Steve Hearn on the Future of the London Insurance Market
The London Insurance Market traces its roots back three centuries to the shipping docks of London. Underwriting and insuring the risks of trade and travel made London the international hub for managing large and complex risks, facilitating its emergence as the undisputed global center of commercial insurance.
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, the 2011 New Zealand earthquake, and the Deepwater Horizon oil spill in 2010. London has insured singer Bruce Springsteen’s voice for a value of $6 million and soccer player Cristiano Ronaldo’s legs for $144 million.
Now, however, the London Market is discovering that it faces daunting risks of its own. The 300-year-old market confronts a historic tipping point as globalization and local competition erode its £60 billion market share and imperil its international role, according to a joint study by The Boston Consulting Group and London Market Group (LMG) on behalf of the latter’s insurance members.
The report, titled London Matters: The Competitive Position of the London Insurance Market, was commissioned under the leadership of LMG chairman Steve Hearn, the deputy CEO of the Willis Group. Hearn notes that while London’s other financial sectors were transformed by reforms including the “big bang” of 1986—when sudden financial-market deregulation took place—the London Insurance Market has remained close to its ancient traditions and less attuned to some of the market’s evolution.
The BCG study, based on extensive market research and more than 300 interviews with customers and market participants worldwide, found that customers increasingly prefer to buy insurance in local markets—jeopardizing 30 to 40 percent of London’s premiums. Further, London does not have a strong presence in high-growth emerging markets, where its share has declined more than 20 percent in three years. At the same time, London is losing share of reinsurance business.
Hearn sat down to discuss the findings of the study, and what comes next, with Miguel Ortiz, a partner and managing director in BCG’s London office. Following are edited excerpts from that conversation.
So, Steve, first of all, can you tell me what motivated the LMG to commission the report?
It wasn’t the big bang in terms of why we commissioned the report. I think probably a catalyst for it was that as the LMG sat around the table at the beginning of the year, we were thinking about what our agenda or mandate was. Up till that point, the LMG had been very focused around the important subject of process and operational reform around the various technologies and other considerations. We felt there was an opportunity perhaps to think to a much broader agenda. What were the other factors that were actually driving what was going on in the London Insurance Market—the opportunities and threats?
That quite quickly got us to what’s the fact base, and we recognized perhaps that a lot of the conversation had been driven by anecdote rather than substantive fact, and that we needed some facts.
We went out and spoke to BCG to get your thoughts about quantitative and qualitative research to help inform the current position, but also where the opportunities and threats were for us moving forward.
Was there anything in the report that ended up surprising you?
There were a lot of things in the report that surprised. Firstly I should say there were some things that were very reassuring and that our strengths that have held us in good stead for three centuries in fact have held us in good stead over the last three years. The data has underlined that in fact our share of the global level has actually been consistent over the period.
It did give us the data points, however, in terms of the threat that exists where we’re not capturing enough of the growth in the insurance marketplace. And whilst anecdotally we understood that was there, we didn’t have the facts to give us empirical evidence to support where we were.
I think we were also surprised by the sheer contribution that we make to the UK’s GDP.
Why is London important to Willis or to global carriers more so than any other insurance center in the world?
One of the things that’s been said is that if London didn’t exist it would reinvent itself somewhere in the world, the global center of excellence. Our client base is increasingly global. There are lots of interdependencies in terms of the way they operate through supply chain, their own geographic distribution of their customers, etcetera. Having just a regional view doesn’t offer up the adequate answer to those customers’ needs. There needs to be a global central of excellence.
If you think about the market in 15, 20 years from now, how do you see that changing?
Personally, I think the convergence of new capital—the superabundant capital as we’ve described it in the report—with the end customer is going to become increasingly close. I think we’ll see a huge change in the intermediary and reinsurance intermediary’s role and how they create the analytic capability in underwriting activities that enable the capital to be deployed directly into the customer base. I think we’ll see that as a huge change in the business model itself in a 15- to 20-year time frame.
Then obviously you’ve got us hanging on to the coattails of the rest of the world changing. Certainly in 15 to 20 years time we might be recruiting the next CEO of Willis in Shanghai rather than in London or New York. I think it will be huge, huge changes, which some would say are well overdue given we’ve been effectively operating the same business model for more than three centuries now.
If I think about slightly more practical time scales of the next two or three years, what do you think the LMG can achieve on the back of this report?
I’d like the LMG obviously to become more integral in terms of working out some of the answers to those challenges and opportunities than it has been. We’ve now got the report that gives the call to action, actually informing the debate, and an opportunity for us to start to think differently as a marketplace about how we operate. There seems to be a groundswell of opinion, post the report, that everybody is up for—most people, anyway, are up for—embracing.
What’s your approach to trying to lead the organization? How important do you think leadership is in shaping that agenda over the next few years?
I’ve been in the LMG Chair now for 11 months and in a month or so will be halfway through a two-year term. It’s been fascinating. It’s a very, very broad church that is the London Market. In the report, we articulate the sheer volume of players, and then a very different scale from the largest to the smallest niche operators within our market. All of them bring a different thought and different perspective in terms of the opportunities and challenges.
Part of it has been trying to work out where are the things that we can have a common voice. Where are the things that we can actually reach some sort of consensus view in terms of what the opportunities or threats are? There’s a very strong recognition that the time is right, among the senior players in the constituencies of the associations and the corporations and the many, many diverse participants that operate in the market. There is a willingness to embrace the opportunity that there is for London. And that’s a good place to be. I feel very, very positive about what we’ve achieved in the 11 months, of which the pinnacle, without any question, is the report that BCG have helped us with.
There are phenomenal amounts of talent in the London Market, and clearly there’s a great platform for continued growth and success. Where do you see the areas of cultural change that need to take place?
A lot of people come back to culture as being an inhibitor for modernization in the London market. Over decades and maybe even over centuries, the culture has been an inhibitor rather than an accelerant for us in terms of what we’ve developed. I think certainly one of the things the statistics have shown us is that the way we’ve embraced gender diversity, tertiary education, the evolving customer demand around analytics, etcetera, we could have done a much, much better job of.
Maybe that comes, again, back to culture. Maybe our openness to looking beyond areas of traditional strengths and embracing the new world and the new opportunities that come from that needs to change. To do that, we need to bring it closer to us, not hold it further away from us.
I think part of that needs to be about where we recruit the talent from around the world, an agenda that brings that gender diversity to our marketplace. All of these things become really important if we are going to embrace change.
Again, something I feel personally very strongly about and I know others around the LMG table do: if you consider yourself a custodian of the marketplace, with people 300 years before you who have been custodians and maybe 300 years ahead of us, then that gives you an interesting perspective as we try to embrace some of these challenges, of which culture is certainly one.