Taking stock of emerging risks in the digital landscape

The contours of risk are changing, becoming more connected and interdependent. There are several examples, but an apt one is the current pandemic that exemplifies how risks are becoming global, complex and difficult to address. Recent research reveals that 73% of general public and 83% of risk experts believe that populations world over are more […]

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Future At Lloyds: Digital Blueprint for a 330 Year Old Exchange

In Sep 2019, Lloyds of London published their vision for the Future at Lloyds (FAL) as Blueprint One. Amid a tumultuous world economy, Lloyds has refined its strategy and game plan to launch Blueprint Two last week, a bold two-year program to establish newer ways of doing business, driven by digital channels with advanced data […]

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Economic reality sharpens future vision for insurance and pandemics


I have been writing about the potential and now actual insurance effects of COVID-19 since late February, and the discussion has evolved from what might be, to what is, to what is not, and to what is now how the industry must begin taking action on what might be for a next pandemic or other systemic risk. 

It’s no longer sufficient to allow coverage gaps to exist for global-effect occurrences, even if another like outbreak may not occur for years or decades- the economic shock presented by being unprepared is simply too great.


Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

The historic pattern is clear in how global economies react to systemic risk events- wailing, gnashing of teeth, rending of garments and governments stepping in to backstop the losses.  For the U.S. and elsewhere the needed government action is due to the outcome of businesses expecting their insurance policies to help cover economic losses due to the mandated shutdowns, and insurance companies never expecting BI losses to be part of insurance coverage.

As of this article’s writing the effect of COVID-19 is exemplified in the U.S. 2020 Q1 GDP results-   -4.8% on an annualized basis, coming on two months of growth and one COVID-19 affected March.  A similar result for Q2 would be unexpected as April and May could produce even less robust results.  Percents and projections, resulting in real-world declines of a few trillion dollars, and mirrored results in other countries.

Can a first step in planning be an understanding of the vagaries of business insurance and business interruption cover?  Not having easy access to policy forms for carriers outside the U.S. market we’ll just have to use the U.S. policies as exemplars.

Description of BI (Business Income or Business Interruption) coverage per U.S. carrier websites:

  • Carrier A– “Helps replace lost income and helps pay for extra expenses if a business is affected by a covered peril.” Lost income being described as revenues minus ongoing expenses.
  • Carrier N– “Helps you pay bills, replace lost income and cover payroll when a covered peril forces you to close temporarily.”
  • Carrier TH– “Can help replace any income your business loses if you can’t open for a time after a covered loss.” Income being total revenues less business expenses, operating costs.
  • Carrier H– “Will pay you the income your company would have made during the period it’s out of action due to a covered loss…including normal operating expenses incurred…most of employee payroll.” Income being revenue less normal operating expenses.
  • Carrier T- “Helps replace income and expenses.”
  • Or per ISO form CP 00 30 04 02
    • Business Income means the:
      • Net Income (net profit or loss before income taxes) that would have been earned or incurred; and
      • Continuing normal operating expenses incurred, including payroll.
      • Must be caused by direct physical loss of or damage to property…in the Declarations.

The carriers’ descriptions of BI cover seem similar, but each has its unique wording and intention.

To highlight varying benefits across the spectrum of the carriers noted above, consider a small business scenario as follows:

  • Monthly revenue- $25,000
  • Payroll- $15,000
  • Rent- $2500
  • Utilities/other expenses- $3500
  • Taxes- $2000
  • Net income- $2000

A one month disruption of the business due to physical damage to a covered loss, insured unable to conduct any business, payroll and expenses are continued, provides the following estimation of the BI cover outcomes:


$2000 BI cover, or $25,000?

Of course the devil is in the details of the policy coverage verbiage, but the tendency is clear- policies differ, there’s a significant variance between policies that cover loss of income alone versus policies that cover loss of revenue and ongoing expenses, or policies that cover ongoing expenses and loss of income.  What is uniform is that BI cover stems from, 1) a cause of loss a policy covers, 2) physical damage to covered property, and 3) no exclusions to coverage applying. Unfortunately, with COVID-19 the drivers of cover are not present in most BOPs and the BI costs are not covered.

That good first step in grasping the gravity of the coverage problem starts with the scenario noted above, and the economic effects extended to the U. S. business economy at large.

There are by estimation anywhere from thirty two to forty million businesses in the U.S., 99.9% being small/medium businesses, with an estimated thirty million being insured by business owner’s policies (BOP), and all being affected by COVID-19 shut down effect- some more than others but the majority affected entirely with full business interruption.

The potential BI data are stark:

  • Thirty million policies with a modest coverage limit of $50,000 would represent a probable maximum loss in a similar pandemic of $1.5 trillion.
  • Thirty million businesses claiming BI damages for one month- even if the claims average $20,000- equates to $600 billion.
  • Thirty million BI claims constitute an estimated $22.8 billion in adjusting expense.
  • Thirty million BI claims would require 600 million man hours to prepare, and
  • 300 million man hours to adjust, or ten man weeks for every claim staffer employed in the U.S. P&C insurance industry.

