Making Paperless Trails At Lloyd's

London -- When Richard Ward joined London's storied Lloyd's insurance market as chief executive a little over a year ago, he had a tough time understanding his new colleagues' jargon-heavy patter. One thing wasn't muddled: He knew he needed to modernize slapdash ways at the world's oldest insurance market. Each day at Lloyd's, thousands of insurance brokers shop for coverage on behalf of individuals and companies. They bustle among scores of underwriters who sit in groups, or "boxes," and write policies. Historically, brokers and underwriters typically scribbled the rough details of policies for big-ticket items like art, tankers, buildings, or planes on slips of paper. They often didn't bother to define key terms with the underwriters who write the policies in what Mr. Ward calls a "deal now, details later" culture. Lloyd's is mutually owned by its "members" -- companies and individuals who are the insurers who underwrite the policies written in the market. Over the years, these insurers have written coverage on everything from satellites and skyscrapers to Betty Grable's legs and Keith Richards's hands. They also acquired a reputation for being overly aggressive at times -- writing coverage on risks (and at prices) other insurers wouldn't. This led to big losses during industry downturns that threatened to topple the market several times in recent decades. Enter Mr. Ward, a 50-year-old physical chemist by training with no previous insurance experience. In his prior job as CEO of the International Petroleum Exchange, now ICE Futures but still called IP, Mr. Ward had changed the company from an old-fashioned market of haggling traders into an electronic trading platform. At Lloyd's, he is trying to replace paper with electronic processing and accounting. In a letter to insurers last month, he threatened to publish lists of people falling behind his targets and to potentially limit the amount of coverage sold by those who keep relying on paper slips. Lloyd's insurers expect to write policies with up to $32 billion in premiums this year. But Lloyd's has to change, Mr. Ward argues, because it faces more tech-savvy insurance hubs growing in places like Bermuda, Dublin and Dubai. At Lloyd's offices, just a few blocks from the site of Edward Lloyd's 17th-century coffee house, where the market started as a place for ship captains and merchants to trade coverage on wooden vessels and cargo, Mr. Ward talked, over coffee, with The Wall Street Journal about being an outsider trying to update an icon. Excerpts follow. The Wall Street Journal: What did you know about insurance when you took this job? Mr. Ward: I knew very little about insurance apart from a dictionary of insurance terms that my colleagues gave me when I left the IP. It was very helpful because I'd never come across a business with so many terms, phrases, and acronyms of which I had no understanding. The amount of jargon was really quite extraordinary. I remember one of the first conversations I had here. There were literally 20 or 30 acronyms or phrases that I just didn't understand. WSJ: Does your experience running a derivatives exchange, or as a scientist, help? Mr. Ward: This business is mainly about people, managing change, and risk. When I think about my previous job, it was also about understanding risk, change and people as well. That is a common thread. With science, it's a bit more tenuous. But my time as a scientist prepared me very well for my career in business. It taught me to think and analyze problems in a disciplined way. WSJ: How do you wage a war against paper in a place that's used paper for more than 300 years? Mr. Ward: The expression I've used is that if you want to eat an elephant, the best way to do it is with a teaspoon. What I'm saying is that if you take a big dig into it, you will choke. I look upon the Lloyd's processes as the elephant. We have to take small bites out of that elephant to make sure we can digest the changes we're making. We're taking small bites with things like electronic claims filing and electronic accounting and settlement. We are sorting out the quality of contracts and introducing the checking of contract terms. Each is a small bite, but when you put them together, I do think they will have a significant impact. WSJ: Is simply making sure that insurers and customers agree on details before a policy takes effect one of the biggest changes under way? Mr. Ward: I found it odd that we had this "deal now, details later" culture. The percentage of certain contracts is rising. The latest figures have us at over 90%. Now we're moving toward what I'd call a quality-assurance phase. That is a process of contract-checking to ensure we have the right terms in the contract and that those terms are checked before an insurer takes on the risk. WSJ: Will handling more claims and policies electronically avoid having brokers lugging so much paper around? Mr. Ward: The first day I came to Lloyd's, I was in one of these wonderful wall-climber lifts we have. A lady came into the lift with a suitcase on wheels. I said, "Have you been anywhere nice?" and she said "I'm afraid these are just claims files." Now 30% of claims are being processed electronically. That's good progress, but from where I'm sitting, it's never fast enough. By the end of the year, I'd like all new claims to be processed electronically. You should see some of these claims files from the past -- the sheer volume of papers with Post-it Notes stuck on them. WSJ: How much paper is the market generating each day? Mr. Ward: A colleague of mine in the IT industry estimated we're generating about four tons of paper a day. That's all going down to Chatham [a London suburb] in these white vans. I think they're white. I've never seen one. They don't have Lloyd's emblazoned all over them. We try to keep them below the radar screen. The target we've set ourselves is that by March 31, we crush the vans and all of it is processed electronically. We might have a symbolic crushing of a van, and it might become a piece of art somewhere inside or outside the building. That might be quite appropriate to do once we've reached our goals. WSJ: What levers can you pull to fight resistance? Mr. Ward: There is willingness and acceptance of the need for change here. Obviously, delivering that change is difficult. When you talk to the CEOs, they say "absolutely we need to do this." But it's the execution that is harder and the disconnect sometimes between CEOs and the people actually doing the work. It's not easy to change behavior and culture. . . . We could always fine people, but I'm not that comfortable with that. The name-and-shame or name-and-praise league table idea is on the table, too. You might say here are the 10 best, now where are the rest of you? I like that concept. WSJ: Premiums are falling, or softening, which can lead to big losses down the road. Mr. Ward: We can't afford to repeat the mistakes of the past. I think we're making progress. It's interesting to compare 2005 and 2001, for instance. In 2001, we had over $4 billion in claims from the World Trade Center [terror attacks] and we reported a loss of $6 billion. In 2005 hurricanes Katrina-Rita-Wilma led to claims of over $6 billion, but we had an overall loss of just $200 million. That tells people who come to our market that we are more disciplined underwriters. We are not a place where you put everything on black and 32 and spin the wheel. WSJ: Is there a concern about updating Lloyd's without chipping away at iconic features like the underwriting room? Mr. Ward: We must be very careful to not throw out the baby with the bathwater. There are many things about Lloyd's that are frankly just superb, starting with the Lloyd's brand itself. We've got an underwriting room full of individual entrepreneurs. Their willingness to consider new risks and the speed with which they can understand and price new risks is unparalleled. That's a Lloyd's-ism we need to keep, for instance. I believe we will still have an underwriting room in 10 years because of the complexity of the risks being placed and the lack of standardization in contracts. If there is more standardization, maybe through the use of technology, maybe the time frame will shorten. But I haven't seen two placement documents that are the same. WSJ: Where will Lloyd's be in 10 years? Mr. Ward: Distribution will be increasingly important. We see more business being placed locally, so we need more local presences around the world. In Singapore, we've established a Lloyd's underwriting structure. In China we have a different model, but we are there. We are looking at the Middle East, South America, as well as India.