Roles In London insurance market blur as cost pressure grows – AM Best

A need to cut costs is forcing London market insurers to adapt their operating models, and this is leading to a blurring of roles.

That’s according to a report by ratings agency AM Best entitled Roles in London Insurance Market Blur as Participants Seek to Add Value.

AM Best says that unsustainable operating costs and the evolution of the distribution chain are forcing London market insurers to adapt their operating models in order to remain relevant in a competitive marketplace. Across the London market, pressure is growing to reduce administrative and acquisition costs, prompting radical action at both the individual company/managing agent level and at the Corporation of Lloyd's.

The roles of intermediaries, insurers and reinsurers are blurring, driven by merger and acquisition (M&A) activity and resulting consolidation, the accelerating use of technology and analytics, as well as a more flexible approach to the support and utilisation of capital. All constituents of the value chain are looking to get closer to the end customer and, in AM Best’s view, the winners in this evolving marketplace will be those that are best able to demonstrate the value they offer clients while minimising costs.

Best says expense reduction is essential to remain competitive. The high cost of operating in the London market is a long-standing and well-documented issue. It points to the high cost structure at Lloyd’s, which has a five-year weighted average expense ratio 7.7 points higher than that of the European “Big Four” reinsurers and 6.7 points higher than that of US and Bermudian reinsurers in AM Best’s reinsurance composite. The difference can be partly explained by the London market’s focus on specialty business, which requires a high level of underwriting expertise and has a high reliance on broker distribution. However, inefficiencies associated with placing business, the length of the distribution chain and growing acquisition costs play a significant role in the disparity.

Since 2016, reductions in Lloyd’s administrative expense ratio have been partly offset by increases in the acquisition ratio, largely due to an increase in coverholder business and the associated commissions. Approximately 30 percent of Lloyd’s business is now distributed via coverholders, which write business on behalf of syndicates under the terms of a binding authority.

Underpinning the market’s efforts to reduce operating costs is increased use of technology and the digitalisation of the way risk carriers connect with the distributors of their products. The solutions Lloyd’s has outlined in its Future at Lloyd’s document increase the pressure on all market participants to ensure that their own systems are appropriate and compatible. Being on the front foot and engaging with process change will be important for both carriers and intermediaries if they are to remain competitive in the market.

Best concludes: “Embracing new technology will be key to both reducing the cost of operating in the market and to improving service standards. AM Best expects market participants to continue to develop their own solutions or to partner with insurtech firms in order to take advantage of technological advancements. Those insurers that successfully incorporate technology into their operating structures will likely improve their efficiency and relationships with insureds, strengthening their business as a consequence.”

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