The sudden collapse of Silicon Valley Bank (SVB), followed barely a week later by the decline of Credit Suisse Group, raised the ugly spectre of another banking crisis to rival the crash of 2008.
The reasons behind the fall from grace for both banks differed, but they quickly sparked a rapid decline in rating agency and investor confidence
Credit Suisse was only saved by a rushed merger deal. SVB’s future looked more uncertain; its UK arm was quickly rescued by an acquisition deal with HSBC, but the bulk of its operations were left hanging in the breeze, until First Citizens BancShares stepped in over a fortnight later with a deal hammered out with the Federal Deposit Insurance Corporation to acquire all of SVB’s deposits, loans and branches.
The cause of SVB's collapse has multiple strands, but it is a sobering reminder of the interconnectedness of the financial world. That the 16th largest bank in the US can go bankrupt for want of a $2bn raise is quite scary.
Coming less than six months after the UK’s Chancellor of the Exchequer’s disastrous ‘mini-budget’ threatened to crash pension funds when it caused excessive bond market volatility, these developments made me reflect on the potentially huge impact of the law of unintended consequences - and the correlations in the business world between companies’ assets and their liabilities. While the two may be matched, they are typically managed independently in terms of their risk exposure.
That led in turn to a recollection of when, in the 1990s, I worked as a partner in an accounting firm. From year to year we would have an entire management and business structure focused on one product or industry and would then shift the focus of that structure to another area the year after, and so on.
What inevitably happens if you keep shifting the focus of your business, however, is that you lose sight of what’s going on in the back office of your organisation. This can end up with your organisation accumulating an array of legacy IT systems, with employees in different departments calling data items by different names.
You then face an uphill struggle in attempting to amalgamate all of the components of your business, making it more challenging to assess the likely impact of any seismic macroeconomic events on the overall business.
That level of oversight requires robust IT architecture, a strong data management structure, and a clear ownership framework to enable business leaders to provide their board with decent management information and relevant KPIs that will allow them to determine the organisation’s level of resilience.
Transforming the London market
For many mature (re)insurance firms in the London market, some of whom may have been trading for several decades, the likelihood of accumulating legacy IT is high. At the same time, Lloyd's and the London (re)insurance market has something of a chequered history when it comes to major change programmes.
But with data quality an increasingly important part of differentiating yourself in a crowded marketplace, a minimum requirement for any insurance business looking to make its structure more robust should be to ensure all its individual segments report in the same, consistent way.
Furthermore, ensuring that the data acquired from clients and brokers is robust and accurate will enable companies to obtain real insights into the risks being acquired.
Current initiatives for transforming the market –including Lloyd's Blueprint Two, market-wide standardisation of data, and the development of the Core Data Record–have the collective aim of helping businesses to create contracts with straight-through processing, that allow accounting settlement and tax reporting to be done effectively and seamlessly.
While some commentators believe this is isn’t a true transformation programme, because it won’t necessarily change the customer journey, this is a necessary first step toward automating the back office.
This will provide companies with a platform for automating the remainder of the broking and underwriting process, removing frictional costs, enhancing transaction speeds, and giving greater certainty to clients about coverage and claims.
Going further, faster
The key to market modernisation is going to be finding those businesses – whether brokers or carriers – who are prepared to stick their necks out, go as fast as they can, and who are then happy to share their experience.
The advantage for those who get there faster is that they will have the ability to think more deeply about how to leverage third party data to get further insights and create more customer-centric services based on that data. In many lines of business that could be the difference between winning and losing.
However, the reality for many businesses in the London market is a heavy reliance on outsourced IT services - especially when you consider that in the smaller broker community the majority of organisations outside of the top Lloyd’s and London market firms have fewer than 100 employees.
Companies of this scale typically lack the resources and/or budget to carry out wholesale technological change, which is why a mutualised solution for London market digitisation makes increasing sense.
The insurance industry is a comparatively niche business sector which has largely escaped the notice of global technology companies. As such, all but the largest companies have been reliant on a relatively small number of SME technology firms, supplying highly customised solutions to individual companies. This has resulted in a multitude of complex legacy systems which can prove very difficult and expensive to upgrade or replace.
The foundational modernisation work going on in the London market is fundamentally about automating back office operations that clients never see, but is nonetheless a necessary first step towards improving those products and services which are the real client focus.
What that means for a traditional insurance business is that, rather than reducing headcount as it takes advantage of greater automation, it can instead repurpose colleagues to perform other tasks that add value to the business.
To my mind, that's the hidden value in terms of transforming the way that you think about your business- more thinking time, a reduction in frictional costs, and improved service standards that will drive greater longevity of client relationships.