London market faces up to global challenge

In November of last year London Market Group (LMG)—the body that comprises leaders of the main London market players including Lloyd’s and the International Underwriting Association (IUA)—in conjunction with the Boston Consulting Group (BCG) published the results of research on the current health and future prospects of the London insurance market. The research was based on over 300 interviews with customers and market participants around the globe. The report—London Matters: The Competitive Position Of The London Insurance Market—revealed that London’s position as the undisputed global hub for commercial insurance is under threat.hideWhat makes this report different is that it is based on cold, hard facts that cannot be disputed and demand a reaction. In 2013 the London market generated £60bn of gross written premium (GWP). Some £45bn was written in London, backed by London capital, and £15bn controlled by, but not written by, London market participants. In direct commercial insurance, London (£30.5bn) is nearly four times bigger than Bermuda (£8.5bn), 11 times bigger than Zurich (£2.7bn) and 15 times bigger than Singapore (£2.1bn). London is one of the largest reinsurance hubs in the world (£14.6bn), but is smaller than Germany (£27.6bn), Bermuda and Switzerland (both £16.1bn). The market is made up of more than 65 company market insurers and reinsurers, 91 Lloyd’s syndicates managed by 56 managing agents, 8 P&I clubs and over 200 brokers. “London’s competitiveness is commonly seen to be underpinned by a complex set of factors, which were once unique, but are now under threat from other locations which are investing heavily,” concluded Boston Consulting. It determined that London faces six main challenges to its historic position. These are: Customers have a preference for buying insurance in their local market. This puts an estimated £13bn-18bn (30-40%) of London premiums at risk of being written locally, where capacity and expertise is increasingly available. London does not have a strong position in emerging markets, and its share of business in these markets declined by more than 20% from 2010 to 2013. London is losing its share in reinsurance as reinsurance purchasing is increasingly centralised and emerging market growth gains in importance. London’s expense ratios were nine percentage points higher than its peers in 2013, driven by higher acquisition and transaction costs. This clearly puts the market at a price disadvantage for more price sensitive risks. The comparatively high regulatory burden on London market participants raises costs and could put London at a further price disadvantage, if it is higher than the value of regulation to customers. The prolonged soft market cycle, fuelled by the ‘superabundance’ of capital and securitisation of insurance risk, challenges London’s role as the supplier of additional capacity to meet local needs. But, as readers of Commercial Risk Europe are well aware, with every risk comes an opportunity. The London market is not a lost cause. According to Boston Consulting it has six key opportunities to enhance its position. These are: Meet substantial unmet demand for new products and solutions, building on London’s reputation for innovation and flexibility to offset the commoditisation of more traditional risks. Reinforce London’s strength in expertise-based underwriting with improved analytical techniques to deliver value to customers, enable better selection of risk and help retain more commoditised business. Invest in marketing the strengths of the London market. This is particularly needed in emerging markets and should help stimulate customer demand and encourage brokers and carriers to remove barriers to placement. Break down barriers to (re)insurance and intermediation and develop the distribution network to create appropriate local presence and allow London to compete more effectively in high growth markets. Reduce the cost of doing business by improving the market infrastructure, removing London specific process and realising economies of shared service. This would increase competitiveness for commoditised risk. Embrace the rise of alternative capital to take advantage of deep capital markets, build capacity in capital scarce lines and protect against extended soft market cycles. In response to the report, the LMG focused on two particular aspects: the trend towards local buying and the burden of regulation on London. The local buying trend was also identified by Commercial Risk Europe and our sister title Commercial Risk Africa as we carried out our Global Risk Frontiers survey last year. The LMG quoted one Asian risk manager that took part in its research and summed up this challenge for London neatly. “I see an increasing amount of my risk being written in regional centres of expertise such as Singapore. They have a better understanding of our specific needs and risk exposures than someone in London,” said the risk manager. The LMG is also very worried about the comparatively high regulatory burden faced by London market participants. As noted above, London’s costs were nine percentage points higher than its peers in 2013. “The burden of regulation and the cost that imparts on carriers is a concern, especially if it means a reduction in the flexibility of London to offer bespoke solutions and to be able to offer competitive prices,” commented the chief executive of one risk management association to the LMG. Steve Hearn, Chairman of the LMG and Deputy CEO of Willis Group, concluded that the market needs to get its act together and tackle these big challenges collectively and with vigour. “The findings of this research tell a clear story: the London insurance market matters. But London cannot rely on its historic advantages to guarantee its future growth. As a collective, the market must react with speed to the global competition, respond with new innovative products and reinforce the message that London is the best place in the world to underwrite complex commercial risks,” said Mr Hearn. “For the first time, we have a complete picture of the economic contribution of the London market. Government and regulators need to take note and understand our challenges and play their part in helping us to capture our opportunities. We need the right culture and environment to ensure that London continues to be the global centre of innovation and expertise—think the Silicon Valley of the insurance world,” he added. The fact that the LMG Task Force, recently created to work with the UK government to find ways to build an insurance-linked securitisation market in London, held its first meeting with treasury officials at the start of this month shows that action is underway. Mr Hearn, the LMG team and the London Market Association (LMA) deserve praise for the way in which they are currently rising to the challenge. But those of us who have been around the London market for a long time will remember many other collective modernisation initiatives, not least in the field of technology, that ultimately failed because of competing interests. In this sense, London’s greatest strength—the fact that it is a highly competitive and innovative marketplace that shares a common infrastructure and reserve fund—is its greatest weakness. The ability of the market to rise to the challenges laid out by the LMG and Boston Consulting will therefore ultimately be decided by leadership, vision and a willingness to make short-term sacrifices for long-term gain.

London market faces up to global challenge

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