London’s commercial insurance market is still the world’s biggest, but questions remain about its future

London

The London commercial insurance market is still the biggest in the world, but for how much longer?

In direct commercial insurance, London wrote £30.5bn ($47.7bn) of premium in 2013, making it the largest hub by far, according to a recent report by the London Market Group and Boston Consulting. The report states that London alone writes around 10% of the estimated global total of £307bn.

The US as a whole writes more commercial business (£122bn), but the largest hub is California (£15.3bn) and New York (£10.8bn).

But London’s status as the capital of specialty commercial insurance is under threat. So what is the outlook for the London market, and how will the rise of other insurance hubs affect it?

Partly, the threat facing London comes from other markets copying the factors that once made London unique, such as underwriting and broking expertise, product innovation, secure capital, fair claims payments and a centralised location where insurance firms clustered.

But partly London’s insurance credentials are under threat from the increasing use of data in underwriting, uninsured risks, more globalised insurance firms and the general rise of other hubs, the report went on.

The London insurance market is also at risk from other markets stealing the business that would have historically been destined to be written in London. The London Market Group believes this is the biggest single challenge it faces.

“We estimate, for instance, that between £12bn and £16bn of London premium is at risk of being written in local markets – that is 30% - 40% of our total,” says London Market Group chairman Steve Hearn. “The threats are nuanced, undoubtedly. It is not a straightforward story. But the implications could be stark if we do not react appropriately.”

Coupled to this is the low, and declining, relevance of the London market to emerging markets. The report found that the London market’s share of emerging market business has declined by more than 20% in three years, from 3.2% in 2010 to 2.5% in 2013.

This problem has been a long time coming. London’s status as the preeminent hub for commercial insurance has been under siege for more than 50 years.

Reto Brosi, chief executive, Asia Capital Re says that insurers and reinsurers have been choosing to get physically closer to their customers and risks, and adds: “Different companies and markets have taken a slightly different road, but the general trend is global.”

Other challenges facing London are high expense ratios compared to its peers, the high regulatory burden and the prolonged soft market, the report adds.

So what does the London market need to do about this problem in order to stay relevant in the future?

The London Market Group identifies several solutions. The main one is to meet the demand for new insurance products and avoid the commoditisation occurring in traditional risks.

Other solutions are to make better use of analytics in underwriting to do a better job and give better value, crack emerging and high-growth markets, embrace alternative capital and slash the cost of doing business through infrastructure investment and shared services.

In short, the London Market Group is saying the London insurance market desperately needs to change. One obvious problem with that is the market’s historical entrenchment and resistance to change.

“The problem that London has in competing with other markets such as Dubai is that it has shown a resistance to change for sociological and historical reasons,” said one London market veteran. “Other markets don’t have 300 years of ‘doing it this way’.”

The London market might have a resistance to change, but it has still been trying hard. Initiatives such as the widespread adoption of back-office Ruschlikon software have shown that market players can change, work together and embrace the right technology for the good of the market.

The use of shared services in particular could give the London market a boost, agrees Ebix Europe vice president Jeff Ward, but only if such technology gets complete market support.

“The sort of technology that can give advantages is the sort that everyone has to use before the market gets a significant advantage,” he says. “The market cannot, under any circumstances, afford to march at the pace of the slowest man.”

So what will the future hold for London and the world’s other commercial insurance hubs? Brosi believes there is room for everyone.

“We see the risk landscape evolving globally,” he says. “In mature markets, we see more demand for insuring intangible assets such as services and promises.

“I think there will be plenty of room and opportunity for existing hubs and centres. But new hubs can also evolve to the emerging risk landscape.”

Meanwhile, Hearn is clear that London’s problems require the attention of the whole market to fix.

“The lessons this exercise has provided are not something that the fifteen or so people sat round the LMG table can dictate a response to,” he says. “These are conundrums we need a wider market debate to resolve.”

It seems that the London market is not doomed yet, and it has a bright future if it can work out how to secure its future relevance alongside the world’s other insurance centres. If the London Market Group’s recent report is anything to go by, the market’s challenges are also its potential opportunities.