Ever since ship-owners and merchant sailors started haunting Edward Lloyd’s coffee house to trade shipping news three centuries ago, London has enjoyed a towering status in the world of insurance.

But the London market is worried that dominance is slipping, driven by London’s dwindling share in emerging markets. In fact, a recent Boston Consulting Group (BCG) report commissioned the London Market Group (LMG) surmised that up to 40% of its premiums, or £18 billion, is at risk of being moved to local markets, driven by increasing capacity and expertise, as well as customer preferences for buying insurance locally.

LMG Chairman Steve Hearn says the rise of alternative capital and alternative centres such as Singapore, Bermuda and Zurich poses a challenge for London.

Brokers and insurers are responding by building global models that do not give London a privileged position.

“All of these phenomena have put pressure on areas of insurance business where London has traditionally been strong – specialty commercial risks where broking and underwriting expertise are vital to finding a flexible solution to client need,” he says. “While London insurance results have tended to hold up, many of us active in the market have developed a sense of unease.

State of play

In commercial insurance, London is more than twice as big as Bermuda, Zurich and Singapore combined. Its 5% annual growth, however, is less than a third of that of Singapore.

In reinsurance, London is outstripped by Germany, Bermuda and Switzerland and is going backwards. In 2013, its market share slipped from 15% to 13%.Market comparison

The BCG report states that globalisation and technological change are affecting the commercial insurance industry as much as any other. “Future growth in the industry will be driven by emerging markets, where London is less well represented and where regulators and insurance buyers prefer local underwriting,” it states.

“Brokers and insurers are responding by building global models that do not give London a privileged position. Regional hubs such as Singapore are providing alternatives for business that would have been traditionally placed in London.”

Marsh Asia Pacific Head of Placement John Donnelly says there is no doubt that the destination mix for their portfolio placed overseas has changed as Asian markets have developed, particularly Singapore and China.

“We expect this trend to continue in the coming years as Chinese insurers gain more exposure to the global market,” he says. “Further, Korean and Japanese insurers have shown a greater willingness to underwrite international business.” However, Donnelly says the movement of business away from London is not significant at this point. “To offer perspective, a great deal more business has been repatriated to the Australian market from London than has moved to other destinations.”

Price points

The BCG report found London’s expense ratios were nine percentage points higher than its peers, putting it at a price disadvantage.

Donnelly says now that product availability is the same across markets for the vast majority of lines, price has become the key driver once differences in policy coverage are accounted for.

Aon Risk Solutions Australia CEO Lambros Lambrou says London’s strength has always been the ability to provide innovative product solutions and capacity for complex risks.

“The myriad of new alternative specialty markets is providing increased choice for buyers and many of them have strong underwriting talent that can compete favourably with the London international wholesale market,” he says.

“Also, the role of the independent wholesale broker is increasingly at risk if they are unable to provide seamless connectivity with the retail broker through to the retail clients. Buyers quite rightly are increasingly demanding for transparency around who and how their risks are being placed into the global marketplace and that the process is efficient and executed as one unified broking team to deliver the best results for them.”

Futures market

Marsh’s John Donnelly says the trend away from London will likely continue. “The Asian carriers will become increasingly dominant, particularly the Chinese, Japanese and Koreans,” he says. “Expect them to play a major role in any global market consolidation over the next five years.”

However, he says the London Market will continue to play an important role in many Australian insurance buyers’ programs, via either their traditional subscription offering or through their stable of local underwriting agencies.

Willis Australia Construction, Property and Casualty Executive Director Harry Floyd says the current soft market spell challenges for all overseas centres when competing for Australasian business.

“A true test of the ability of Singapore in particular to compete with London will come when the market turns harder again,” he says. “Placements for Australian-based business into the London market via Singapore may increase due to time-zone advantages; however, as long as capacity remains plentiful in the domestic Australian market, it is more likely that only capacity-driven risks and niche products will be placed offshore.”