Pandemic may accelerate long-awaited London market reform

News that credit ratings agency AM Best believes the rise of Covid-19 may finally force the adoption of long-awaited reform and modernisation in the London insurance market is positive for policyholders. Risk managers across Europe have long complained that the London market – which is essential to a number of specialty lines that risk managers cannot source with local insurers – can be expensive and complex to deal with, and the claims process, in particular, difficult to navigate. The Lloyd’s leadership has recognised the need for change and launched its Future at Lloyd’s blueprint in September 2019. This was updated in February this year in response to the Covid-19 crisis, including the following core principles: Building a next generation of the electronic placing platform Delivering a digital coverholder solution Fast-tracking claims process improvements Building data and technology capabilities to underpin the Future at Lloyd’s ecosystem. “Performance in the London market has been under pressure for a number of years, due to a combination of catastrophe losses, soft market conditions and lower reserve releases. While many London market participants began 2020 generally optimistic, on the back of signs of pricing improvement, the Covid-19 pandemic has cast a shadow over performance expectations for the rest of the year, with significant uncertainty surrounding some lines of business in particular,” stated AM Best. “The pandemic – and more importantly the reaction to it – has also thrown a spotlight on the unique way that the London market operates and might even accelerate some long-awaited changes to the way business is transacted,” added the credit ratings agency. The relatively higher cost of doing business in the London market is a problem for many risk managers and needs to be tackled. “The expense ratio of Lloyd’s over the past five years compares unfavourably to that of its European, US and Bermudian reinsurance peers. That difference can be partly explained by the London market’s focus on specialty business, which requires a high level of underwriting expertise and has a high reliance on broker distribution. Inefficiencies associated with placing business, the length of the distribution chain and growing acquisition cost also play quite a significant role in that disparity,” stated AM Best. “Unsustainable operating costs, together with the evolution of the distribution chain, are forcing London market insurers to adapt their operating models in order to remain relevant in a competitive marketplace. Radical action has been evident at the individual company or managing agent level, as well as at the Corporation of Lloyd’s. Increased use of technology, including digitalisation of the underwriter/distributor relationship, underpins the market’s efforts to reduce its operating cost,” it continued. AM Best recognises that being on the front foot and engaging with process change is extremely important for both carriers and brokers if they are going to remain competitive. “In AM Best’s view, the proposed solutions have the potential to create meaningful cost efficiencies and improve the experience of placing business in the market. But their successful implementation is subject to a high degree of execution risk, due to the level of investment that is required and also the cultural change that is still required in the market,” it stated. The huge scale of the losses faced by the London and wider international insurance and reinsurance market from Covid-19 means reform needs to adopted sooner rather than later if the market is to emerge in decent shape post-crisis. “The London market deals with complex and bespoke business, with transactions often negotiated on a face-to-face basis. Most people in the market recognise the significant value this presents, not only in terms of negotiating business, but also more generally in the exchange of knowledge and the sharing of ideas to support innovation. However, the current situation is forcing individuals and companies to be more thoughtful about the circumstances where in-person interaction might not enhance value and could be done much more efficiently electronically,” stated AM Best. “The pandemic has thrown into sharp focus the market’s modernisation efforts and has demonstrated that the progress made by individual insurers on this journey could be a real differentiator. It is clear that some in the market have been much more able to make a seamless transition to the new way of working. Remote working is forcing a long-needed culture change in the acceptance of digital solutions,” it continued. “The question now is whether the pandemic will permanently change the way the market interacts and transacts its business. In AM Best’s view, London market companies and individuals will need to think about an evolution that allows the industry to operate both digitally and in-person interchangeably, to get maximum value for both these elements,” concluded the agency.

Pandemic may accelerate long-awaited London market reform

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