Similar to trends in other global insurance markets, London is becoming more competitive across the board, with underwriters cutting premiums and boosting coverage to keep accounts and add new business. But that doesn't mean price should be the only consideration for buyers or underwriters, one veteran of the Lloyd's and brokerage communities warns.
“In terms of market conditions, our clients are finding the London market competitive in virtually every single major line of business London is good at–from aviation, to marine, to large property placements and large casualty placements,” according to Julian James, chief executive officer of Lockton International, based in London.
“We're finding that premium is going down in virtually every line,” he said, adding that there is an increasing level of competition among underwriters. “For good, risk-managed business, the deductibles are reducing, and in certain cases coverage has been extending.”
For example, he noted, buyers in the aviation hull liability market have seen an average 12.5 percent reduction. He said hull liability premiums in 2005 were about $2 billion, compared with $1.5 billion this year, “and there are still aviation losses coming in,” adding that “what's happening in the aviation market is pretty typical for what we're seeing in most lines of business.”
Mr. James–who was with Lloyd's of London for nine years, most recently as director of worldwide markets, before joining Lockton last year–said he sees “little evidence of underwriters withdrawing from the market,” noting that the net effect is his clients are getting better deals coming out of the London insurance market.
The trend is global, he said, noting that the U.S. and Asian markets also are extremely competitive. “As ever in this point in the cycle, there is less need for clients to buy their insurance outside of their local markets,” he added.
Mr. James explained that the way risks are treated by underwriters always varies, but that any differentiation is based on how the risks are managed. Buyers who have developed long-term relationships with underwriters or have consistent partnership arrangements with their underwriters may be finding better deals, he observed.
“It's good news for risk managers,” he said. “But as ever, we are advising our clients to look carefully behind the price that's on the slip–to look at the quality of the underwriter; to see that the underwriter will be there for a long period of time.”
He added that his firm is “looking very closely at the capital strength of the carriers with whom we're trading, and we're putting underwriters under a great deal of scrutiny to convince ourselves why the client should want to buy from them.”
Insurance buyers now have more choices, and those who manage their risks well “can differentiate themselves more and they can buy more for the same amount of premium they had before,” he said.
However, Mr. James said Lockton is advising its clients that even with the softening prices, “there is no substitute for strong risk management disciplines in the company”–a message he said risk managers and their brokers also need to convey to their underwriters.
MARKET OUTLOOK
“In the absence of any extraordinary event, I see a continued softening of the market,” Mr. James predicted. “I see an increasing pressure for risks to be placed in local markets, and an increased deterioration of the financial results of carriers,” noting that “we're beginning to see that already with some of the combined ratio results that have been reported.”
The exposure organizations face is also increasing–for example, in areas such as technology risks–particularly anything involving the Internet. “We're spending more time trying to understand those risks and making sure underwriters understand them–and getting them to write in some of these new areas,” he said.
Mr. James also observed that the current trends are similar to conditions in the late 1990s, “and we've been witnessing these trends for some time now. We saw them beginning to happen early last year.” At that time, he said the market was softening in most areas.
What's different this time around, he noted, is that while carriers are competing for business in a softening market, they also are better equipped internally to understand their risks and analyze pricing trends.
The key is that the information systems within carriers about the risks they're carrying have improved. “They've done a lot of work to understand the risks, and to build pricing tools within their own companies,” he said.
“The real question,” he said, “which is still unanswered, is whether all that additional information is actually going to make any difference to underwriting strategies. Time will tell.”
In regards to London's increasing involvement with the Bermuda market, he commented that in recent years, “we've seen a lot of companies domiciled in Bermuda buying into London market underwriting operations.”
A number of Lloyd's vehicles and other London market companies, he noted, have been bought by companies based in Bermuda, “so they're getting a lot closer in many ways.”
Overall, he observed that the trend should benefit both markets.
“There was a feeling years ago that London and Bermuda would be great rivals,” he said. “I never saw it that way–they always were going to be working closely together.”
The current expansion is a stage in the evolution of Bermuda companies, he added.
“It's natural that they would want to expand by picking up good, quality businesses in the London market,” Mr. James said.
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