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Insider in Full: London’s fading star in reinsurance

London has seen its absolute and relative position in the global treaty reinsurance market eroded over almost whatever period you choose to specify over the last 30 years...

Good statistics are not available – with treaty and fac not clearly distinguished in the numbers which are kept – making it difficult to track the decline in the numbers. (The London Market Group’s numbers are here, and below we compare Lloyd’s combined treaty/fac with a Bermuda composite.) 

 But in almost all areas of treaty reinsurance Lloyd’s – and the London market more generally – has lost both market share on placements and standing in the eyes of the market.

Where London once was a leader in the global cat market and in areas of specialty casualty like US medical malpractice, it is now largely a follow market. London underwriters are more likely to be involved in a placement now at the point where the heavy lifting of structuring and pricing have already been handled by the continentals or in Bermuda, filling out the balance of a slip.

The reasons for the decline are complex and inter-related, and have varied in proportion depending on whether the timeframe is the 1990s, the 2000s or 2010 onwards.

If you go back far enough there was no true marketplace except Lloyd’s for some of the risks it wrote, with some erosion of its position inevitable as the global reinsurance sector matured, giving clients choice not just through Bermuda, but also regional markets like Singapore and Zurich.

Focus in on the post-Katrina period and the causes cease to be inevitable and instead reflect issues that emerged in London/Lloyd’s, and the growing appeal of Bermuda.

In roughly the 10 years from Katrina onwards, there was a wholesale shift in the ownership of the Lloyd’s market towards multi-platform insurance groups and away from independent, London-centric businesses. 

Increasingly Lloyd’s players came under the ownership of Bermudian, American and Japanese insurance groups that had distribution across a range of markets. And just as these businesses moved into Lloyd’s through acquisition (and start-ups), dedicated Lloyd’s businesses moved outwards, establishing platforms in Bermuda, the US and elsewhere.

This process meant that Lloyd’s syndicates – and London companies – increasingly became one of a number of platforms groups utilised to access a pool of risks. They now had horizons and opportunities that extended beyond Lime Street.

Without as much London-centric management and dedicated capital, existing structural disadvantages for EC3 became more apparent or intensified, including in areas like line size, regulation, and higher acquisition and operating costs.

At the same time, other markets were becoming relatively more attractive for writing reinsurance books, triggering both a drift out of Lloyd’s for multi-platform players that now had choice, and the formation of bigger amounts of new capital in Bermuda.

And just as there was a movement on the underwriting side from reinsurance management optimizing their businesses, brokers and clients rebalanced away from Lloyd’s reflecting issues around continuity of capacity, leadership capabilities and the breadth of the available product suite. 

 London’s fading star within treaty reinsurance is not necessarily irreversible, but it is dangerous for a marketplace to allow a part of its core proposition to fall away.

In a companion piece, I will touch on some of the things which it might look to do to arrest and then reverse the decline.

But here I want to explore some of the challenges in more depth, and specifically those things which have acted in conjunction with the structural ownership issue to erode the position of Lloyd’s.

This will centre on four points:

Lloyd’s diminished ability to lead

Issues with Lloyd’s regulation and the convention around brokerage

Declining client relevance

The rise of Bermuda

1. Lloyd’s diminished ability to lead

One of the features of the 2010s has been a requirement from cedants for reinsurers to put out bigger lines to support panel consolidation. This can be read either as a function of clients wanting fewer but stronger relationships, or simply as a function of lazy broking.

Regardless, in a marketplace where scale is being prized, no Lloyd’s syndicate is putting out a $100mn line in cat, placing even its biggest writers well outside the top 10 on capacity per programme.

Sources said that 30 years ago the small line size from each Lloyd’s syndicate did not matter, because Lloyd’s was seen as more of a coordinated independent market able to work together to put down a large single line.

And although the structure may be no different today, the perception has changed – with clients and brokers often reluctant to collect a 20% order in 1% and 0.5% increments.

This has been exacerbated by London’s fallen angels, a development that is related to but not solely determined by changes in ownership.

The humbling of Amlin – the key London leader of the 1990s and 2000s under Tony Holt – has diminished London, along with the disintegration of Catlin through two rounds of consolidation.

They do not belong exactly in the same category, but Hiscox has had its struggles recently and in reinsurance its centre of gravity has shifted towards Bermuda. Meanwhile Tokio Marine Kiln stumbled – although it has since been righted by new management – and has migrated the balance of its book away from treaty reinsurance.

While there were as many as 20 credible cat treaty leaders in London in the 1980s and 1990s, they can now easily be counted on one hand.

The humbling of Amlin has diminished London, along with the disintegration of Catlin through two rounds of consolidation

Market sources are sharply divided on the diminishing number of individual lead underwriters in Lloyd’s with real standing.

Some believe that the talent pool is not what it was, with the current crop of London treaty underwriters lacking the skills of their predecessors. Others argue that while the underwriters lack the profile and importance of their forebears, this is a function of the structural challenges. In other words, a younger generation of talent cannot emerge because the conditions for its emergence do not exist, with too many underwriters disempowered by over-extended chains of management.

Regardless, a perception has grown amongst brokers that outside of a couple of old school hold-outs – like Ascot’s Mark Pepper, MAP’s Richard Trubshaw and Fidelis’ Richard Brindle – the ability to respond quickly and creatively, and to solve client problems rapidly, has disappeared.

