Brokers and insurers face a challenging year ahead with regulation changes, modernising the London market, and making the Lloyd’s Vision 2025 plan a reality
After coping ably with the losses from Superstorm Sandy as 2012 drew to a close, the Lloyd’s and London company markets have started 2013 facing a fresh batch of challenges.
Regulation, market modernisation, and making the Lloyd’s Vision 2025 plan a reality, are taxing the minds of London market brokers and underwriters as they enter the new year.
Like the rest of the UK financial services industry, the London market is gearing up to be regulated by two new bodies from 1 April: the Financial Conduct Authority (FCA), which oversees market behaviour, and the Prudential Regulation Authority (PRA), which monitors firms’ financial strength. While brokers will only be regulated by the FCA, insurers’ activities will be governed by both.
I’m still very interested in subjects such as commission disclosure, contingent commissions, and payment for order flow”
David Gittings, Lloyd’s Market Association
There is some uncertainty in the market about what the transition will hold.
Lloyd’s Market Association chief executive David Gittings says: “There are a number of issues there that haven’t really landed yet. I’m still very interested in subjects such as commission disclosure, contingent commissions, and payment for order flow.”
Lloyd’s broker Miller’s chief executive and chairman of the London & International Insurance Brokers’ Association Graham Clarke says: “With brokers coming under the auspices of the FCA, there is still quite a lot to work out with our new regulator about what that is going to mean for each and every one of us.”
Challenges from Europe
As well as keeping an eye on its home regulators, the London market also has to keep tabs on the European watchdogs.
The report from the European Commission’s study into the competitiveness of co-(re)insurance, pools and ad-hoc subscription arrangements across the continent, which is being prepared by accounting firm Ernst & Young, is expected to surface at the beginning of this year.
This is a particular issue for London and Lloyd’s because it is a subscription market and makes a lot of use of co-(re)insurance.
Gittings says: “We are still awaiting the final report, but I understand it is imminent.
“It has dropped off the radar a bit and it is important that we don’t let it, because depending on what [the Commission] decides, it could be significant.”
Brokers have their own challenges coming from Europe with the proposed revision to the European Commission’s Insurance Mediation Directive, nicknamed IMD II.
Clarke says: “That is likely to lead to much greater transparency around broker commissions.”
As well as coping with regulation, the modernisation of the London market continues apace, with many developments expected in 2013.
Project Darwin, which aims to modernise the market’s central back-office structure, has been rebranded Central Services Refresh.
Despite setbacks, such as the exit of key members of the original Darwin team from Lloyd’s, the project has more support across London market brokers and underwriters than any previous modernisation initiative and continues to progress.
Having made progress on electronic claims filing over the past two years, a particular goal for the market in 2013 is tackling low-value, high-volume claims.
At the other end of the insurance transaction chain, underwriters and brokers have joined forces to negotiate with providers of electronic placement platforms to create a central placement facility.
But this initiative is on hold as Qatarlyst, which Gittings describes as the “only game in town”, has been put up for sale by its owner, The Qatar Financial Centre Authority.
Gittings says: “We are gathering the requirements of the underwriters for what they would like to see in that placing platform environment, so we are ready to negotiate as soon as we have got someone to negotiate with.”
Another challenge will be making the Lloyd’s Vision 2025 plan, a series of goals to hit in 12 years’ time, come to fruition. A key part of the plan is expanding in developing markets. But this could be easier said than done.
Gittings says: “Underwriters are conscious that they are required to show a reasonable prospect of making an underwriting profit in their business plans, and at the same time they are being encouraged to develop opportunity in the emerging markets where there might not be the same opportunity for making that level of profit.”
Despite the challenges, many feel the market is heading in the right direction.
Clarke says: “For London as a whole, I am still very optimistic. London has done exceptionally well at getting its house in order, particularly Lloyd’s.”
Russell Higginbotham, chief executive, Swiss Re UK
In a long-term, ultra-low yield investment environment, the contribution to earnings from the asset side of the balance sheet will continually diminish. If (re)insurers want to generate an attractive return on equities for investors, and to see their stock values rise, they can increase underwriting results through higher prices and/or improved risk selection, reducing costs, moving into higher yielding investments, and addressing profitability through product design.
Andrew Hitchings, reinsurance chief executive, Cooper Gay
The market went through the Monte Carlo and Baden-Baden conferences with nothing more to discuss than proliferation of capital and the role of insurance linked securities. Then during the week of both the PCIAA conference in Dana Point and the EAIC in Kuala Lumpur, Sandy gave us something to talk about. Loss estimates still range from $10bn to $20bn+, but in an extremely benign nat cat year, Sandy has served to remind the market that losses will happen.
Dave Matcham, chief executive, International Underwriting Association
Last year will be remembered for the devastating effect that Superstorm Sandy had across the US. A significant proportion of the insured losses will, of course, be met by the London market. A recent statistics report from the International Underwriting Association showed that the US and Canada account for 15% of company market premium, behind only the UK and Ireland as a source of income. But the report also showed the diversity of London market business, which provides the strength to meet large-scale losses.
● Will the European Commission find that the co-(re)insurance market is amply competitive?
● Who will buy Qatarlyst to allow it to progress to the next stage of its development?
● Is there enough support for the latest London market modernisation efforts to create the efficiencies needed?