The recent London Matters report has rekindled debate on the future of the London Market for commercial and specialty risk. Prepared by London Market Group (LMG) and The Boston Consulting Group (BCG), the report suggests that London’s position as the undisputed global market for specialty commercial insurance is under threat.
The impact of globalization and new technologies is putting strain on the London Market. The London Matters report highlighted a number of issues; customers preferring to buy insurance and reinsurance in local established and emerging markets rather than London, London’s expense ratios are driven by higher transaction costs and the regulatory burden, and an abundance of capital from global sources is seeking competitive rates in a prolonged soft market cycle.
Further threat exists:
- The nature of the treaty reinsurance market has been changing rapidly with large insurance groups moving to consolidate their ceding arrangements and leverage the diversification value under group-wide global cover. Some organisations are using insurance listed securities in their debt structure, which act as quasi-treaties. These developments are rapidly shrinking the treaty reinsurance market.
- The declining ability to meet the needs of large corporations. According to the Chief Executive of the Risk Management Association, “The proportion of the corporate risk map covered by insurance has shrunk to perhaps as little as 10 percent.” Corporations will start issuing their own catastrophe-linked bonds, further removing the need to place risk in the London Market.
- The nature of London Market carriers has changed systemically over the last 5 to10 years. The large Lloyd’s managing agencies have diversified, and have been expanding multi-nationally so the reliance on overseas licenses from Lloyd’s to write overseas business is diminishing. All the major carriers operating in the London Market are seeing the potential to bypass London and go “local”.
- A talent gap is looming with key experts in both underwriting and brooking are approaching retirement age. The skills pool has also shrunk to some extent as a result of mergers and acquisitions.
- New technologies are emerging and we can expect risk data and analytics to become more readily available worldwide, undermining barriers to entry in specialty lines insurance. It may be that, one day, “crowd-sourced” risk models will be more robust than proprietary ones.
The extent of the threat to the London Market may be daunting, but it also brings with opportunities for growth. In my next post, I’ll examine the steps the market must take to enhance its position in the global market.