The U.S. is two months into a shut down, so the potential BI loss cost grows to $600 billion plus LAE (loss adjustment expense).  Want to guess what the entire amount of available cash and investable assets are for U.S. P&C carriers?  $1.75 trillion.  Considering these numbers- having business interruption cost financed by traditional indemnity insurance cover is as carriers have known- untenable.

However, insurance carriers cannot be blind to the economic effects of COVID-19 because they affect the viability of a large segment of the carriers’ business base- the SMEs. Economic pressures from legislators and litigation are presenting potential ex post facto cover, and if the outcomes pass constitutional muster the end effects are enormous in implication.  The inability of the industry to deal with the logistics of handling the claim demands are clear.

There must be plans to shift expectations from no response to some response, indemnity investigation to parametric,  avoidance of customer responsibility by all to collaborative and shared responsibility by insureds, insurers, the capital markets, reinsurers, and government.  Early efforts in the UK in devising a fund in parallel with Pool Re, France working on an insurance backstop for pandemics, and early U.S. efforts to craft a similar plan as the terrorism TRIA fund are meaningful, but absent serious consideration of parametric options not meant to solve the BI cover problem but to take a big edge off of it will carry the industry to a similar place as now.

There are additional efforts being made to build discussion; Lloyd’s Lab is sponsoring varied innovation programs focused on COVID-19 matters, and insTech London is in the midst of its sponsored podcast series on pandemics and what might come next for insurance (yours truly participating with Dr. Marcus Schmalbach , Laurie Miles and Matthew Grant in the 5/05/20 session).  These efforts as well as those of the nascent Ten C’s Project (more to come) are the counter to having no insurance response, or inconsistent, impractical indemnity programs that cannot apply as designed.

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Blueprint One- a building plan for a Lloyd’s digital/culture change decade, or pie in the culture change sky?


It’s really a tour de force, the 146 page Blueprint One recently released by leadership at Lloyd’s, a detailed road map for the staff and approximate ninety syndicate players that comprise the firm, its reinsurers, customers, associated MGAs, vendors, brokers and agents.  Plans, flow charts and implementation strategy that are planned for the next two years, with all the new moving parts in synch by close of 2022.  Oh, and did I mention the £35 billion in annual premiums that the organization generates through its stakeholders?  Bold plans for a three-hundred-year tenure organization.  And there is the unmentioned tension- an entrenched business model planning to evolve into an agile, cutting edge tech leader.

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.


Lloyd’s is the industry standard bearer for specialty risk management, AKA ‘the stuff an underwriter can’t thumb to in his/her U/W manual’.  Its technique and mystique have evolved during the more than three centuries since a few gents sat in front of some pints and pondered financial hedges against loss of shipping cargos.  Why then, does the firm think that several months of research, interviews, participant interviews, technology vendor schemes, and resulting blueprint from Lime St are the best answers to changing the course of the culture and operations of a complex global insurer?

Consider this voice from the street (location to remain unmentioned):

“Sadly, it seems that Lloyds underwriters have developed a degree of contempt for the XXXX market, over the last year I’ve seen the worst performance from certain Lloyds underwriters I’ve ever experienced in the last 20 years or so. In particular, not having renewal terms ready in time when renewal submissions have gone in well on time. It’s definitely a hard market from where I’m standing, and it isn’t particularly civilised either!”

Well, hard markets currently abound for many reasons across the globe, and anecdotal responses are a little unfair.  But the basis of the speaker’s concerns may not be- Lloyd’s is a huge, multi-variate, multi-cultural, global organization that cannot be changed under dictate, singular plan, or silo-driven flow chart.  Underwriters remain subject to the performance matrix of the day, and grand plans from on high take a rear seat when quotas aren’t met, or loss ratios are trending north.  Additionally, the firm remains entangled in aftereffects of sexual harassment accusations, mitigating the perceived impact of an over-arching office culture of suits and club decorum (although well past the days of PFLs), and recent years’ declining profitability.  Can Blueprint One be communicated, integrated and adapted uniformly in the face of these challenges? And can the evolution avoid the strong effects of the “Quarterlies?”

Culture and process changes aren’t new with the advent of Insurtech, innovation, globalization or change of leadership.  Much of what the blueprint discusses has its foundation in technology and transparency across the organization’s depth and breadth.  At its core we are talking insurance, so the topic may be busy, but it’s not rocket science.  Identify risk, understand risk, price risk, hedge risk, service occurrences that confirm risk (claims), and pay less than is taken in.  The firm is smart, therefore, to look to leverage technology for easy inclusion of participants across many regions and many forms of access, easier aggregation of business, more effective application of information, collection of data, and so on.

