Despite being the largest global re/insurance market in the world, the London Market faces challenges and while primary business has expanded minimally over the past decade, its reinsurance market share has shrunk by 2%.
Yesterday, The aim of the inquiry is to “explore the extent to which regulatory policy is well-designed and proportionately applied and the possibilities for optimising policy following Brexit.”
The call for evidence commenced with commentary from Caroline Wagstaff, Chief Executive Officer (CEO) of the London Market Group (LMG) and Christopher Croft, CEO of the London & International Insurance Brokers’ Association (LIIBA).
Wagstaff explained that London is home to the largest global insurance market in the world, bringing in a huge £110 billion of income each year. In fact, this is larger than the next three competitors – Bermuda, Switzerland, and Singapore – combined.
At the same time, the marketplace contributes 23% of the city’s gross domestic product (GDP), and £37 billion a year to UK GDP, and that has been growing in recent years.
“So, we are in a very strong position. We are a thriving market. We certainly came through the pandemic very strongly. But we’re not without threats,” said Wagstaff.
One of those threats is competition from other jurisdictions. “Our market share has been broadly stagnant for the last decade,” said Wagstaff. Adding that the London Market’s largest category of business, primary insurance, which makes up around 70% of what the market does, has only grown by around 1% during this time.
On the reinsurance side of the business, Wagstaff explained that a decline in market share has occurred.
“If you look at reinsurance, our market share has shrunk by 2% in the last decade and that’s because really, we’re not as competitive on cost, and the cost-of-capital particularly, in that sector of the market as some of our competitors are,” she said.
At the specialist Lloyd’s, London, and wider UK re/insurance market it is more costly than some other jurisdictions, both from a regulatory and operating standpoint. And while Lloyd’s is currently in the process of a digital transformation, driven in part by its need to bring down costs, these measures won’t apply to London Market companies and re/insurers elsewhere in the UK, suggesting the challenge around operating costs will persist.
Croft noted that historically, “there’s been a tendency for capital requirements to be more strictly introduced into the UK market than they maybe are in other countries. But its combination of regulatory and operational costs that’s a challenge in London. But we think that the additional burden of regulation is a significant factor in that.”
According to Wagstaff, part of the issue is that reinsurance companies are treated by the regulator the same as insurance companies, despite being very different in the risks that they pose.
The UK boasts a limited number of domestic reinsurers despite being home to an active market. Wagstaff explained that this declining market share is more a reflection of less reinsurance buying happening in London than of people setting up new companies here.
“I think we’re less concerned about the absence of domestic reinsurers than we are in ensuring that the people who are here remain here,” she said.
Many reinsurers that operate in the UK are passporting and operating under a temporary permissions regime. Once this period is over, the company has to become fully regulated by both the PRA and the FCA, which can be a challenging process.
“People who’ve gone through that process have not spoken positively about it, shall we say,” said Wagstaff. “So, we know that some of those branches are really thinking about whether that’s something they want to go through, and they don’t need to go through it. They could just take that business back to the domestic market.
“So we are worried that the processes may cause people to not want to operate in the London market going forward.”
Wagstaff also warned that while the UK market is an important player in regions such as North America, Canada, Australia, and South Africa, it is weaker in emerging markets.
But of course, challenges also bring opportunities and there’s clearly potential for the market to expand in both emerging markets and emerging risks.
On the latter, Croft told the Committee that the industry is facing a period of significant emerging risks.
“Certainly, around the climate change challenges, and around risks such as cyber, where London has an opportunity to be the global center of excellence for those risks, but will face competition from some of those sectors,” said Croft.
Expanding on this, Wagstaff said that London is leading in cyber with a roughly 25% global market share but warned of the challenges of navigating a moving target.
“I think we have the roots to be very strong in climate change and have the appetite. So, London has fantastic climate modeling skills, for example. It has lots of experience in weather risk; we’ve been underwriting hurricanes and floods, and wildfires for over 100 years.
“But it’s going to permeate everything as the world transitions to net zero. From how technology evolves and new technologies. And, I think we are worried that unless we have the right regulatory environment, we won’t be able to keep up with the speed of development,” she said.
Clearly, London’s commercial re/insurance market is an important global hub, and it maintains a strong share of global risk transfer business. And as other jurisdictions look to advance their share and current risks evolve and new risks emerge, London has an opportunity to boost its global presence through its talent pool and underwriting expertise.
However, the decline in global reinsurance market share shows that the London and wider UK market needs to address its cost-of-capital issue or risk losing more business to other regions, which might be viewed as more efficient.
“The opportunities are there… that greater regulatory precision could achieve the same ends without causing unnecessary costs on our sector where they’re not dealing directly with members of the public,” said Croft.
