London Matters - Update
Last week we posted an article that focussed on some of the challenges in the reinsurance sector, particularly in the London Market, and gave some of our views on how blockchain and smart contract based solutions can be used to address some of the structural expense issues in the market. In writing the article we drew on information from the London Matters 2014 report that used sector data up to 2013. We knew at the time that the LMG were refreshing the report but we were pretty confident from our own market knowledge and discussions with practitioners that trends in reinsurance were likely to have had continued since.
This week, the latest London Matters report was published to bring us all up to date as of the end of 2015. It’s again a really useful report and it’s really great to see that the LMG have taken this forward and are continuing to develop a sound ‘fact base’ which can be used to help inform strategic decisions.
On the positive side, it was also encouraging to see that the London Insurance Market is, in some key areas, holding its own against some of the other global hubs and particularly in specialty and commercial insurance in the established insurance markets. However, it’s also clear that many of the challenges and trends articulated in the first report are still very much there.
Our article did focus on reinsurance and it’s clear that this remains, as we anticipated, a difficult challenge:
- The key message was that “London has continued to lose market share in reinsurance” (i.e. from 13.4% in 2013 to 12.3% in 2015.).
- The 2017 report goes onto say of reinsurance GWP that “London’s decline (-3.0% p.a.) was not mirrored in the global market, which grew by 1.2% p.a.” and that “The global reinsurance growth occurred despite an estimated 7.2% p.a. fall in pricing over the period.”
- The underwriting margin pressures were emphasised by a new piece of information that reinsurance Combined Ratios had slipped (i.e. increased) by 4pp from 92% in 2013 to 96% in 2015.
London Matters then goes on to account for this decline in share because of five identified “structural factors”. The particular one that resonated with our thoughts was:
- “[the] Competitive market has intensified the advantage of carriers with the lowest cost of capital and expenses, putting London reinsurers at a disadvantage.” (our emphasis).
As we noted in our previous article, we continue to think that addressing the expense imbalance through the use of innovative technologies will place the focus back on underwriting and client service and is a path to achieving deep operational efficiency savings and using that to both secure and then win market share.
We can’t claim that these technologies can also give a lower cost of capital but if London drives forward by accommodating alternative capital (e.g. Lloyd’s Special Purpose Arrangements and Insurance Linked Securities) and combines this with these innovative efficient operating models, the future could be significantly brighter. Indeed, market participants establishing such new offerings through ‘New-Co’ style operating arrangements could provide a compelling service and help the London Market retain and reinforce its leading position in reinsurance.