The following is a column written by Matthew Moore (pictured), chair of the London Market Group and President of Liberty Specialty Markets
Currently the news is full of capital raisings by insurers aimed at ensuring they have sufficient capacity to support their trading partners and clients through the challenges that businesses are facing from the COVID-19 crisis. The ability of the London Market to continue to attract new capital is vital to its ability to develop solutions to new and emerging risks. Because capital is such a fundamental part of the mix, for the first time, the 2020 edition of the London Matters report investigated what it is that brings investors to the London insurance market.
London has always attracted, and continues to attract, investors of all types – including insurance companies, private equity and institutional investors. Analysis for London Matters 2020 confirms the ongoing internationalisation of the market which, between 2010 and 2018, saw an increase in the amount of capital invested from countries outside the UK, with the exception of Bermuda. This evolution of the London Market reflects the globalisation of the world in general. This trend has increased the competition among London carriers, requiring them to prove their business case to capital providers, instead of relying on the London-based investors’ historic attachment to the market.
Capital has flowed into London from different regions at different times, often for different reasons. One reason is that national carriers have sought to develop outside their own borders to service the increasingly international operations of their domestic clients in a variety of industries. London, as the world’s leading insurance hub, is the natural place to pursue this strategy. Another is the pressure to diversify. For example, by 2010, 20% of the premium contribution in the market came from businesses domiciled in Bermuda, many of which were monoline carriers under pressure from ratings agencies to diversify.
More recently, London has seen new market entrants from other countries with mature insurance industries. Investment from Japan and Korea was driven by the need for insurers in both countries to expand beyond their then stagnant domestic markets and develop the capability to compete in the more complex property and casualty risk markets abroad. Throughout the past decade, the London Market has also seen increasing investment by US carriers, often carried out via mergers or through buying a Lloyd’s vehicle. This reflects their desire to diversify and access specialty risk and demonstrates their preference for London’s shared language and culture.
The report also shows that between 2015 and 2018 there was a significant private equity investment in London Market companies, with 10 deals worth more than £250 million, targeting both insurers and brokers. Private equity capital will likely remain attracted to the insurance sector as long as there are significant opportunities to create value, primarily from the transformation of legacy platforms into more customer-centric and cost-efficient businesses.
As the number of London Market businesses has diminished through acquisition, there are fewer opportunities to invest directly into the London Market. This means there is a growing opportunity for institutional capital to invest directly into the London Market through alternative capital vehicles, such as insurance-linked securities (ILS), as a distinct and discreet asset class from other insurance risks globally. In 2018, after lobbying by the LMG, the UK Government put in place legislation to develop an ILS market in London. The structure was designed so that investors in the UK ILS market can invest beyond the traditional property catastrophe bonds in a much wider range of risks, giving them more choice. Since the legislation was passed, four protected cell companies have been approved in the UK, including one for Pool Re that created one of the most innovative ILS deals in 2019 covering terrorism risk.
The UK’s legislative and regulatory ILS framework and tax arrangements are globally competitive and have been broadly welcomed by investors. However, not all insurers, reinsurers and fund managers are persuaded that operating through a UK-based risk transformation vehicle is as cost efficient and flexible as those in other countries. We believe that there are good reasons to believe that this could change:
