The Fate of London
The industry has changed beyond recognition since Edward Lloyd opened the Lloyd’s Coffee House on Tower Street in 1688. But in the centuries that have ensued, one thing has remained constant — London’s status as the insurance capital of the world.
That status has for so long been taken for granted. But in recent years, there’s been a shift.
A study by PwC released in December found that underwriting confidence in London is on the wane, with respondents assuming an average combined ratio of 97 percent for 2015 and one in five materially reliant on investment returns to make a profit.
In one sense, London is being impacted by factors that are affecting the industry in general.
An abundance of capacity has led to substantial rate declines over the past year, with aviation the only line projected to remain flat in the short term; sound familiar?
Property reinsurance and energy (direct and reinsurance) have seen rate declines of as much as 10 percent, and PwC predicts that mid-sized generalist reinsurers will be under extreme pressure in the current environment. London is also a relatively expensive place in which to operate.
In mid-January, hundreds of London jobs were put in jeopardy when U.S. insurer XL announced cost-cutting plans after acquiring London-based rival Catlin for $4.22 billion, the largest-ever takeover of a Lloyd’s underwriter.
XL pledged to cut at least $200 million in annual costs, and with London the biggest area of staff overlap between the two firms, many London underwriters could be redundant within the year.
Meanwhile, London’s share of the global reinsurance market declined by 15 percent between 2010 and 2013.
And in 2014, London fell for the first time in seven years to second place as both a financial services center and insurance market behind New York in the most recent Global Financial Centers Index Report.
London professionals admit that the finance center is facing an unprecedented challenge, with Lloyd’s CEO Inga Beale declaring the market is “at a crossroads.”
The London Market Group (LMG) embarked last summer on an immense soul-searching exercise resulting in a 50-page report on the threats to London’s prosperity.
According to Steve Hearn, deputy CEO of Willis and chairman of LMG, London needs to introspect and redefine its identity. The report found that while London is keeping pace with commercial specialty insurance growth, it is losing 2 to 3 percent of market-share globally in reinsurance and major insurance lines such as energy, while its share of emerging market business shrunk by 20 percent between 2010 and 2013.
“Other centers are growing faster than London and we are losing our position relative to the rest of the world.” — Steve Hearn, deputy CEO, Willis, and chairman, LMG
Asian premiums grew 11 percent from 2013 to 2014 and London’s share of those premiums slipped by 0.5 percent, while Africa grew 5 percent and London’s share fell by 1.3 percent.
“Other centers are growing faster than London and we are losing our position relative to the rest of the world,” said Hearn.
“We need to recognize that 300 years of very important history cannot be our raison d’être. The world is changing, and we need to identify the threats and grab hold of the opportunities that creates for London,” he said.
Largest Specialty Market
It is important to note, however, that despite its challenges, London remains comfortably the largest commercial speciality risk market in the world at around $60 billion, well ahead of Bermuda ($37.78 billion), Switzerland ($28.72 billion) and Singapore ($6.05 billion).
According to LMG’s report, London’s annual growth rate of 4 percent keeps it well in the hunt with its competitors.
It is also financially stable, with many underwriters currently enjoying some of their most profitable years ever.
It’s clear that London will remain a force in the global insurance space and that its competitive challenge lies not with international carriers or other global hubs, but with the carriers increasingly soaking up business in their own regions.
According to the LMG report, the increasing preference of global insurance buyers to use carriers in their local markets puts $19.65 billion to $27.20 billion (30 to 40 percent) of London premiums at risk.
“People in my region understand my specific risk and company better, so assuming they have the required underwriting expertise I am very happy to place business with them. Only when I can’t do that would I go to a global hub,” one Latin American risk manager was quoted in the report, aptly summarizing London’s predicament.
As a result, London’s underwriting and broking stalwarts find themselves walking a delicate tightrope. Clearly they must grow their businesses in alignment with global opportunities — their shareholders would expect nothing less — yet there is a palpable loyalty to their home market.
Lloyd’s underwriter Beazley, for example, now writes 60 percent of its business in the United States. However, CEO Andrew Horton is sensitive to the need to keep specialty business flowing into London; Beazley’s U.S. platform concentrates primarily on small risks and any large, complex risks still make their way into the Lloyd’s market.
Ultimately though, profits will always trump brownie points; and for the majority of major players it is more a case of limiting the damage to London’s premium flows than protecting the market at all costs. Indeed, one word keeps cropping up to describe their position on where to win and write business: “agnostic.”
“High growth markets are already mopping up business that historically used to come to London. That is happening in spite of us, not because of us,” said Rupert Atkin, CEO of Lloyd’s underwriter Talbot, deputy chairman of Lloyd’s and chairman of the Lloyd’s Market Association.
“Nowadays, Lloyd’s is one of many markets. Global brokers have lots of choice as to where to place the business so you have to go out and work with them — you write where there is an opportunity to make money.”
The United States still offers huge growth potential, and for companies like Beazley, it is excellent growth in U.S. business that is keeping their balance sheets above water, while London-based broker JLT also made a major push into the States last year.
“There is nowhere on the planet like it — it’s much better having all the underwriters in one place to bounce ideas off each other rather than spreading expertise around.” — Andrew Horton, CEO, Beazley
One prominent broker warns that even firms loyal and committed to London will only continue to be so as long as London can meet the requirements of its clients.
“I certainly aspire for us to always be a London market player, but whether we will or not depends on whether external factors outside our control play out — regulatory regimes; capital gains tax; the ability to attract business into the market,” he said.
“Protectionism continues just under the surface of many emerging markets around the world, and we continue to see actions that prevent the free flow of capital. All these factors pose threats to London.”
The broker does, however, laud the expertise London possesses. After all, London leads the way when it comes to highly unusual, complex or catastrophic risk, and there is nowhere that can match the City of London for density of talent and specialty capacity (350 market participants within slightly more than 400 yards of Lime Street.)
“We have a strong, capable, powerful specialty business here in London; I need the intellectual capital that resides in London working with our now global distribution and sales teams to create the right outcomes for our clients,” he said.
Beazley’s Horton added that the reputation of Lloyd’s has endured through the recession, and the market continues to have pulling power — most notably attracting its first Chinese syndicate (China Re) as recently as November, as well as seeing interest from American wholesalers.
“It’s quite a buoyant and healthy market,” he said. “There is nowhere on the planet like it — it’s much better having all the underwriters in one place to bounce ideas off each other rather than spreading expertise around. London has got the balance of being a great market for service and an innovative environment.”
Seizing the Day
Lloyd’s CEO Beale said the London insurance market has “real power” — with a commercial and specialty market more than twice the size of Bermuda — $222 billion in paid claims over the last five years and representing 8 percent of London’s GDP. It’s hard to argue.
“If that’s not power, I don’t know what is,” she said, before making the stakes clear: It is now or never for London to define itself and prosper in the new world order.
“The London market has the talent, skill and discipline to prosper as the world changes. I know that we will,” she said.
“This is a significant opportunity for us all. It is a unique opportunity, which will come along perhaps just once in the lives of the London brokers and underwriters. We can underwrite the digital revolution, just as we did the industrial revolution.The London market is, I believe, on the edge of a golden era.”
Ultimately, with the global insurance market currently awash with surplus property & casualty capacity and rates continuing to soften, the best way London can capitalize on this golden opportunity is to carve out a niche — by reinforcing its reputation as the home of specialty underwriting.
“Talent and intellectual property is at the heart of all of this,” said Hearn.
“The growth for us is in specialty classes that require intellectual property and sophistication in pricing, placing, product design and structuring. Specialist insurance and reinsurance and complex large account business is what we do, and we do it better than anywhere else in the world. We need to continue to protect and grow that capability.”
Or as one European risk manager quoted in the LMG report put it: “London’s role in the commercial specialty market is contingent upon innovation and flexibility; it is advantaged when there are products which no one else can offer.”
The prominent broker agrees, but believes innovation has stalled and London has a long way to go. Even Hearn admits the likes of Zurich, Munich and even some emerging markets are more innovative than London right now.
“I worry about the lack of innovation,” said the broker, who questions whether U.K. lawmakers and the Franchise Board of Lloyd’s are “truly enabling our industry to innovate.”
“London was always the place innovation would start, but now I see it more offshore and in the U.S.,” he said.
“If we don’t innovate, London will become less relevant, and the LMG report shows that to already be the case. We do have extraordinary intellectual capital residing in various businesses in London which enables us to be the market leader in insurance. Can we maintain that? It’s questionable. We need all the right ingredients to make that work, and I’m less positive than I ought to be.”
According to Horton, London players need to be more proactive in the way they promote the market, including opening up to issuing documents in local languages.
“To do this we need to change culturally,” he said.
“We need to do as much as we can to market the benefits of coming to Lloyd’s — offensively rather than defensively — so that Brazilian firms, for example, know why it may be in their interests to write large complex risks at Lloyd’s rather than at home.”
Let’s be clear. London is here to stay.
But the strategic moves it makes in the next few years may determine whether it stays at the top of the tree for generations to come or becomes, as many foresee, just another option in an expansive global marketplace.