Senior Partner & Managing Director, Global Leader, Insurance Practice
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Beginning three centuries ago—as British merchants explored trade with the East Indies, the New World, Russia, Africa, and the Middle East—waves of globalization propelled the London Insurance Market to its position as global leader in managing the world’s large and complex risks.
By distributing the risk of trading ventures, insurance underpinned London’s evolution as the center of international trade. The growth of trade, in turn, facilitated London’s emergence as the undisputed global hub for commercial insurance.
What globalization gave the London Market, however, it is now threatening to take back.
The London Insurance Market in its current form emerged about 300 years ago, based around Lloyd’s of London, originally a coffee shop and meeting place for merchants and the wealthy individuals who could underwrite their voyages. Over time, what became the Society of Lloyd’s and the London Company Market wrote an ever-increasing variety of risks, in particular those with high severity and low frequency, such as natural catastrophe. The London Market became the leading market for companies that needed (re)insurance coverage for large, complex, or bespoke risks.
Today, members of the London Market are responsible for assessing, insuring, and paying claims on high-profile risks, including the 2011 Japanese earthquake and tsunami ($1.95 billion paid out), the 2011 New Zealand earthquake ($1.2 billion), and the Deepwater Horizon oil spill in 2010 ($600 million). London has insured singer Bruce Springsteen’s voice (for a value of $6 million) and soccer player Cristiano Ronaldo’s legs (for $144 million).
But London’s historic £60 billion market is now threatened by globalization, the connected economy, and good, old-fashioned cost-based competition, according to London Matters: The Competitive Position of the London Insurance Market, a study commissioned and published by the London Market Group (LMG) on behalf of its insurance members in the market and conducted by The Boston Consulting Group.
“We needed to answer an increasingly urgent question,” said LMG’s chairman, Steve Hearn. “Is the development of a globalized insurance market undermining London’s position as the preeminent center? There is evidence to suggest that it is.”
BCG’s study warns that the 300-year-old market, the largest in the world for commercial and specialty insurance, is at a tipping point and at risk of losing its global share and importance.
The study, based on extensive market research and more than 300 interviews with customers and market participants around the globe, found that London faces six central challenges:
The market depends on global risks finding their way to London. It has strong links with major Anglo-Saxon economies; the UK, the U.S., Canada, and Australia account for more than two-thirds of London volumes. However, emerging markets, with booming industrial and consumer sectors, accounted for 43 percent of the absolute growth in global insurance premiums from 2010 through 2013. London’s share of risks originating in these markets was 2.5 percent and declining.
The report found that global corporate risk managers—the London Market’s ultimate clients—would prefer to have their risks insured locally when sufficient underwriting capability and capacity is available. Local regulators, meanwhile, increasingly move to retain insurance premiums within their borders, and regional markets such as Singapore compete directly with London for global business.
Nevertheless, the London Market still has a large global share of unusual and complex risks, accounting for 57 percent of global aviation premiums, 48 percent of energy, and more than 30 percent of shipping. These risks are all insured by underwriters located within a couple hundred yards of each other in a corner of the square mile of the City of London. London represents an ecosystem of expertise, capital providers, underwriters, brokers, and technical-support services that bears comparison with Silicon Valley in its concentration and uniqueness.
The study found that the London market controlled more than £60 billion of gross written premium (GWP) in 2013—£45 billion of which was written in London and backed by London capital. That is nearly double the amount of Bermuda (£25 billion) and Zurich (£19 billion), and 11 times more than that of Singapore (£4 billion).
The Market’s financial impact extends into the broader economy. The 65 company market insurers and reinsurers, 91 Lloyd’s syndicates, 8 protection and indemnity clubs, and more than 200 brokers operating in the London Market provided 21 percent of the City of London’s—and 8 percent of London’s—GDP in 2013. Furthermore, the Market employs 48,000 people in the UK and 34,000 within the City of London, primarily in skilled roles.
Yet while other financial sectors in the City of London have been transformed by the Big Bang of 1986 and other reforms, the London Insurance Market remains close to its ancient traditions. Underwriters can be seen walking between meetings clutching their slipcases, the flimsy leather sheaths that bulge with bundles of paper. Despite the global nature of the risks insured in London, more than 90 percent of employees are British and less than 35 percent have a university degree. Many have risen to their current positions through a long, experience-based apprenticeship program.
London’s position as the global center of insurance expertise is also precarious. Much of its advantage comes from the network benefits of physical proximity—an advantage that is directly threatened by remote connectivity. Such is the depth of specialist knowledge that London’s expert underwriters must complete a multiyear training program often exceeding ten years. However, even the value of expertise is under threat, as underwriting is increasingly being carried out using analytical techniques and manipulation of large quantities of data.
At an even more basic level, brokers and clients complain that London’s benefits—expertise, colocation, networking, and rigorous regulation—also make it expensive. Although clients and their brokers will accept this premium for complex risks, they are reluctant to pay a premium for more commoditized risks.
The report estimates that despite London’s unique position, 30 to 40 percent of its business is in relatively commoditized lines, which could move to regional or local markets if the cost gap is not closed.
While London may be old-fashioned, it shows signs of reinventing itself, the study found. But can a 300-year-old market, with a fragmented governance model, transform itself quickly enough to combat forces of change?
The report identified six central opportunities for the London Market to do so:
With its position as market leader and its “old school” traditions, the London Market is not obviously equipped to take these steps and others needed to compete in the new economy. However, there are promising signs that it may be moving in the right direction. Increasingly, participants understand the Market is competing in a global knowledge economy, and they are investing to make London more global, innovative, and competitive.
Large insurers such as AIG and Zurich Insurance Group have increased their presence in London, as have global brokers such as Aon and Marsh. Many now realize the benefits of concentrating expertise in complex underwriting—with London as the main beneficiary.
Equally, London participants are reaching into new markets to capture growth. Lloyd’s of London has opened a hub in Singapore, and managing agents have moved directly into emerging markets, with Catlin Group, a major London insurer, having gone from 4 global offices in 2005 to 56 in 2014.
The growing importance of analytical techniques has stimulated innovation among London participants. Many insurers believe that London today is at the forefront of the development of analytics to assess more complex risks. The sharing of data across Lloyd’s, or across London as a whole, could be valuable for those developing underwriting models. London’s proximity to top UK universities, and the City of London’s ability to attract global talent, could make analytics a source of competitive advantage.
New capital and a new entrepreneurial spirit are flowing into London, the BCG report says. Large investors are increasingly interested in insurance as a countercyclical financial investment, and London offers unique opportunities to investors to get exposure to insurance-based assets. At the venture capital end of the market, small start-up syndicates are developing new propositions to target risks that still lack insurance solutions. One interviewee in the study suggested that this could represent as much as 90 percent of the corporate-risk map.
The report shines a light on the broad changes taking place in the global market for commercial and specialty insurance and reinsurance, and it makes clear the challenges that carriers and brokers face, including the following:
“The combination of globalization and technological change is causing a major shift in the way risks are underwritten by commercial insurers and by specialty and reinsurance players, requiring market participants to respond,” said Pia Tischhauser, global head of BCG’s commercial insurance practice. “To succeed in this market, carriers and brokers must get closer to their customers and build truly global operating models to meet their needs more effectively. Deciding how to take advantage of the unique capabilities found in the London Market will be central to these decisions.”