Reinvention key for Lloyd’s as it bids to capture emerging market growth

As a result, in order to capture growth in emerging markets, Lloyd’s may need to boost its primary insurance as well as expand its local capabilities.

"Multinational insurers are not buying as much reinsurance as they used to," says Steve Jackson, partner at Rainmaker International, a Brokerslink specialty member. Jackson believes that a reliance on reinsurance licenses in emerging markets will hinder future growth.

Many large insurers have developed a strong position in emerging markets. This enables them to reinsure a larger share of the business among their regional units. If AIG in Mexico can reinsure the risk internally with AIG New York, the company can reduce its overall reinsurance purchase.

London’s share of global reinsurance premiums has declined to 12.3 percent in 2015 from 13.4 percent 2013, according to the London Matters 2017 report, continuing the trend reported in the 2014 London Matters which showed a 15 percent share in 2010.

This decline was driven by increased competition from emerging market reinsurers, markets with lower cost of capital and expense, and jurisdictions that have actively supported the growth of alternative capital, the report noted.

“Despite the Market’s continued strengths, many of the key challenges identified in the first London Matters report in 2014 remain, and this should give us all cause for concern,” said Nicolas Aubert, chairman of the London Market Group.

The difficult environment in reinsurance is pressuring the market in general and some players are already reacting.

"Swiss Re is now in many countries a direct writing insurer," Jackson says.

"Berkshire Hathaway is doing a similar thing in the US with Berkshire Hathaway Specialty, going from a reinsurer to a direct writer and I think that is exactly what Lloyd’s needs to do," he adds.

In many emerging markets, Lloyd’s only holds a reinsurance license. Lloyd's underwriters are, for example, currently not licensed to write primary insurance in or from Brazil, India or Argentina.

“Where Lloyd’s has a direct insurance license such as in the US, it is growing,” he adds.

In the US Lloyd’s operates with a direct writing license in addition to a reinsurance licence.

In 2015, Lloyd’s grew its premium in the US & Canada by 4.5 percent to $19.2 billion compared to 2013. The whole London Market grew 3.5 percent in the region to $22.5 billion over the period.

While Lloyd’s and the London Market grew in North America as well as in the UK & Ireland, the market shrank in all the other regions including Asia, Australasia and ‘Other Americas’.

London premiums from emerging markets declined to $9.3 billion in 2015 from $10.5 billion in 2013. Asia remains the highest growth market globally, but was also the region in which London lost most ground over the period.

In Asia, Lloyd’s premium shrank 5.1 percent to $2.8 billion between 2013 and 2015. For the London Market as a whole, the business declined even faster, dropping 9.3 percent to $4.3 billion.

London has seen absolute declines in all emerging markets, leading to clear reductions in already small market shares in Asia and Africa, and an erosion of London’s foothold in “Other Americas”, according to the London Matters 2017 report.

London Market’s divergent performance in different regions has also resulted in a decline in the proportion of overall premiums originating from emerging markets. This has fallen from 16 percent in 2013 to 14 percent in 2015.

"A lack of proximity, language barriers and missing direct insurance licenses are three fundamental things that squeeze Lloyd’s ability to capture an increasing market share in emerging markets," Jackson says.

In the London Matters 2017 report, experts cited several reasons for the declining appeal of Lloyd’s and its products in emerging markets. For one, demand for London’s more specialist capabilities is limited as insurance needs remain relatively less sophisticated.

But the London Market may be missing opportunities.

While much of the insurance growth in emerging economies is still likely to be in relatively standardised business, these markets will develop an appetite for more specialist cover, says Scott Farley, director of communications of the International Underwriting Association (IUA).

“It is important therefore that the London Market establishes a strong presence and cements its reputation, so that it is well placed to cater for future growth,” he notes.

Jackson believes that in some places the specialist market is developing fast as large insurers adapt their product offering to local demand.

"In Latin America, a lot of the specialty products like marine, D&O, aviation and energy are now available locally," Jackson notes.

"I think that’s taken Lloyd’s a little bit by surprise," he adds.

Experts participating in the London Matters report agreed that one reason why the London Market was losing market share in emerging economies was that brokers seek to place business locally in line with client wishes.

The insurance business in emerging markets is changing and some companies are taking action.

“Clients naturally have a preference to buy locally if they can and many IUA member companies have increased their profile across a range of different markets in order to cater for this demand,” says Farley.

Reacting to client requests, carriers are developing locally financed re/insurers which are capturing growth in emerging markets at the expense of the London Market and global carriers, according to the London Matters report. Local insurers and brokers have developed broader risk appetites and capabilities.

"Multinationals bought local companies, gave them capital, gave them products and trained their underwriters, as a result squeezing the reinsurance business Lloyd’s of London was underwriting," Jackson says.

As a reaction and to capture growth, "Lloyd’s should attempt to secure primary insurance licenses in emerging markets and also have a local presence," he notes.

But the combination of expanding in primary insurance and developing a local presence in emerging markets may prove difficult for Lloyd’s.

London offices of global carriers are avoiding competition with their growing local insurance networks, the London Matters report says.

"Acquiring direct insurance licenses is likely to be difficult for Lloyd’s, as this could mean that the market would compete with some of their existing client base and distribution, potentially causing conflicts," Jackson says.

“It also has to be considered that a lot of the capacity that comes from Lloyd’s is received from big corporations like Liberty, QBE, AIG and ACE. They may not favour Lloyd’s going after direct licences to compete with their local franchises,” he adds.

But for Lloyd’s and the London Market, pushing into local direct insurance in emerging markets may be vital to secure its relevance in the future.

"Lloyd’s needs to reinvent itself in these regions to make itself relevant again," Jackson says.

A lack of local capabilities and expertise may be holding back many London Market firms from growing their capacity in emerging markets.

In the London Matters report, participants complained about underwriters’ limited understanding of some of the emerging markets, particularly the risk and regulatory environments.

There is also the concern, especially for some liability classes, that there is not yet adequate precedent in how courts will rule in certain claims situations.

But Jackson believes that there is an opportunity for Lloyd’s and the London Market.

"The greatest success story of Lloyd’s is their model of accessing business in far-flung territories where they don’t have underwriters on the ground by delegating their authority to a carefully chosen underwriter," he explains.

Lloyd’s needs to find strong, local and independent insurance underwriters in emerging markets that have strong relationships with retail brokers, Jackson suggests. The London Market should supply capacity from London directly to the retail broker in each one of these emerging economies.

"Where Lloyd's has a direct license, the MGA (managing general agent) delegated authority binder concept has worked extremely well for them. That distribution model based on local underwriters given capacity from London is still very relevant but it needs to be adapted to the idiosyncrasies and regulations of these new markets that they want to target such as Asia, Latin America."

"To me, that’s the way forward for Lloyd’s. Compete or become irrelevant.”