12th November 2014

London Market under threat says LMG/Boston Consulting global research report

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London Market Group(LMG) and The Boston Consulting Group BCG) have published the results of extensive market research into commercial insurance and reinsurance, and over 300 interviews with customers and market participants around the globe. The report-"London Matters: The Competitive Position of the London Insurance Market"- addresses the current status and future prospects of the market and reveals that London's position as the undisputed global hub for commercial insurance is under threat.
The London Market, the largest global hub for commercial and specialty risk, reached £60bn of gross written premium in 2013, with £45bn of this written in London and backed by London capital. The study shows that, based on business written in London alone, the market(£45bn) is nearly double the size of Bermuda(£25bn) and Zurich(£19bn) and 11 times bigger than Singapore(£4bn).
The study's findings are also a strong reminder of the role the London Market plays in supporting the UK economy separately and distinct form the rest of the UK insurance industry. The Market contributed £30bn to UK GDP in 2013, which is 21% of the total GDP contribution of "The City" and 8% of total London GDP. It employs a collective 48,000 people throughout the UK and 34,000 in London alone. It also plays a role in supporting the broader global economy by paying large claims every year, including for specialist risks which are hard to cover elsewhere. A total of 94 FTSE 100 companies are covered by the London Market and in the last five years more than £140bn in claims has been paid to policyholders.
But the 300 year old market is at a tipping point warns LMG and BCG in Monday's report. Analysis reveals that London is only tracking global growth in commercial insurance, while it is losing its share in reinsurance: London's share declined from 15% to 13% between 2010 and 2013. Furthermore, London, heavily reliant on the UK, US, Australia and Canadian markets, is failing to capture the emerging market opportunity. Only 0.5% of the absolute growth in emerging market premiums in markets such as Latin America, Asia and Africa, was placed in London. Its share of the Asian insurance market, for example, is currently just 2%. More than half of future growth will come from emerging markets, meaning that London's global leadership will become increasingly challenged.
"I see an increasing amount of my risk being written in regional centres of expertise such as Singapore. They have a better understanding of our specific needs and risk exposures than someone in London",stated a Risk Manager, in Asia.
Interviews with 120 market participants from around the globe track what is driving placement decisions and reveal additional stark challenges facing the London Market. Unanimously, customers prefer to buy insurance in their local market or region, which puts up to 40%, or £16bn, of London premiums under threat where underwriting expertise and capacity is available locally. Interviewees also expressed concern over the comparatively high regulatory burden on London Market participants which raises costs and could put London at a price disadvantage. London's costs were 9 percentage points higher than its peers in 2013.
"The burden of regulation and the cost that imparts on carriers is a concern, especially if it means a reduction in the flexibility of London to offer bespoke solutions and to be able to offer competitive prices" said the chief executive, Risk Management Association.
The report further points to the opportunity for the London Market to build on its reputation for innovation and flexibility to cover new risks such as cyber, supply chain and reputation in order to offset the commoditisation of more traditional coverage.
Steve Hearn, chairman of LMG and deputy ceo of Willis Group comments "The findings of this research tell a clear story: the London insurance market matters. But London cannot rely on its historic advantages to guarantee its future growth. As a collective, the market must react with speed to the global competition, respond with new innovative products and reinforce the message that London is the best place in the world to underwrite complex commercial risks.
For the first time, we have a complete picture of the economic contribution of the London Market. Government and regulators need to take note and understand our challenges and play their part in helping us to capture our opportunities. We need the right culture and environment to ensure that London continues to be the global centre of innovation and expertise-think the Silicon Valley of the insurance world."
Pia Tischhauser, senior partner and BCG's global lead for Commercial Insurance, added "This study provides a broad view of the challenges and opportunities for London Market participants. The growth of regional hubs such as Singapore, Zurich and Bermuda is challenging the traditional structure of the global insurance industry and London's role within it. The London Market must grasp the opportunity that is most definitely in their reach. It has products and capabilities nobody else has, it can develop expertise that nobody else can, and it needs to be confident and coordinated in building and marketing these strengths to secure its future."
Insurance Newslink comments: This research gives a stark warning to the London Market that a global approach is vital if it is to maintain its premier position.
Although the London Market domestically is modernising more quickly and providing wider access locally in some overseas markets, it is clearly not doing it quickly enough from a worldwide perspective. Information technology and communications will always be exploited by innovators and the London Market cannot afford to rest on its laurels in a 24x7 global environment.