The London Market is the largest global centre for insuring commercial and specialty risk and, as a result, is in a great position of strength. The Market offers fantastic opportunities to meet demand for new products and solutions, contributing to London’s reputation of innovation and flexibility. Over time the Market has become more accessible and efficient, due to ongoing investment that has been supported by financial strength ratings, expertise based underwriting and analytical techniques.
However, the world is changing and has caused the Market to encounter new challenges. For example, customers are increasingly demonstrating a preference for buying insurance in their local market, where expertise is gradually developing. Additionally, London does not have a strong position in emerging markets, and consequently its share of business in these markets is declining. London is also losing market share in reinsurance as purchasing is increasingly centralised as well as emerging market growth becoming more predominant. On top of this, features such as high expense ratios, tough regulations and prolonged soft market cycles have created a threat to the London Market.
The Soft Market
The insurance market is described as soft when there is an excess of capital seeking a finite pool of insurance risk (i.e. more firms are hoping to profit by receiving premiums on the same pool of risk). Increased competition puts downward pressure on premiums and lowers return on capital. A prolonged soft market, with its lower returns on capital, has the additional side effect of reducing funds available for underwriters to invest in operations and technology.
A Target Operating Model (TOM), supported by all stakeholders, was created, by the London Market Group (LMG), in response to the challenges encountered in the Market. The TOM identified fifteen initiatives to deliver central services and realise the benefits of straight-through-processing for all Market participants. However, to make this more practical, three initiatives were prioritised for 2016:
- Central Services Refresh Programme (CSRP). Focuses on centralising third party suppliers accounting and claims process to remove paper-based inputs and automate these wherever possible. CSRP will reduce brokers’ administration, as well as improve the quality of data, reduce cycle times, complexity and delays.
- Placing Platform Limited (PPL). An electronic placing platform that allows brokers and carriers to quote, negotiate and bind business, but also supports face-to-face placing of (re)insurance business. PPL is beneficial to the Market as it improves access to London that may have previously been restricted due to prohibitive processing costs. When fully integrated, the initiative removes duplicated effort and reduces processing time and errors.
- Delegated Authority. Addresses existing legacy systems that are limited by poor integration of data between systems and restricted functionality.
The LMG’s TOM is currently undergoing a market consultation, the results of which are due to be published at the end of March 2016.
The Need for Affordable Change
Market participants face the dual cost of modernising their own operations at the same time as funding the TOM against the backdrop of a soft market. The challenge is enormous and requires a combination of technology and high class delivery, both for the TOM and for individual Market participants. Years of underinvestment in delivery of technology has left the Market with a shortage of skilled change experts. Therefore, disruptive innovators are being encouraged to assist Market participants look for solutions outside of their usual ways of practicing, to ensure that the London Market retains its reputation for innovation and as a leader for writing specialty and commercial risk.