Strengths, weaknesses, opportunities, and threats facing the London company market.

London's company market has a long history as the global centre for underwriting insurance and reinsurance risks. It is renowned as a specialist insurance and reinsurance provider, with a reputation for providing innovative solutions for risks that prove difficult to place in domestic markets. However, the innovation associated with insurance provision does not extend to all aspects of the business. Recent technological advances, particularly with regard to communication, have been widely shunned by underwriters and brokers. Given the emergence of dynamic new insurance centres to rival London, the market cannot afford to be complacent. As is increasingly seen, opportunities develop quickly and they should not be ignored.

One of the London company market's key strengths is the diversity and choice that it provides to cedants. Like any marketplace, however, it contains companies with various levels of financial strength, both weak and strong. The nature of many risks underwritten in London is such that there is the potential for greater volatility in technical results when compared to many marketplaces elsewhere. There is therefore a greater chance of company insolvency, but diversity is maintained through relatively low barriers to market entry, allowing capital replenishment. The presence of many of the world's largest insurers and reinsurers transacting business in London through subsidiaries or representative offices indicates the importance of the market in a global context.

The variety of risks placed in London both adds and detracts from its global position. It is costly to transact business in London, but this disadvantage can be balanced against the strength and depth of the underwriting skills that London possesses but are often lacking in other markets. Other strengths and opportunities for the market include the London Market Principles 2001 (LMP2001) initiative, which is endeavouring to advise on the best practice when transacting business in London, superior servicing of clients, provision of alternative risk transfer products, London's position in world time zones, and the commitment of the global insurance and reinsurance community to the

London market.
However, notwithstanding the strengths that the London company market continues to show and exploit, challenges have appeared over the past decade. Dealing with these challenges is vital to the market's future. Weaknesses and threats have manifested themselves through company insolvency, poor market perception, the relatively high costs of transacting business, and competition from other markets.

In recent years the London market has rationalised operations in order to remain competitive. The single administration platform, and more recently the development of LMP2001, are responsible for laying the foundations of a defence of global market share. The LMP2001 proposals appear to have been well received within the market, and AM Best believes that the focuses of LMP2001 are a significant step forward to the achievement of a more efficient marketplace, where underwriters and brokers have historically worked together to provide solutions.

The cost of transacting business in London is high in comparison with most other markets. The relatively high taxation regime applied on the UK mainland adds to other costs such as brokerage and information technology. Unfortunately skilled personnel do not come cheaply, thus the requirement is to cut the other costs of doing business. Brokerage is a cost that needs to be addressed, particularly as underwriters now have more direct contact with clients.

Historically, London has been a relatively expensive market in which to transact insurance and reinsurance business, but the benefits of operating within London have always outweighed the costs. AM Best believes that the current strategies that are being put in place – primarily through LMP2001 – will continue to cut costs, and thus maintain London's position as an attractive location to transact business. Nevertheless, as other markets become more efficient, London's high cost-base will remain a threat to the continuity of the London market.

Service is an area where the London company market can compete with overseas markets. As discussed previously, London offers the ability to underwrite specialist risks, and is thus providing an immediate value-added service to insurance and reinsurance purchasers around the globe. The recent trend has been for the broker to become more of a business facilitator than a broker in the true sense of the word. The broker introduces the client to the underwriter who will develop a relationship with the client. Previously, the broker was the point of contact for the client, particularly in establishing risk transfer requirements.

To a certain extent, brokers remain the main point of contact with the client. However, the underwriters are now much more involved in the process, with client contact high up on their priority lists. This change has evolved as a reaction to increased sophistication of insurance and reinsurance buyers. As such, the underwriters are providing an enhanced service which has the additional benefit of promoting long term relationships with clients, thus providing a more stable income stream. The benefits of providing an enhanced service outweigh the additional costs involved.

Consolidation within the London company market and at Lloyd's is affecting brokers in two ways. First there are fewer choices when placing business. This is primarily as a consequence of underwriters writing larger lines, leaving the broker more restricted in terms of the choice of market, particularly as rates harden. Second, the dominant brokers – Marsh and Aon – are familiar with the inefficiencies in the London market and are seeking alternatives, which results in the redirection of business.

However, the consolidation trend provides an opportunity, in so far as specialist teams are establishing small broking firms that provide an alternative to the bigger players. These smaller brokers do not have the scale of distribution of their larger cousins, and thus rely upon the London market to place risks. This dynamic, which is important to business regeneration, is recognised as one of the London market's ongoing strengths.

