Mark Butterworth sees benefits in recent London market changes but stresses the continuing need for improving service.
A corporate insurance buyer just back from a 10 year round trip to Mars would hardly believe the changes that took place in the London market in the 1990s. On the surface, little seems different and our space traveller would readily appreciate that insurance is (still) a “people business” and see the London market as busy and as sound as ever. But the foundations of the market have felt the seismic tremors of huge losses, with underlying changes required in order to secure London's position as the leading centre for insurance in the world for the future.
The transformation of Lloyd's, in particular, has been incredible - and fundamental to the London market because few people could believe London's global position would have survived if Lloyd's had gone under.
The arrival of corporate capital has provided the much needed financial strength and financial discipline that soundly based insurance operations require. However, welcome though corporate capital is, the ability and apparent willingness of some capital providers to pull out of the syndicates in which they are investing makes me feel uncomfortable about the degree of reliance the market has on the continued support of few distant accountants.
Consolidation within the industry has seen the emergence of the three-letter giants - CGU, RSA, ZFS, AXA and ACE - as well as the disappearance of one of two, such as GRE. Insurers' consolidation has had many positive effects for insurance buyers, with the senior management of these new enterprises determined to pushed down administration costs as part of the savings promised to the shareholders. More efficient use of capital by the larger position-taking insurers helps to control premium levels and these larger companies have the resources to develop innovative risk financing structures.
It is not just insurance company takeovers and mergers that have changed the landscape of the London market. Insurance brokers (sorry, I believe I should refer to brokers as “risk solution consultants”) have, of course, had their frenzy of mergers, all in the name of efficiency and lower overheads. Again, there are certainly real benefits for corporate insurance buyers. The “Big Three” (Aon, Marsh and Willis) are leading the field towards more focused service standards and consultancy skills, with a challenging pack of medium-sized players not far behind. The ability to invest in IT resources, people development and global representation will facilitate growth in the value contribution these firms can offer corporate insurance and risk managers.
But is the consolidation of so many of the London market's insurers and brokers always a good thing for insurance buyers?
There are clearly dangers in any market dominated by a few powerful players and the question of incentive payments, which has had a good airing in the last couple of years, has still, to my mind, not been adequately resolved and could potentially threaten the good reputation of the London market. It will be interesting to see how the General Insurance Standards Council addresses this issue in its forthcoming code and principles. It is also clear that the major brokers control a significant amount of business and there is a danger that clients may become just one of many and feel a little neglected. The management teams of these major firms must ensure that the promise of greater client value-added is, in fact, delivered.
Insurers themselves must not lose sight of the need to provide top rate service. Many corporate buyers might be forgiven for getting impatient with the market “in meetings” and hope that they bed down the merged businesses without delay. Hopefully too, the difficulties certain insurers are presently experiencing will not be “solved” by further takeovers!
The e-commerce revolution is not passing the London market by. The huge volume of correspondence through which the market transacts its business is speeding up through the use of internet e-mail. Brokers are developing improved client serving facilities through the internet such as AonLine, InMind (Marsh) and Adviser (Willis). None of these will replace the need for personal contact.
The future success of the London market depends on underwriters being able to obtain the right premium for the risks they are carrying. There is general agreement that rates must rise but buyers will be highly averse to blanket or unjustifiable knee-jerk increases that are not related to the risks of their own businesses. Buyers benefit from the London market being able to absorb large risks and to co-ordinate capacity. If (or, more realistically, when) premiums start to increase, any signs of a herd-like stampede for rating increases will send buyers searching for alternatives. Captives will surely make a big comeback and relationships will be tested as insurance managers seek competitive and fair alternatives.
London's ability to create a vibrant market stems from the close proximity of so many insurers within a couple of streets and the good fortune of having the main brokers' offices within walking distance. Perhaps it is not simply good fortune but more an understanding of the importance of being able to meet face to face in order to strike deals.
There is clearly a basis of trust in the dealings between an underwriter and a broker, developing over time as the two parties get to know each other. Clients are featuring more and more in the meetings with underwriters and brokers. It is probably now the norm in the London market, rather than the exception, that underwriters have a close working relationship with their major policyholder clients, as well as the broker.
Following on from this is the trend for clients to deal direct with underwriters without involving an intermediary. Many Association of Insurance and Risk Managers (AIRMIC) members find that, for certain types of insurance, they can obtain all they need from direct dealing with the market and that brokers do not materially add value to the process. This, coupled with increasing efforts by insurers and even reinsurers to court insurance risk managers, sets a challenge to brokers to demonstrate just how and where they do add value, and justify their fees. Brokers are not redundant - far from it - but the pressure on them to grow in professionalism and quality of service has never been greater.
Investment banks and capital market players promoting alternative risk financing are now also approaching insurance buyers, citing the sheer size of the capital markets and their ability to structure bespoke deals. I cannot see that the London market will be overtaken by this competition, rather it is another reason for innovation and higher standards of service among insurers and the broking fraternity. It will be a while yet before we fully understand the implications for the London market of the convergence of the banking/capital and insurance markets.
AIRMIC has developed close working relationships with a number of institutions that represent the interests of the London market - a role I believe to beneficial to all concerned. For example, AIRMIC members meet with the Association of British Insurers (ABI), Lloyd's Non Marine Association and Lloyd's Corporation to provide comments and feedback on issues of importance to corporate insurance buyers. we also work with the Chartered Institute of Loss Adjusters on trends in loss management and containment.
AIRMIC's executive management team places great importance on good public relations; in 1999, our comments and viewpoints were represented in over 50 different journals. It believes that good risk management and sensible, cost effective risk financing programmes play a vital part in the direction and management of an enterprise and that this message should be carried particularly to the senior directors of these enterprises.
Insurance buyers are generally involved in risk management practices in their organisations and contribute to their firm's corporate governance activities. AIRMIC made a major contribution to the Hampel Committee on Corporate Governance (The Combined Code) and the Turnbull Committee's work that resulted in the Guidance on Internal Controls. Risk management, and consequently the risk financing strategy, have become board agenda items for all listed companies. It is binding upon all those involved in the insurance function to ensure the role they play meets the expectations of the board.
The corporate insurance buyer back from Mars will be delighted to see that the insurance role has been projected into the boardroom limelight. He will expect his advisers and carriers to support him with the highest standards of service, in a market that makes best use of both IT and personal negotiation, that has the ability to issue the contracts upon which the product is based within a few days not a few months, and to honour without too much resistance the aims of the insurance contract. I have no doubt the London market will respond fully to these expectations for a long time to come.
Mark Butterworth is chairman of the Association of Insurance and Risk Managers, which has over 900 members with insurance premium expenditure of over £1 billion. Its aims include representing the views and interests of insurance and risk managers to key industry and government decision makers and creating networking opportunities for all those involved in the insurance and risk management community.