Broking sources have further suggested that it is difficult to know who from the London treaty space to put in the room to represent the market with a key client.

2. Issues with Lloyd’s regulation and convention around brokerage

There are three features of the Lloyd’s and London market that make it relatively less attractive to write reinsurance there for a group that has other platforms.

First, the Lloyd’s framework has not been well set up to write proportional reinsurance, and is particularly badly adapted for casualty pro rata.

Issues include the way it eats up stamp capacity given the amounts of income that can be written with a small number of deals, and how unfavourable the capital calculation is for casualty treaty. In addition, the Corporation has at times rigidly focused on acquisition costs, pushing back on syndicates that wanted to write casualty treaty at mid-30s cedes, despite lower overall expense ratios than most binders business.

All of this has had consequences beyond the proportional book in that it has made it impossible for Lloyd’s syndicates to write a balanced book of business.

Second, multiple syndicates spoken to by this publication considered the Lloyd’s capital requirements on cat treaty punitive, and criticised the way the Corporation treats extreme tail risk.

There are said to be issues with the capital calculation that render Bermuda more capital efficient, with the calculation also making it relatively more attractive to take cat risk through a binders/D&F book despite the limitless sideways risk these lines carry.

Third, London markets pay total brokerage of 15% on US placements, comprising 10% retail commission and an additional 5% wholesale commission. London also pays 2.5% commission on pro rata business, again in excess of other markets.

For the most part, London-centric businesses are in favour of the additional brokerage as a means of supporting the wholesale broking force in EC3 and encouraging business flows.

However, if the same business can be accessed in Bermuda at 10% - plus an excise tax that is believed to add around another 1% - then there is a tempting arbitrage for multi-platform players even allowing for some additional operating costs.

And in recent times, there are examples of groups moving treaty books out, with Hamilton one of the firms consolidating its book in Bermuda. Axa XL made a similar if more dramatic move, but this was motivated by different corporate imperatives around a potential sale.

3. Declining client relevance

Reduced relevance to clients is a frequent broker complaint with regard to London, and this ties to earlier points around line size and diminished leadership capabilities.

But it also reflects a number of other factors.

As Bermuda has evolved over the last 15 years from a cat reinsurance-focused market into a multi-line marketplace, mirroring the continental Europeans, there has been a growing demand from clients for broad trading relationships.

London-focused writers typically are not in a position to provide this kind of all-line trading because they do not have the same breadth of product suite.

A broker’s fickleness is perhaps an underwriter’s discipline

Even more importantly, there is a perception in certain quarters that Lloyd’s and London do not provide the continuity of capacity delivered elsewhere.

This is attributed in part to the Lloyd’s oversight regime’s tendency to restrict freedom of movement, with the Hancock Remediation still fresh in the memory. As importantly, though, is the perception that there is a London mindset around cycle management that is not found to the same degree elsewhere. 

 Cunningham, Michelle

 

The controversy turns around whether an opportunistic approach to underwriting is perceived as a key lever for delivering returns, or an approach that damages the value created by long-term client partnerships.

Some in London simply argue that it will always say ‘no’ to clients more than other underwriters because it perceives itself as a surplus lines market, one which will inevitably wax and wane with the cycle.

A broker’s fickleness is perhaps an underwriter’s discipline.

4. The rise of Bermuda

All of the challenges around London have been magnified by the increasingly attractive environment that Bermuda has created, with the island getting things right that London did not.

Tax has played a role, but sources stressed that the accommodating regulatory environment has been more important.

The Bermuda Monetary Authority is described as an informed and supportive regulator, and one which provides significantly more room for manoeuvre than London’s layered regulation. This perception of a smooth regulatory road – and fast response times - has been one of the drivers of higher capital formation in Bermuda relative to London. 

 

Other advantages include an increasingly deep pool of expertise in cat reinsurance and the proximity to the most important client, US cedants. And, as noted above, there may now be a capital arbitrage versus Lloyd’s to go with the more competitive acquisition costs.

The other crucial aspect, though, was Bermuda’s success in exploiting the development of the ILS market to improve its competitive positioning.

Many of the bigger and more successful reinsurer managers – like RenaissanceRe and Validus Re – have been Bermuda-based companies. This was crucial through the soft market in facilitating major lines that were then backed up by third-party capital, delivering risk-free income.

Caveats

There are some important caveats to the picture painted above when considering London’s place in the reinsurance ecosystem.

The first is the incredible centre of reinsurance broking talent that London represents, with senior reinsurance broking management located in London and teams there handling some of the biggest global accounts.

The second is that there are some areas where London maintains its old pre-eminence. The most obvious of these is the US mutual market where London has maintained its historic leadership position in cat.

Last of all, London-centric businesses were not entirely bypassed by the 2020/21 influx of capital. Inigo is writing all of its business, including a reinsurance account in Lloyd’s. Convex’s top management is based in London, and it writes over half of its reinsurance book here. Fidelis’ senior leadership – which raised more fresh capital than any other business – is also mostly based in EC3.

But the direction of travel is very firmly established and if London wants to recover some of the ground it has lost in treaty reinsurance, it will need to change.

Insurance Insider delivers global wholesale, specialty, and (re)insurance intelligence that enables you to act first. Redeem your complimentary 14-day trial for more premium content from Insurance Insider.

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