One often-overlooked strength of the London market is London's position in international time zones. London is placed between the powerful economies in North America and the Far East. The City is also, of course, in close proximity to the European markets. The ability to transact business during the normal working hours of both the US and Japan gives London a strategic positioning advantage over some other insurance and reinsurance markets. This is increasingly important within the global context of the marketplace.

The commitment to London of global insurers and reinsurers is another advantage. A large number of global players have subsidiary companies in the London market. A threat to this commitment comes from opportunities presented by electronic trading, however, current systems are inefficient and are not widely used. London has continued to thrive, despite competition from continental European risk carriers that transact London market-type risks via fax and telephone.

Alternative risk transfer (ART) is marketed via a multiplicity of products, many of which have not been made available by traditional risk transfer markets. The threat to the London market is considered minimal by AM Best, as there is little overlap between ART products and traditional insurance and reinsurance. There are instances, however, where contracts need to tie up all areas of a client's risk transfer requirements, and traditional forms of reinsurance have supplemented ART. This practice is prevalent in the finite risk product sector.

The necessary skills to transact ART business are already available to the London company market, but less headway has been made by the marketplace than in Bermuda or Dublin, because the demand for traditional forms of risk transfer has not tumbled, despite the increased global awareness of ART products. Many companies in London have tended to take the conservative approach of maintaining a watching brief on the development of ART. The strong infrastructure in London, including the broker network and its global links, provides an opportunity for companies to expand their product range to include ART. If this opportunity is taken, then the London company market could transform from being a net purchaser of ART to a net producer.

Technology impact
Technology should be viewed by the London company market as an opportunity.

In the majority of cases, London market companies have taken full advantage of technological advances to assist in the operations of their businesses, but not as an effective means of transacting business. Due to the complexity of many risks, the London re/insurance market has not been as amenable to transacting business electronically, as banks have been, for example. As a result, it is unlikely that the London market will ever witness the ‘Big Bang' style changes that made such an impact upon the banking sector in 1986.

However, AM Best expects communication technology to have a slow but steady impact upon underwriting over the next five years. We do expect to see an increasing number of endorsements and basic risks being transacted electronically, but do not expect risk transfer systems to transact large volumes of more complex business, at least in the short term. Underwriters in London remain resistant to transacting business via computer, with many advocating the benefits of being able to ‘see the whites of the brokers' eyes' when being presented with a risk. This obviously cannot be achieved electronically, but the fact that risks presented in an electronic format take longer to consider is an essential aspect to consider when assessing the opportunities of electronic trading.

We will leave it to the reader to decide whether underwriters having to spend more time on risk analysis prior to putting their line down is a benefit or not. Under soft market conditions, many would argue that the fewer risks underwritten the better! Under hard market conditions, underwriters typically have less time to cover non-underwriting tasks. It might seem reasonable, therefore, to expect electronic trading to be far from the top of underwriters priority lists whilst the current hard market persists. AM Best believes that it is important that the companies transacting business in the London market stay fully in touch with technological developments to avoid compromising their position in global markets

During the 1990s, the London market was subject to a high number of insolvencies following the impact of asbestos, pollution and losses spiralling out of control on the LMX market. Lloyd's of London came under intense financial pressure, and required a rescue plan. All of this served to produce negative publicity, which tested client loyalty to London and boosted other markets, in particular Bermuda, allowing them to develop at a faster rate. In the opinion of AM Best, the London market has now shed most of the notoriety of the 1990s, and thus the threat to its future has now transposed into a strong position with opportunities to develop new and existing business.

AM Best views the biggest threat to the London market as complacency. Complacency about other markets and their development, electronic trading and client retention must all be addressed if the London company market is to continue as one of the premier insurance and reinsurance markets in the world. This requires improved co-ordination with other participants within the London market as a whole, a move that LMP2001 is addressing.

AM Best believes that the London company market has the ability to retain its global position, particularly in view that it is the home to some of the most talented personnel in the world.

A threat to this is the ability to retain and resource such staff, particularly against the more lucrative financial services industry in London. AM Best believes that steps have been taken to improve areas in the London market, but there are threats that it has still to overcome. The process of overcoming the weaknesses and threats facing London will strengthen it as a marketplace and ensure that it retains its global position as a provider of insurance and reinsurance.