Tough market conditions will drive modernisation in the London Market

06-10-2016

Tough market conditions will drive modernisation in the London Market

Richard Clarke, Xuber director

With the pressures as they are on both underwriting and investment returns, the London Market must modernise or lose business, argues Richard Clark, head of business development at Xuber, a part of CSC.

The difficult market conditions facing the re/insurance industry, including an elongated soft market and historic low interest rates meaning low investment returns, can actually act as a force for positive change for some parts of the industry that have previously resisted change.

That is the view of Richard Clark, head of business development at Xuber, which provides products and services to an array of companies involved in various types of risk transfer. Clark believes that despite the many unsuccessful attempts made previously to modernise the London Market, this time is different because of the many compelling business reasons driving the industry to change.

“I know that when it has come to modernising the London Market, there have been many failures in the past. But this time it is different,” says Clark. “The technology is better, and it makes it easier to change systems but more than ever, we are seeing a real need out there and compelling business reasons to change.

“It is no longer a question of changing for the sake of it; now there are true business reasons to modernise and get on board. You look at the pressures on the market and the case becomes clear. Rates are down, investment returns are down and with so much new capital flooding in, there is little sense the pressures will abate any time soon.

And the real challenge comes because brokers are also increasingly minded to place business where frictional costs are lowest and speed of transaction is highest lowest.

“The one thing that can set companies apart is how efficient and cost-effective they can be and the extent to which they embrace the many technologies available in the market.”

Clark believes these market conditions, combined with the growing globalisation of the industry, will act as a catalyst for change. He says all parts of the market are under pressure to remove frictional costs and find ways of driving profits in a difficult operating environment. And the real challenge comes because brokers are also increasingly minded to place business where frictional costs are lowest and speed of transaction is highest lowest.

“There has been a drive towards globalisation and we are starting to see that brokers don’t always want to deal with the London Market and will place business elsewhere because it is easier,” Clark says. “They are under pressure too and it is natural that they take the path of least resistance where they can.”


Losing out

While statistics are hard to come by, he believes the London Market is now losing market share to other jurisdictions, and its participants are slowly realising this.

“The business is growing but it is growing much faster in other markets such as Bermuda, Zurich and in some of the hubs in Asia,” he says. “It is bypassing London more and more, and the balance is shifting away from the City. As people realise that, their motivation to change will increase.”

The ease of change should also be greater than it was previously, he stresses. Technology has improved in ways that make it easier for businesses to transfer and crystallise their objectives. The analytical capabilities of technology are also enhancing the industry’s ability not only to be efficient but also to better select risk and allocate an appropriate premium.

“Technology is advancing all the time and big data, and the way it can be used has the potential to revolutionise the industry,” he says. “For London to continue to be the location of choice for the industry, it needs to simplify its processes and also embrace what is possible. Other markets now have a lead on London and it needs to catch up.”

He adds: “The capability and agility of today’s technology are also greater; it is much more flexible than when previous generations were asked to adapt. It is no longer as daunting as it was and that also means it is on the agenda of the main boards of companies, instead of people just seeing it as a hidden back office irrelevant to their world.”

Clark stresses that dealing with the market’s complexities can be daunting to a newcomer. With Lloyd’s and the LMA, there are multiple administrative systems to grapple with when placing some risks—which is very different in markets without traditions rooted in the past.


C-suites on the ball

The process of change will also be enhanced by a new generation of executives very comfortable with using technology in their private lives coming through and championing change.

“We are having a lot more conversations with people wishing to standardise and automate their underwriting who see the possibilities as a competitive edge,” he says.

“These are people who have grown up with technology and they are challenging the more senior executives to champion the speed of change, which we see as a good thing.”

The final driver of change that has not existed before are the post Solvency II requirements which mean companies understand a lot more about their own businesses and have better access to key information.

“This has shone a light on some of the processes firms use and the data used to support underwriting discussions,” Clark says. “They need to show decisions are being backed up with evidence and are based on more than just a gut instinct.”

He accepts the intertwined nature of the London Market makes it difficult for one or a handful of companies to take the lead. Instead, it must be a decision by the market to adjust as one body. But he is confident that change is now imminent due to the market pressures carriers are facing.

“The London Market needs to stay on its toes,” he says. “We are seeing a lot more interest, but it needs to be a cross-market initiative. I do believe that all the right factors are now in place to make that a reality. There will be a tipping point where early adopters will eventually get a small advantage and then drag the others along.”

Xuber, Richard Clarke, London, UK, London Market, Insurance, Reinsurance, Risk management, Bermuda, Europe, Technology, IT

Intelligent Insurer