resultingimprovements in a number of keyareas including working capital andcredit control.

A number of leading companies havealso begun to include non-financialvalue drivers in their managementreports. As Figure 6 reveals, morethan half incorporate benchmarkdata about people, around a thirdabout reputation and more than aquarter on brands and customers,though it is still unusual to report oninnovation within the managementinformation.


Working capital/cash management

People

Reputation

Customers

Brand

Supply chain

Innovation

93%

57%

33%

29%

27%

27%

7%

0 100%


Yes

Figure 6: Do the internal management reports and measures address the following categories of long-termfuture value along with benchmarks?


Nonetheless, it is surprising thatthe availability of balancedscorecards and non-financialinformation is not more extensive.It is especially telling that only40% of respondents seek to assistdecision-making by incorporatingemerging claims trends in theirinternal reporting (see Figure 7).

An equally mixed picture emergesin relation to business planning.The short-term business plan istypically translated into theorganisation’s budget for the next

year and into the long-termforecast for the years thereafter.However, only a quarter have fullyestablished a formal frameworkthat documents the key issuesthat need to be considered whiledeveloping the business plan,including scope, objectives, extentof scenario analysis, potentialissues and review procedures.Nearly 40% have no formalfeedback programme to measurethe effectiveness of the planningand forecasting processes and reports.


‘There is no pointproducing informationthat is not looked at.’Survey respondent

Exchange rates

Interest rates

Emerging claims trends

Consumer confidence

Gross Domestic Product

64%

53%

40%

14%

7%

0 100%


Yes

Figure 7: Does the internal reporting incorporate external and macroeconomic data such as the followingto assist in decision-making?



Dealing with regulation

The burden of compliance is likely to be a key influence on theeffectiveness of the finance function,both directly in meeting increasinglyexacting regulatory demands, andindirectly in how much time it leavesfor other activities. Most respondentsappear to be managing regulationreasonably effectively. As Figure 8highlights, more than 90% ofrespondents have a formal processfor tracking any regulatory changesthat might affect finance andensuring the impact is evaluated andcommunicated around the organisation.More than 80% systematicallyupdate policies and procedures androles and responsibilities.

Many participants will be required to demonstrate compliance with the Sarbanes-Oxley Act as a result of their parent company’s US listing.Fewer than half of these have doneso as yet. Of those that havecompleted the implementationphase, some are beginning torecognise the benefits. One alreadyuses the Sarbanes-Oxley review asthe key control in ensuring that alldata/measures reported tomanagement are always reconciledagainst the underlying records.


The impact of compliance changes is evaluated and communicated

The key regulatory compliance changes impacting finance are immediately known

Finance roles and responsibilities are defined

Business processes and computer systems changes are documented

The finance policies and procedures are created or updated

94%

94%

88%

81%

81%

0 100%


Yes

Figure 8: Is there a formal process in place whereby:


‘We use Sarbanes-Oxley as a benchmark.

It helps the CFO tosleep better at night.’

Survey respondent

Retention anddevelopment

The increasing demands on thefinance function are making itharder to recruit qualifiedpersonnel and putting existingteams under strain. Staff turnoverin 2004 was around 10% onaverage, though for some it wasup to 15%. However, recruitmentand retention policies are still oftenreactive. While all job descriptionsinclude a clear definition of therequired skills, only around a thirdof respondents carry out analysisto identify the skills needed tomeet changing requirements andpinpoint any gaps.

Recruitment is increasinglyexpensive, encouraging manyrespondents to improve trainingand focus on career developmentand promotion from within theorganisation. Around two-thirds ofrespondents operate a qualityimprovement programme andmore than 80% offer structuredtraining for all finance staff.However, as Figure 9 highlights,

in most cases this is fewer thanfive days per year. With so muchof this time being taken up byenabling staff to keep abreast of the latest accounting andregulatory changes, it is debatablehow much this training helpsfinance personnel to thinkstrategically and support decision-making.

