Issues and opportunities facing the Corporation of Lloyd’s
The issues and opportunities facing the Corporation of Lloyd’s were raised by the inaugural speech given by Inga Beale, the Lloyd’s CEO at an IIL lecture on 6 January 2015. Insurance brokers will play a key role in helping to respond to these and we consider below the highlights of a most enlightening and thought provoking talk: “Why London Matters” the London Market Group Report – commissioned from the Boston Consultancy Group.
The report rated seven insurance markets across the world, using eleven performance indicators. London is ahead of the other markets in ten of those categories, but it is clear it is under a competitive threat. In particular, Lloyd’s was identified as not making enough headway in the markets which are growing fastest (eg, Asia, Africa and Latin America).
Options faced by Lloyd’s
Beale presented Lloyd’s with three options, and placed particular emphasis on embracing the final two:
- Concentrate on the business and the clients already known and compete to retain this business.
- Get out to the fastest growing markets ie, Asia, Africa and Latin America and attract new business from there.
- Develop new forms of cover which clients need, but are not currently available.
Opportunities presented by Asia, Africa and Latin America
In Asia and Brazil, students are pouring out of business schools, keen to ensure that all that new business comes to them. If Lloyd’s has not built up a presence in those markets within the next ten years, those local to them will probably have found a way to write the tricky specialist business themselves.
To address this, Lloyd’s is looking to ensure it has designed a service to a truly global economy, to work with markets which have little knowledge of specialist cover and partner up with cedants to find the products that work for them.
The scope for new business is vast. In China only 3 per cent of economic losses following a natural catastrophe are actually insured, even though China is probably the country most exposed to natural catastrophe. It is also the second largest economy in the world.
Similarly, in Turkey, a country highly exposed to earthquake, only 18 per cent of economic losses are insured for losses following a natural catastrophe. In India, which faces significant flood peril, it is just 15 per cent. There are swathes of commercial and industrial activities which are currently underinsured, or not insured at all, because innovation in the industry has slowed.
The London insurance market is not responding quickly enough to the opportunities in the high growth economies; only 0.5 per cent of the absolute growth over the last couple of years in emerging market premiums was placed in London, and the London share of the Asian insurance market is a mere 2 per cent.
The Corporation is responding: it has for example set up platforms in China and in Singapore. While there are concerns that these platforms are writing business that would otherwise come to London, Beale presented them as a positive response to the need to tap into these new markets, where much business is currently being retained locally.
The LMG, which was formed some years ago to look at reforming the market, identifies a vast, practically untapped, market for the kind of difficult, specialised cover that Lloyd’s currently writes.
Lloyd’s has confirmed that it will be releasing a report in the next few months which shows that manmade threats, like cyber and pandemics, are growing in importance as a threat to global GDP. These are areas where traditional clients – as well as the new ones – will need cover.
Beale highlights that in the corporate world this is an arena where assets are as likely to be intellectual as well as physical. Where the assets are stored in the cloud rather than in a warehouse, and where supply chains stretch all around the world. The Insurance industry needs to respond to these new challenges.
Challenges identified by the Boston Consulting Group Report
The BCG report looked at what the London market as a whole needs to do collectively to keep it relevant. This report identifies six challenges, which are best summarised as:
- A preference by customers to buy insurance in their local market
- London’s share of business in the emerging markets is declining
- London is losing share in reinsurance
- London’s expense ratios are higher than its peers, and that there is a danger that the high regulatory burden could put London at a further price disadvantage
- Current pricing conditions
The Council of Lloyd’s has set a strategy – Vision 2025 – which is about growth, expansion and innovation. This was launched at Lloyd’s by David Cameron.
The Corporation is implementing it as demonstrated that in 2014 Lloyd’s got:
- A licence in Beijing
- Approval for an office in Dubai
- A new life licence in Poland
- A direct MAT licence in Colombia
- and the go ahead to open a representative office in Mexico
There is also more encouraging news on the regulatory front in India, with signs of progress being made on important reforms of the insurance industry that will enable Lloyd’s to establish a local reinsurance branch.
Lloyd’s approved 107 new coverholders and two in countries for the first time – Lithuania and Mexico.
The Corporation also helped to set up consortia in China, France and Singapore.
Seven new Lloyd's registered brokers are accessing Lloyd's in London from outside the UK – five are within the EU, two are outside the EU.
Lloyd’s achieved consensus across the market on the way forward for our modernisation effort on refreshing the central services provided by Xchanging.
Beale’s message was powerful and persuasive. Lloyd’s does not want the market’s growth to come from undercutting existing business at unsustainable prices – rather it should look beyond the horizon to opportunities where it can demonstrate its expertise and resource by providing a solution to the needs of developing industries/markets.