Operational parallels with the FX Markets

Every so often I come across some interesting insights into other sectors that could provide some pointers to the “art of the possible” for our own industry. One such instance I came across was the success story of the Foreign Exchange markets.

Forty years ago this was a highly regulated sector, providing exchange services to commerce for the purchase of goods and services, but now it has grown phenomenally to the point where most trades are purely financial.

It is a global 24/5 de-centralised financial market, with London by far trading the largest proportion of business - at over 30% of the total market - with its nearest competitor at around 18%.

So what has driven this growth and dominance? It is perhaps explained through six factors:

1. People – Availability of a skilled, flexible workforce
2. Business environment – Levels of regulation and tax
3. Infrastructure – Primarily the price and availability of office accommodation
4. Market access – Volume of trading and the clustering effect of a number of companies operating at a location
5. Competitiveness – Price level
6. Technology – 24/5 real-time capability, which lowered transaction costs and increased capacity.

It is here we see parallels with the London Insurance market, where we score highly on the first four factors but less so on the final two. Operationally these translate into making it easy to do business from a process perspective and increasing capacity. In my view it is the increase in capacity that is the most interesting.

We have seen that in the endorsements pilot over 90% of the endorsements sent electronically have been dealt with screen to screen. The lack of box visits has increased capacity amongst the scarce resource of brokers and underwriters.

In other words, their time has been released to concentrate on value adding activities such as sourcing new business and secondly because more volume (risks) can go through the same resources it reduces the operational unit cost which improves competitiveness.

An often cited tale is that smaller more attritional risks, as opposed to CAT risks, do not come to London because the frictional costs are too high. It seems that technology can reduce these frictional costs without harming one of London’s unique selling points – face to face trading of complex risks.

The subscription market has benefited from the greater appreciation of concentration of risk generated by the banking crisis which has translated into greater premium volumes. If this newly acquired business can be “locked-in” through reducing the frictional cost, the competitive threat from other jurisdictions reduces.

PS: The IUA’s recently published market statistics report suggests that the market is growing and the ability to do so relatively painlessly (service standards are improved) may be indicative of technology increasing capacity – something to keep an eye on.
 

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