A London Insider’s View

Here in the United States we are seeing inflation and related increasing property premiums. What does that look like in the United Kingdom right now?

Obviously, we have our own problems with inflation, probably slightly worse than yours. And we have this slightly odd position whereby we are almost in a lame duck government in that now, while it’s not an absolute certainty that [the Conservative party] will lose the general election sometime next year, it’s very likely. I mean, it’s perfectly possible that they’ll win, but at the moment, not many people would think that. And their reaction to that is to become more and more populist.

So we have this issue with 15,000 people pitched up on the south coast of Kent in small rubber dinghies from France this year already, which is on top of something like 45,000-50,000 coming last year—in a world where at least a significant portion of our nation thought that what they voted for was to take back control of the borders when we left the European Union. And ever since, more and more people are coming in. It is a very emotive issue. So it’s pretty unstable and divisive.

Sounds like the U.S.

There’s an article in the Financial Times today comparing Rishi Sunak and Ron DeSantis—Sunak having replaced a fairly strange populist prime minister in Boris Johnson and DeSantis attempting to with Trump. So it’s a world of quite a lot of uncertainty. And particularly for our market, given that we all live in the U.K. and the U.S. is our biggest market. But times of heightened risk are opportunity for the purveyors of risk management services. So it should be something we look on relatively positively from a business point of view.

How do you see inflation playing into any of the market pricing? We see it here, but we also hear rumblings about the market maybe starting to end its hardening cycle.

It’s different class by class, obviously, but yes, the beginning of the end of the hardening process certainly. It’s difficult to know what price reactions are driven by general inflation and what are driven by the demand for and supply of capital, and we’re still sort of feeling our feet in what was a very face-to-face, personal relationship built market prior to the pandemic. Then we had two and a half years of very few people in the city. And now we are not really quite sure what everybody’s doing in terms of going back into London.

Do you think with the London market trying to modernize and digitize, is that helping foster some of that?

We ran four workshops with brokers in their 20s, and they’re all really keen to be back meeting people. Therefore, I think that, in terms of modernization and digitization, we would make a distinction between the deal and the transaction. You can digitize the transaction and take cost out of that. But the deal is probably something that still needs to be done in person for certain bits. We would reckon now that up to 30% of the business that’s done in London is quite commoditized and you can do it remotely and equally. Big global programs don’t lend themselves to trading in an underwriting room. They’re all big meetings of broker, client, insurer, quite often reinsurer, and a whole collection of lawyers. But that still does leave a big tranche in the middle, where going from underwriter to underwriter and doing deals is the best way of finding solutions that other markets tend not to. And that’s what London is there for.

But we are doing a massive amount of work on modernization that hopefully will start to bear fruit next year. Anything we can do to provide better service to clients is pretty fun.

The challenge, in addition to getting physically in the underwriting room, is getting to a place where underwriters will take decisions at the box, which is challenging nowadays because of things like modeling and capacity management that the regulators tell them they ought to do and that actually probably are quite a good idea as well. So we need to find ways of catering for that.

Since you mentioned underwriting, the U.K. has proposed a terrorism bill called Martyn’s Law that’s supposed to require venues to consider terrorism threats and prepare accordingly. Do you think that will have an impact on terrorism cover, given that it’s most often excluded?

I think it’s something that’s been pushed for in the wake of the attack at the Ariana Grande concert in Manchester. But yes, it sort of adds compulsion to a terrorist cover. It is a live threat in the U.K. at the moment still, so it’s a perfectly reasonable thing to be suggested that people consider. But compelling people to buy insurance is all very well if there’s capacity available. So that’s the difficulty—if there’s a mismatch between publicly driven demand and actual availability, then it’s a challenge. I fear that we spend rather too much of our time as an industry at the moment going and talking to government and saying, “If only we could do this ourselves, but do you have more public money to provide some sort of reinsurance backstop?” I think we need to get better as an industry at being able to solve our own problems and not constantly turning to government for help.

That’s a cyber question, too, for systemic cyber risk.

And a climate question.

Yes it is. We can talk about that a little bit. The increased wildfires, secondary perils, flooding, and drought—you all are seeing it there and in Europe.