Almost all participants also offerpersonal development planscovering such areas as technicalskills or career planning. Somecompanies have gone one stagefurther by linking training directlyto their performance appraisalsand offering share options as anincentive. Few, however, offer helpwith the work-life balanceconundrum, despite the potentialfor burn-out. Moreover, less thanhalf have formal succession plans,which is surprising given thegrowing competition for seniorpersonnel.

It is perhaps fitting that the reportinto the findings of our latestLondon Insurance Market survey


More than 10 days per annum

6-10 days per annum

3-5 days per annum

1-2 days per annum

6%

6%

69%

19%

0 100%

Figure 9: How many days of training do finance function staff undertake annually?



should end with succession plans as the Market is entering a difficultenvironment that will test the resolve,strategic insight and other leadershipqualities of today’s seniormanagement. Although questionmarks remain, many organisations

are laying the foundations for abroader portfolio, stronger riskmanagement and a more effectivefinance function. Their performanceover the next 12 months will revealwhether they can realise the benefits.


London Insurance Market

Background

The London Insurance Market is a subscription market in which large primary risks and reinsurance covers aretraded and in 2005 comprises:

• 62 Lloyd’s syndicates (backed by individual Names or corporate capital);

• UK-domiciled insurers and reinsurers; and

• UK subsidiaries and branches of US, European andinternational insurers and reinsurers.

Total capacity in the London Insurance Market is of theorder of £25 billion, of which nearly £14 billion isprovided by Lloyd’s.

The London Insurance Market is a centre of underwritingexpertise, especially in specialist risks such as aviation,marine and energy.


Contacts


If you would like to discuss any of the issues raised in this survey inmore detail please speak to your usual PricewaterhouseCoopers contactor one of the partners listed below:

Philip CalnanTelephone: 44 20 7212 4419Email: [email protected]

Roy ClarkTelephone: 44 20 7212 5670Email: [email protected]

Paul DelbridgeTelephone: 44 20 7212 3085Email: [email protected]

Andrew KailTelephone: 44 20 7212 5193Email: [email protected]

Mark StephenTelephone: 44 20 7804 3098Email: [email protected]

Producing the survey

We are extremely grateful to all the organisations and executives whokindly gave their time to the development of this survey, and in particularthe openness with which they discussed the issues facing their industry.

The research and production of this survey report involved a large team of people and we would like to thank the following for theirvaluable contribution:

John AshworthPeter BoxDawn ElmsChristine GrayLouise HayterMark KnowlsonDavid Morey

Sarah MurphyAlpa PatelIoanna PanayiotidouJames SmithMelinda StrudwickHannah Wilson

PricewaterhouseCoopers International Survey Unit (Belfast)Alison BlairLorna McAuleyLynne Rainey

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services for public and private clients. More than120,000 people in 144 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders.

For information on other insurance and financial services related publications or if you would like additional copies of this survey please contact Louise Hayter, Senior Manager, Global Insurance Marketing, on 44 20 7804 7083 or email [email protected]

© 2005 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopersInternational Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP. Designed by studio ec4 17534 (09/05)

Disclaimer:

PricewaterhouseCoopers has exercised professional care and diligence in the collection and processing of the information in this report. However, the data used in the preparation of this report (and on which the report is based) was provided by third-party sources and PricewaterhouseCoopers has notindependently verified, validated or audited such data. This report is intended to be of general interest only and does not constitute professional advice.PricewaterhouseCoopers makes no representations or warranties with respect to the accuracy of this report. PricewaterhouseCoopers shall not be liable to any user of this report or to any other person or entity for any inaccuracy of information contained in this report or for any errors or omissions in itscontent, regardless of the cause of such inaccuracy, error or omission. Furthermore, to the extent permitted by law, PricewaterhouseCoopers, its members,employees and agents accept no liability and disclaim all responsibility for the consequences of you or anyone else acting, or refraining from acting, in relying upon the information contained in this report or for any decision based on it, or for any consequential, special, incidental or punitive damages to any person or entity for any matter relating to this report even if advised of the possibility of such damages.

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