Heavy operating costs mean the London market has been losing business to foreign re/insurance hubs in recent years, but according to Fitch Ratings, an upcoming review of broker practices by the Financial Conduct Authority (FCA) could help to reverse this trend.
Rising broking commissions have added to pressure on insurers’ underwriting results, so any steps taken by the FCA to regulate broking prices and practices could reduce costs for London market insurers in the long-term.
The FCA’s review of the London broker market will examine brokers’ ability to raise the price of their services beyond normal market levels, potential conflicts of interest, and other broker practices such as “broker facilities” that could negatively impact competition.
Broker facilities are a system in which underwriters commit capital in advance, and the broker then groups a large number of risks together to place with those insurers.
Although insurers continue to commit capital to these facilities, many have recently criticised the higher commissions placed on facilities.
Fitch said the FCA has highlighted that placing business through facilities rather than the open market may exclude smaller insurers and harm competition.
If the FCA finds evidence of anti-competitive practices, this is likely to be more negative for the larger brokers.
Insurers are now paying more for broker commissions than before even though the soft market means their income has dropped: Lloyd’s of London data shows average acquisition costs, which are predominantly fees to brokers, rose from 17% of gross premiums written in 2005 to 22% in 2016.
In addition, insurers have faced higher regulatory costs and higher investment spending on IT infrastructure in recent years.
These factors have added to the pressures of operating in the London market where high operating costs have caused its emerging-market business to shrink in recent years, while local Singapore, Bermuda, and Zurich hubs have grown.
London’s biggest market loss has been in Asia, where its market share fell by 1.2% between 2013 and 2015, according to London Market Group data.
Thus any regulatory crackdown on brokers’ practices that leads to lower commissions could help make the market more competitive with its international rivals, Fitch said.
There’s a possibility that aggressive FCA measures could prompt brokers to try to route more international business to other markets, but Fitch said this risk is limited because “there is strong underwriting expertise for more complex risks in the London market and this is unlikely to change, at least in the medium term.”
The final outcome of the review, however, is still highly uncertain and won’t be revealed until Autumn of 2018, when the FCA publishes preliminary conclusions in an interim report.