The interesting thing about climate is that, over the last couple of years, we’ve spent a lot of time with our government trying to persuade them that we’ve got lots of clever people who know about climate risk and they can be really useful to them. But there was a by-election in Uxbridge and South Ruislip about a month ago, which was Boris Johnson’s old constituency, after he resigned as an MP. It is just outside the boundaries of the London low-emission zones. So if you’ve got an old car that you still drive, then you have to pay 12 pound 50 a day in the low-emission zone. There’s a proposal to extend that to places like Uxbridge. The Conservative party, which was on course to lose Boris Johnson’s seat, hung on to it by about 450 votes, at least in part as a protest vote against the extension of the low-emission zone, because that’s being done by Sadiq Khan, who’s a Labour mayor of London.

So, in the wake of that, the government has more or less completely abandoned net zero as a concept.

But back to the point I made earlier, I think it’s an enormous opportunity. There is a syndicate just about to go live, if it hasn’t already, in Lloyd’s. They have a relationship with the fire department in California, and they will send people in to assess your house from a wildfire risk perspective and give you a whole list of recommendations, and then they’ll provide you with property insurance on the basis that they’ve minimized the risk and made it possible. That’s the sort of thing you would want to see the international insurance industry doing. Also part of the cover is that they’ll send people back if there is a wildfire heading towards your property to help you manage the risk of it getting to you. So it’s a manifestation of what we’ve talked about for quite a long time—services becoming more important than just paying a premium and getting a check a few months later. It’s actually a complete risk management solution.

Regarding the EU and Brexit, the EU is trying to make sure that insurers are opening shops in Europe and trying to find capacity within Europe instead of going to the U.S. or to London. And they’re trying to strengthen their supervision of that. How do you see it playing out if they ever make that decision that capacity must come solely or mostly from the EU?

So there is definitely a faction of opinion within the EU that they shouldn’t export specialty insurance, which seems pretty ill advised on the basis that, if nothing else, it just creates a massive risk bubble in the EU because they’re all just insuring each other. It’s a faction that’s seemingly gained ground at the same time that we have left the Union.

Us leaving has coincided with the growth of a slightly isolationist protectionist faction in the EU. Protectionism is quite a general world trend at the moment. So they might do it.

Equally, we are seeing some of the larger insurance groups looking at creating hubs, some in Madrid. The idea is you could create your own specialty hub in Madrid that does all your EU business but you can also move your Latin American book through it because a lot of Latin American business comes to Madrid, either via Miami or directly.

It’s the inevitable consequence of a seismic change. Everyone goes, “Well, why are we doing that? And should we carry on doing it?”

Do you think the U.K. market has been doing a good job of accessing third-party capital?

I think so. Most ILS deals done in London are usually still domiciled somewhere else, despite the efforts of our government to attract them here. It’s not been easy because there’s not been as much capital about. But it’s not a subject that comes up much.

What else is top of mind for you?

We’re still interested in growing insurance penetration in markets where we haven’t been successful. Basically Asia, Africa and Latin America. We talk of a global insurance industry, and it’s sort of global, but it’s quite focused on a relatively few number of territories where significant economic growth is happening and, thus, demand for commercial insurance.

Our penetration into those markets is less than 5%. It hasn’t grown, in fact, might have shrunk. So that’s a challenge.

Any thoughts on how we can penetrate those markets?

Certainly in Asian markets it’s understanding the nuances of how business works in those territories. I’m not so sure that we’ve yet developed enough expertise in London to do that. It’s very different from how it works in other parts of the world.

It’s a question of how we do that while not losing focus on our traditional markets. Everybody sees a huge growth in the U.S. excess and surplus lines market, and our members who are particularly focused there are making a lot of money and bringing a lot of business in.

Partly that was thriving in domestic markets during the pandemic because everyone got a bit nervous, but it’s carried on afterwards. So we would hope that others would sit there and think, “Wow, maybe it is a good idea to put your risk into international markets.”

On another note, the Financial Services and Markets Act is a new piece of proposed legislation which gives both regulators and international competitiveness objectives. So we are keen that that actually makes some tangible difference. One of the things we’ve been discussing with them is, at the moment, they’re very unclear about what responsibility they have for overseas clients. Because our Financial Conduct Authority won’t definitively say we have no responsibility for the end client, what you tend to find is that the broker here will try to second-guess the recommendation in case they get held accountable for it. That just creates an amount of work that is costly and unnecessary. They ought to be able to say, “My client is the producing broker. They have given me instruction. I’m just going to now go carry that out.”

So if we can get that sort of clarity from the FCA, that will be a real win for U.S. clients, because they are as much a victim of this as anything. It should be a much more efficient process. So maybe even more E&S business will come our way.