A report from the London Market Group, looking at the competitive position of the London insurance and reinsurance market, finds that it is under threat and one recommendation is to embrace the rise of alternative capital to build capacity.
The report authored by the London Market Group (LMG) and The Boston Consulting Group (BCG) includes the results of extensive market research into commercial insurance and reinsurance, and over 300 interviews with customers and market participants around the world.
The report finds that London’s competitive position as the undisputed global hub for commercial insurance is under threat. The report seeks to give a holistic view of the current status of the market and a look into its future with recommendations for the direction it should take.
The six main challenges to the London insurance and reinsurance market’s future are listed as:
- Customers have a preference for buying insurance in their local market, putting £13-18bn (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 3.2% in 2010 to 2.5% in 2013
- London is losing share in reinsurance (from 15% in 2010 to 13% in 2013) as reinsurance purchasing is increasingly centralised and emerging market growth gains in importance
- London’s expense ratios were 9 percentage points higher than its peers in 2013, driven by higher acquisition and transaction costs, putting it at a disadvantage for more price sensitive risks
- The comparatively high regulatory burden could further increase this price disadvantage for London
- The prolonged soft market cycle, propagated by the superabundance of capital and securitisation of insurance risk, challenges London’s role as the supplier of additional capacity to meet local needs
The six key opportunities which could enhance London’s position as a leading insurance and reinsurance market are listed as:
- Meet substantial unmet demand for new products & solutions, building on London’s reputation for innovation and flexibility in order to offset the commoditisation of more traditional risks
- Reinforce London’s strength in expertise based underwriting with improved analytical techniques
- Market its strengths particularly in emerging markets, to stimulate demand and encourage access
- Break down barriers to (re)insurance and intermediation and develop the distribution network, creating appropriate local presence, to allow London to compete more effectively in high growth markets
- Reduce the cost of doing business to increase competitiveness, particularly for more commoditised risks
- Embrace the rise of alternative capital in order to take advantage of deep capital markets, build capacity in capital scarce lines and protect against extended soft market cycles
We’ve highlighted the risk and corresponding recommendation that relates to alternative reinsurance capital, insurance-linked securities (ILS) and catastrophe bonds or insurance securitisation.
Of concern to the London market should be the cost of doing business there, with expense ratios 9% higher than peers and causing the market to lack price competitiveness for some products. In the current reinsurance market environment this could further erode London’s leading role as a re/insurance hub, especially if other such hubs are quicker to embrace the capital markets and ILS.
The report urges the London market to establish how it can better attract and leverage alternative capital within its businesses. This will be welcomed by some capital market players and ILS managers, particularly those who have wanted to access the London market but found it difficult to enter to date.
The report features telling quotes from those surveyed, some of which clearly show that market participants feel that the London market has been slow to fully embrace alternative capital. Two examples are:
Sticking your head in the sand and waiting for alternative capital to leave, as some London market participants are doing right now, is not a sensible strategy.
VP Reinsurance Management, US Insurer
There are capabilities which pure alternative capital providers do not provide, such as tried and tested claims handling ability. A blend of traditional insurance capability and alternative capital seems like the most compelling offering.
US Risk Manager
Another problem for London right now is the glut of capacity available in the marketplace which means that some cedents do not need to look to the London re/insurance market to fill their program, as there is plenty of capacity in their local re/insurance markets.
The report states that London is only tracking commercial insurance growth and is lagging behind the growth of the global reinsurance market, suggesting that its share is shrinking with each year. In fact London’s share of the reinsurance market declined from 15 per cent to 13 per cent between 2010 and 2013.
Another issue is that customers prefer to buy their insurance and reinsurance in their local markets, where expertise and knowledge is often considered greater than if you take your business to London.
The fact is that the London insurance and reinsurance market remains the largest globally, but is facing increasing pressures and losing business to local market players. That’s a trend that is likely to continue.
Globalisation will result in local and niche markets becoming more important. That is happening in every industry, unless the biggest players can become truly globalised themselves. Here is where London has perhaps not excelled, preferring to bring business to its capacity that is located in London, instead of perhaps setting its capital and capacity free and going to the business.
This is happening, examples like Lloyd’s new Singapore and Dubai locations show that London is trying to go to the business rather than waiting for it to come to Lime Street. However it needs to happen more.
London also needs to be more accommodating to the ILS and alternative capital managers that would like to access the business underwritten there. It has not been easy for the ILS market to break into the London underwriting circles, with only one provide of ILS capital active at Lloyd’s in an underwriting capacity so far (Nephila Capital with Syndicate 2357).
A telling quote from the report states:
“We would like to write more business on Lloyd’s paper, but they don’t seem interested in us. It’s an uphill battle working with them.”
Investment Manager, Alternative Capital Fund
And it’s not just the ILS players, risk managers and reinsurance buyers are increasingly becoming aware of their options to leverage different providers of capacity and alternative capital now features in their consideration set when looking at protection options. They expect to see alternative capital availability in markets like London and want the choice it provides.
Other implications for the London market from the rise of alternative reinsurance capital include:
- Alternative capital settles in the most favourable tax environments, which makes it unlikely that London will be able to attract funds to be domiciled in London
- The additional capacity provided by alternative capital will continue to grow and put downward pressure on prices, especially in property catastrophe business
- London carriers need to find ways to use alternative capital in capital scarce lines where they could use their expertise to meet significant demand (e.g. cyber, supply chain, and catastrophe)
- Some customers report that they would be willing to pay a premium (at least relative to a pure alternative capital provider) if they could receive alternative capital from a (re)insurer with ratings, traditional underwriting expertise and claims paying ability
The London Market Group wants to stimulate modernisation across the market, which could be extremely beneficial for its participants.
It is to be hoped that London market participants embrace this and realise that the world is much bigger than London alone, capital and capacity needs to be mobile and local expertise will be key as the market tries to grow its efforts in emerging economies.
Alternative capital and ILS continues to be considered a threat by many in London, but this report goes some way towards turning that around and suggesting that now is the time to leverage the capital markets in order to position London as the leading insurance and reinsurance hub for the future.
Alongside the Lloyd’s market’s stated aim to proactively embrace alternative capital this could provide a real opportunity for capital markets investors and ILS specialists to engage with London and find sustainable ways to augment the re/insurance market’s capacity there.
Steve Hearn, Chairman of LMG and Deputy CEO of Willis Group commented; “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.
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.”
The report contains many more insights and recommendations for the London insurance and reinsurance market. You can access the press release here and links to the full report can be found at the foot of that page.
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