Global Reinsurance conducted an informal survey of the senior executives of a representative sample of IUA member companies.
What does the London company market need? How has it changed? What lies ahead? Global Reinsurance conducted a blind survey of chief executives and managing directors from about a third of the IUA's active member reinsurers to uncover the answers to these and other questions. Strong views and divergent opinions combined to paint a bleak picture, despite optimism over market conditions.
Broad consensus emerged in the identification of the London market's greatest imperative for 2001: effect change to restore profitability. However, the company market's leaders found different ways of describing the goal, ranging from the policy-like, “make an underwriting profit, before investment income, and including an appropriate return on investors' capital,” to the single-minded, “working as a community to implement the various proposals for updating the processing of our business,” to the simply blunt: “concentrate on survival.” “Obtain realistic terms.” “Regain trust.” The commonality in the divergent answers is the call for action. Words such as regain, improve, get back to, and recapture were abundant. Absent were the satisfied sentiments implied by words such as maintain and continue. Clearly, none of the companies questioned are happy with the status quo.
Slightly more than two-thirds of responding IUA member companies said they have not signed up to the London Market Principles 2001 (LMP2001), broadly in line with widespread reports. Of those that have not committed to the terms of the Green Book, 15% are not going to. “We do not agree with the General Underwriter Agreement and changed role of the leader,” one refusnik declared. About 30% said they intended to sign up, but were waiting for more detail from the programme office, or, in one case, training. The rest – more than half – are undecided. “The case for LMP2001 is not yet proven,” one company manager wrote. “Our major concern is delegation of authority, and possible increased costs. However, it is absolutely right to increase the focus on service standards.” Another had more specific concerns: “We are waiting to see the text of the lead agreements. With the increasing speed of communication via IT, we are not fully convinced of the necessity, and harbour ‘suspicions'! [sic].”
The negative tone of some comments belies tacit support. In a multiple-choice question only one respondent gave the effort negative marks. All the rest said it was either “a step in the right direction” (71%) or “just what we need” (24%). The next question reveals that it is the process of LMP2001 which is under scrutiny, since, when asked to mention their greatest frustrations about the London market, most executives cited problems which the initiatives intend to address, including:
This irony is perhaps explained by one company head's declared greatest frustration: “The evident inability to embrace change.” Others included:
When asked to name London's greatest competitive advantage over other reinsurance centres, the answers were less divergent. In contrast to a frustration noted above, one company cited “the ability to manage change” as one of London's competitive strengths. Another wrote that: “We have a tradition of pulling together, but only in a crisis, which is what we are in,” However, almost all the answers mentioned London's concentration of skills and expertise, the knowledge and choice it offers, or its leadership and ability to react to clients' needs quickly. One respondent cited London's concentration as a strength, but pointed out that it could also be the market's greatest weakness. “We are all fighting over how the pie will be cut, with the broker at the centre feeding the mechanism, which is not always good for stability,” he wrote.
Is the size of the pie changing? Opinion was almost evenly split over the future size of the London company market, with about 41% expecting growth in business volume, and exactly the same amount predicting shrinkage. The rest expect no change. Competition and decreased reinsurance buying, the globalisation of risk transfer as enhanced by e-commerce, the increased head-office control of London subsidiaries, and, worryingly, the “flight to the quality of major global reinsurers” were among the reasons cited by those predicting shrinkage. Those predicting growth looked to improving market conditions, new insurance products in the western world, and the growth of emerging markets.
Change is an ongoing feature of London – embraced or not – and the executives polled were in basic agreement on the greatest changes to affect London in the past ten years. Consolidation and concentration of carriers and intermediaries were most-cited, and the increasing focus on quality (of capital and underwriting) was also often mentioned. Changes at Lloyd's, including corporate capital and the formation of Equitas (curiously summarised as “Lloyd's decline” by one respondent), were mentioned as often as the increase in foreign capital and the impact of technology and e-commerce. Some mentioned negative change: “dearth of innovation,” “increased influence of major brokers,” “reduced expertise,” “vulnerability of employment.” Such comments were not balanced by many positive sentiments – although one mentioned technology improving information and communication. Another executive offered: “less drinking at lunchtime,” which can perhaps be interpreted as a comment on underwriting quality.
