The outsider’s view: change requires strong leadership
How will globalisation affect the London Market?
Emerging markets will be the engine of growth in insurance. Our analysis showed that 50% of absolute growth to 2025 – defined as additional premium – will come from emerging markets.
In the long run, that must be viewed as an opportunity for London. It needs to find growth, and, in time, those emerging markets will become very important for the kind of specialty insurance risks in which the London Market excels.
But, currently, the London Market’s primary trading partners are English-speaking markets, such as the United States and Australia. Buyers we spoke to for the report believe that while London had greater technical expertise in specialty risks, it lacks language skills and an understanding of their local market and business culture. The London Market lacks the social and cultural diversity that exists in investment banking, for example.
London Market insurers told us that although most of the growth is coming from emerging markets, their profits still come from the mature markets. But history has shown that if you don’t expose your business to emerging markets, regardless of the low margins they offer, you don’t learn to compete in what will become the new paradigm. That is how you write yourself out of an industry.
A good example is the British motorcycle industry, which initially scoffed at the quality of the low-cost bikes being produced by new Asian manufacturers. But, they came to dominate the industry, and, as a result, many of the British bike makers went out of business. There’s a danger that if London Market insurers don’t sufficiently embrace emerging markets then low-cost business models, developed in those markets, could come and take away London’s business.
What about the growing use of data and technology?
Our view is that we’re seeing a shift in insurance very similar to that in asset management, away from ‘active’ to ‘passive’ underwriting.
Today, most insurance is ‘active’, but the model, involving brokers and underwriters negotiating a price, is very inefficient for some risks. Once the data becomes available to set a market price, I suspect that many risks will not require that level of personal intervention.
The London Market lacks the social and cultural diversity that exists in investment banking
London is very well placed where specialist underwriting is required, but it faces an increasing challenge from analytics-based underwriting in some simpler lines. I think London will eventually come to adopt these new practices, although it might take some time.
But this trend is likely to increasingly expose the fact that a lot of London’s business is actually commoditised. As we highlight in the report, if London starts to lose that commoditised business then it faces a real threat, because there is a lot of fixed cost within the market.
The London Market needs to embrace the idea that it does detailed underwriting on only the most complex risks, while doing as little underwriting as it needs on simple, commodity risks.
Also, there’s a perception the global commercial insurance industry as a whole is pretty poor at operating digitally. London could gain a real competitive advantage if it became a leader in ‘straight through processing’.
How could these two trends merge?
The global insurance players will build facilities to collect and analyse risk. But they don’t have to build them in London. If they decided to base these in Silicon Valley or India, then we could see a lot of the specialist underwriting expertise move to where these analytical facilities are based.
I think it’s really important for the London Market that some of these analytical capabilities are either based in London, or under the leadership of London teams. The good news is that we believe a number of the big players have decided to make their big analytical-capability investments in, or connected to, London.
Also, it’s worrying that virtually no innovation on connecting insurance to the Internet of Things is being led from London. I think this is a real lost opportunity because clients will increasingly want underwriters to advise them on how to prevent a claim from occurring, and the Internet of Things will help with that. If London insurers could put up capital for innovation in this space, and then build the products of this innovation into their underwriting processes, they could take a real leap forward.
What did the insurance buyers you spoke to for the report believe the London Market currently does well?
Flexibility – London is still the most flexible market, in terms of policy wordings and coverage, albeit often at a higher price.
The breadth of product offering – one buyer told us: "I can get almost any risk covered in the London Market, more so than any other market in the world".
London has the highest concentration of broker and underwriting talent in the world, and therefore has the strongest expertise in specialty risk.
The London Market needs to embrace the idea that it does detailed underwriting on only the most complex risks, while doing as little underwriting as it needs on simple, commodity risks
A willingness to cover new and emerging risks – a risk manager said: "If I have a problem or risk which nobody else will cover, London is the place to go."
It has the capacity and ability to speedily place difficult or ‘distressed risks’ (for example, those with poor loss histories).
What do they think London does not do well?
Buyers said they really value London’s expertise in difficult risks, but they question whether they can justify the additional cost of insuring less volatile risks in London. Local markets present a credible challenge to London on more commoditised lines of business.
Something else we heard was that London is not as good at innovation as it used to be. Buyers cite cyber, supply-chain and reputational risk as being increasing areas of concern for them. Although London is operating in these sectors, it is not emerging as a world leader.
They also argued that London lacks analytical expertise. Risk managers don’t simply want to transfer their risks – they would prefer the event did not happen in the first place. But they don’t feel they’re getting loss prevention insights from London carriers.
Insurers told us that because so much of the risk process in London remains paper based, it is not a market that makes it easy to analyse data. So I think the modernisation initiative in London should be as much about giving players better access to their data as it is about reducing costs.
Is there still a benefit to being part of the London Market?
The evidence shows that, even in today’s digital world, it makes a huge difference to be part of an economic cluster, in which expertise linked to a particular industry is concentrated in one location. A good cluster is more productive and innovative, and has access to better information, talent and expertise. The London insurance market has for centuries been an outstanding example of an economic cluster. The challenge is to ensure you deploy those assets in the right way.
I’m not sure the London Market has done enough to improve its productivity. For it to thrive in the future it must make itself measurably more productive than its competitors. But its cost base remains very high – we estimate it is around £8 billion. Although it is dealing with more complex risks, we strongly suspect it is still more expensive to do business in London than it needs to be.
Many of the leading London Market players are global players. How could this impact the market’s future?
What really matters are the processes within a global broker or carrier to decide where Asian business, for example, should be written. London needs to make it more attractive for these global players to do business in London than elsewhere in their operations.
The London Market has to prove it’s a really good place to do business; then it has to persuade global firms to do more business in London.
Can the various London Market players collaborate in the way the report recommends?
The governance model in the London Market does not lend itself to big, bold moves. My sense is that, in the past, the various industry associations’ main concern has been to ensure their voice is heard, rather than to think collectively about how to make the London Market more effective.
The market has tended to work on getting consensus before moving forward. But if you look at how other financial markets became electronic then it was typically driven by a handful of the biggest players in those markets. They saw the internal business case for why this should occur and so they stumped up the money to make it happen.
The London Market has to prove it’s a really good place to do business; then it has to persuade global firms to do more business in London
I think it is an issue of leadership. You need high-profile CEOs who believe in the London Market, and who will bring others CEOs along with them. I think we’re now seeing that from people such as [Hiscox’s CEO] Bronek Masojada, [LMG Chairman] Steve Hearn and [Lloyd’s CEO] Inga Beale, which makes me optimistic about the potential for real change this time.
Is there a danger that London Market players could take its continued existence for granted?
Yes absolutely. The London Matters report sets out the big challenges facing the London Market, and I agree with the LMG’s action plan for tackling these – although personally I would go a little further in some important areas around innovation.
But, the key is to finish what has been started – that hasn’t always happened in the past. But now the market has some leaders who can drive this process forwards.
Read the report
Courtesy of Boston Consulting Group London.