In April, Willis Towers Watson announced the launch of Radar Workbench, a new software product enabling frontline underwriters to make better decisions at pace and, more recently, Chubb engaged the services of WTW’s insurance consulting and technology business for advanced pricing delivery software. All in all, it’s been a busy time for Dave Ovenden (pictured), global head of product, pricing, claims and underwriting consultancy at Willis Towers Watson, and his team.
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It’s been quite the journey for Ovenden, who wrote his degree thesis around the future of electronic trading in the London market in 1992, and has seen first-hand how the last three decades have shaped the space. Discussing the benefits and challenges that come with commercial insurers trading digitally, he noted that a prescient thing to have come out of last year’s COVID wording shock was the revelation that digital trading done well allows insurers to understand what contracts they are trading on.
“Proper digital trading means you will understand these digitally and therefore be able to run analytics, by asking questions of the platform and thus allowing insurers to really know what they’ve covered. It’s not that they don’t know now,” he said, “just that it requires a lot of effort to go and find it out whenever there’s a market shock. And it happens every time there’s a black swan event - the industry has to find out what it’s covering and, with digitally traded risks, you’re able to wrap your mind around that much quicker.”
Another interesting benefit of exploring digital trading, he said, is that if you have proper digital contracts, they can be much smaller because the process removes friction, of which there is traditionally a lot in the commercial value chain. From the client all the way to the reinsurers, there is a lot of rekeying, energy and effort that shouldn’t be necessary. Beyond the expense saving, with this removed, products can become smaller because the cost of trading a product is very low.
“Current contracts tend to be quite big as they’re designed around people’s aggregate appetite,” he said, “but you could be much narrower in your contracting, and, as a result, you might be able to get the customer a better outcome, earlier. Because what you’ll find is that people with appetites for the macro product, might not be able to do everything for that type of exposure, because they’ve got their own risk appetite.
“So, if they were able to carve that out so they could do 90%, but the remaining 10% could go somewhere focused on that 10%, you could get a situation where, by having smaller, modular components, there’s more liquidity in the market, which means better outcomes for the end client.”
Among other positives there are benefits such as the rich data that flows around such transactions, Ovenden said, and, from a broker’s or distributor’s perspective, there would be a lot of placement data available. From an insurer’s perspective, such data brings enhanced portfolio grip, as they receive another degree of certainty about their wordings and thus their exposures. Things like accumulation and management, and systemic risk monitoring, become easier if the data is already there to use.
Of course, the commercial market is a different proposition of digital trading than the personal lines space, he said, and it comes with its own array of challenges that need to be resolved. The good news is that it is doable, and most of these problems either have been solved either in the industry or externally by another industry.
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Exploring some of the main challenges, Ovenden took, for example, the wordings component of digital contracts, such as PDF is an electronic document, not a digital contract. A machine-readable contract however, could itself be traded, due to the enormous amount of data appended to it. Such digitally-rich contracts exist within the legal industry, and even in digital manufacturing supply chains, so the industry needs to embrace the innovation that exists in other sectors. It’s not about reinventing the wheel so much as knowing that it exists and figuring out how to attach it to your wagon.
“We’ve been doing some work with the Lloyd’s Corporation around their expectations for portfolio management,” he said. “And actively managing your portfolio from an exposure and pricing and a mix perspective actually is a foundational capability. The data will make it easier to do but those who are doing it today ‘the hard way’ will have the skills and capabilities to make a move to full digital trading much easier.
“I suspect it will be easier, as well, for companies that have it inherently in their DNA - so if you’re an insurer that has a personal lines division, an SME division, and then a complex commercial division, then you’ve probably got it in your DNA to handle things around electronic trading, because you’ll have transferable skills and transferable insight.”
Ovenden highlighted that shifts in digital trading are simpler for personal lines because the nature of its products are simpler and there’s homogeneous unity of data. With commercial, however, he said, you’ve got complex exposures and complex products while you’ve also, at the moment, got comparatively simple pricing. But talking about simplifying contracts or products, is not the way to go.
“So, I refer to [what we do] as codification, not simplification, because making the product simpler raises the risk that client doesn’t get what they need, or an insurer gets an unanticipated exposure,” he said. “Ignoring the complexity of commercial products is a difficult path and could lead to some unexpected consequences. But the codification of that complexity means it is capturable in data and can be described in data… So that’s why we are investing and doing R&D around codification.”
He and his team are lucky to have a sister organisation with a distribution arm, he said, as it allows them to speak with those teams about how they think about codifying their exposure, allowing Ovenden’s team to act as a vehicle for the trends insurers will want to engage with. From this, other challenges have become clear, including the problems that legacy platforms within some insurers may bring. When embracing digital pricing considerations, these insurers will face the challenging question of how to define their automated appetite – i.e. what are they comfortable automating?
“And this needs to be continually tested, so you can get comfortable with other data sets,” he said. “And what’s automatable should be a living thing, rather than something that just establishes broad parameters. It needs to have geography and trade dimensions, and absolute and average relative premium dimensions, and loss dimensions. There’s so many dimensions that need to be attributed to the appetite… and the solution needs to be rich and dynamic. But again, the technology exists, so it can be done.”