Each executive was asked to pinpoint the cumulative effect of the three changes he had identified. Responses ranged from “surprisingly little” to “we've lost the sparkle”. Although one respondent said the result was a “more efficient, professional, and competitive marketplace,” most answers illuminated a negative undercurrent, describing the result of change as: “concentration of power into the hands of a few companies,” and “we are handling more complex issues more quickly in an increasingly competitive environment.” Several noted that much of London's decision-making authority had migrated overseas, and another said that change had yielded “a longer than expected soft market cycle.”
On questions of rating improvement and the future pace of the cycle, IUA reinsurance executives are almost unanimous. More than 70% said, with regard to improvements in terms and conditions at the 1/1/01 renewal, they are “satisfied but expecting more.” The rest reported that they are “unsatisfied and insisting on more,” although none are “ecstatic,” and none “dejected.” Even more, some 76%, said they expect that the market will peak in 2002/2003, but a quarter of the reinsurers predicted the good times will roll only until next renewal. None say it has peaked; none expect hard times to last until 2003/2004.
What comes next will be bleak, they agree, mentioning: “a repeat of the sustained downcycle of the late 1990s,” and “a renewed attempt to drive prices down, which will succeed if the major professionals wish to do it.” One gloomy respondent predicts that “worldwide recession” will follow the hard market (surveys were completed before the equity slump); another says that the “roller coaster will begin again.” None of the executives, it seems, subscribes to the occasionally-aired theory that the cycle is dead.
Another area of consensus was a negative opinion of the prevailing terms of payment of receivable premiums. No one reported indifference to the current terms of trade, 53% said they are “deeply unhappy,” 29% declared optimistic dissatisfaction, while only 18% said they were “somewhat dissatisfied.” Yet if brokers are passing on their premiums late, they appear to be doing so in greater volume. The vast majority of companies reported a growth in premium income, while only three reported a fall.
All companies that saw a contraction said it was the result of increased underwriting discipline and the refusal of unprofitable business. “We have exited certain business segments, are re-underwriting the book, and cancelling a lot of marginal and unprofitable business,” one of the shrinking companies said. Yet most grew. Since the survey is blind, no weighting can be given to each respondent's premium change figures, but a crude simple average yields 3.9% growth (excluding one company that reported 170% growth due to a merger). If the companies reporting premium income declines are excluded, average growth at a growing London market company is 17%. All those reporting increases said that increased rates were the result of the rise – except for the merger partner, one manager working under company policy of growth in the UK, and another refreshing respondent who said his company had been maturing, doing a better job, providing better service, and “has been trying to do things right.”
The Global Reinsurance survey of London company market executives ended with four snappy multiple choice questions. All but two executives thought that the role of the capital markets in reinsurance will “grow a little bit” over the next five years. One of the dissenters said it will not change; the other believes it will grow dramatically. Agreement was almost as broad on the timing of the widespread acceptance of electronic placement and closing: 65% believe it will be the norm in five years, while 24%, the e-commerce bulls, say the revolution will come in two years' time. Almost all the respondents selected “a necessary evil” as the best description for the ratings agencies, although a few selected “a helpful service,” and two felt, given the choice, that the ratings agencies are best described as “a protection racket.” Finally, the majority of the company market feels that Lloyd's and the companies, ultimately, should keep their distance, although a handful support a merger, and a the same number are in favour of convergence.
A gloomy angst permeates the chief executives' and managing directors' answers. London has been stripped of its autonomy and is finding its ability to compete, and even the justification for its existence, challenged in the face of the globalising world. The survey responses paint a picture of a market aware of its need for change, but struggling to accept the path of modernisation which it has set for itself. It is revealed to be optimistic about improving conditions, and already enjoying them, yet at the same time resigned to the ongoing cycle of boom and bust, dogged by the past, and dejected.