Consider the Blueprint’s ‘what it is’:

  • The firm’s strategic intent, description of vision.
  • Current thinking on each of six identified solutions-
    • Complex Risk platform
    • Lloyd’s Risk Exchange
    • Claims Solution
    • Capital Solution
    • Syndicate in a Box
    • Services Hub
  • Details of the initial phase of each solution
  • Invoking cooperation from Lloyd’s market players in the firm’s future
  • How and why success will be gained.

That’s on page 7 of the 146 page blueprint; it is an ambitious, wide scale road map.

It’s clear the more complex a plan is the greater the chance of incomplete implementation; the more incomplete or disuniformity of implementation the greater the chance of not achieving success.  The firm has its plan, its foundation for success, if the plan can be implemented.

Skipping forward to “Why we will succeed,” on page 11 , and I chime in with some observations that the principles suggest from other large org’s culture/ops changes:

  1. Capitalize on prior market investments (that’s funds spent previously on innovation).
    • This the “not throwing the baby out with the bathwater” approach. How to include the capital investments of the past few years in how we move forward.  A small anchor on innovative thought?
  2. Learn from the past
    • There are plenty of reorg carcasses along the wayside, let’s figure ways to have innovation not die at birthing. Of course putting the words, “Our collaborative approach to building the Future at Lloyd’s will ensure the solutions are designed for the benefit of Lloyd’s and the wider London market,” are contradictory right out of the box.  Perhaps solutions designed by and for Lloyd’s global staff and customers might sound more collaborative.
  3. Communicate regularly
    • Cascade those ideas from Lime St. to the world.
  4. Ensure the corporation and the market has (sic) the right skills to deliver the plan
    • Collaborators- prepare to invest time and money in change management plans that will be as successful as any change management programs. Can’t buy success.
  5. Deliver value to the market quickly
    • The rollout cannot interrupt business. There are those darn quarterly reports.
  6. Deliver the technology in parts
    • Deliver solutions in parts- of course each discipline needs different starting points; the law of unintended consequences will prevail.
  7. Retain control and operational responsibility (for tech)
    • Autonomy is resolving rollout issues will be suppressed to ensure uniformity. There will be scapegoats.
  8. Ensure the appropriate governance is in place
    • Central control of the collaborative integration. Decision making is the firm’s.

Rather than ramble on I am going to shamelessly borrow some innovation/org change concepts from a Property Casualty 360 article penned by Ira Sopic, Global Project Director at Insurance Nexus that has an apt perspective- “Agility is the key to technology innovation for insurers.”  But let’s build a contrast from Lloyd’s presentation.

Agile?  Can a global, £35 billion insurance giant be agile?  Do Lloyd’s customers demand innovation, or will they benefit materially from innovation?  We can see what the author and Lee Ng, VP of Innovation at Travelers Insurance say.

Fundamentally, the article notes org agility means looking at how decisions are made across an org and making significant changes.  That’s ambiguous until the addition of, “you can’t prove innovation before it happens.”  Uncertainty of innovation’s results can be overdone with analysis.  ‘Agile’ is the opposite of ‘waterfall’, an approach where plans and decisions are made at the top and cascaded down through the org as steps in a process are encountered.  Rolling out comprehensive plans by their nature inhibit iteration- big plans have milestones, have successive designs, benchmarks and schedules.  Agile has ideas, iterative maps, acceptance of failures.  Lloyd’s has established a grand approach to the former method- I kid you not, here’s an exemplar flow chart of planned core technology:

Core tech

Many participants influencing and accessing the tech core of the firm, and those magical skeleton keys to open the doors- APIs and interfaces.

Continuing, agile can be successfully piecemeal- protect the primary ROI factors of the biz, experiment with agile ways of working with collateral functions, build the innovative environment without whacking the quarterlies.  The inherent problem with piecemeal approaches?  They are hard to measure for success, and hard to program into project management software.

Another agile tack to take? “Done is better than perfect’.  Resist the urge to over plan, over measure, and to set expectations that the first attempt is a go or no go for the entire org.  A popular innovation concept applies- try, and fail fast.  Then try again.  There are many vendors who are experts in narrow parts of an org’s innovation path- it’s OK to rely on them.  Investment in a POC or two is as good as implementation.

Perhaps another day will allow discussion of the plans for the six Solutions, particularly Claims and Risk Exchange (the nexus of provision of service and of customers’ expectations from the firm.)  In spite of a skeptical take on the Blueprint I certainly want Lloyd’s to remain the bastion of risk management in a increasing risky world, but the concern is the firm is approaching this insurance elephant as a full take away meal, instead of as tapas.

In closing consider this- if there are five levels of Blueprint implementation and each effort has a 98% probability of success, after the five levels there is an aggregate probability of integration success of 90%.  That’s not bad, unless the interplay of five operational areas serving clients is considered with 90% effectiveness at play- aggregate 59% average Blueprint compliance outcome.

Consider those little bites, Lloyd’s.  The industry is pulling for you.

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