Consolidation won’t harm Lloyd’s growth

Consolidation won’t harm Lloyd’s growth

Lloyd’s of London can expect to see further consolidation in coming years but that decrease in the number of major players within the market will not stop it from remaining the world’s leading provider of specialty insurance coverage.

At the beginning of this year, XL Group announced it was acquiring Catlin Group in a £2.5bn deal, a move which will further cement the latter’s position as the largest player in Lloyd’s. Looking at Lloyd’s figures for 2013 – the last time full year figures are available – Catlin contributed approximately 11.5% of the market’s close-to £26.12bn of gross written premium, while XL was responsible for just 1.2%.

This new and enlarged syndicate may well be the way for the future, if, as Sean McGovern, chief risk officer and general counsel at Lloyd’s, believes, there is further consolidation within the market.

“If the largest syndicate in Lloyd’s thinks it needs scale, where does that leave everyone else? I think consolidation is inevitable. It’ll be driven by market forces, we’ve been through periods of consolidation in the past – arguably it’s a necessary part of the constant evolution of the Lloyd’s market.

“It’s not something that concerns me, but we can’t be complacent. If the market focuses on the fundamentals of differentiating themselves through innovation, that will keep a strong degree of vibrancy and independence, and that is a key part of the market.”

As outlined in its Vision 2025 programme, the largest share any one managing agent can have of the Lloyd’s market is 15%.

“We have set that 15% limit because our responsibility is to maintain the diversity and dynamics of a marketplace. If we don’t, you start to end up with too few, larger managing agents,” explained McGovern.

undermine the subscription nature of the market. It undermines the diversity of the market, and it’s that diversity that makes it attractive to brokers and customers, and so we have to maintain it.”

The market has now entered its 327th year but that long history does not mean it can rest on its laurels, with Lloyd’s pushing ahead with a series of initiatives that it hopes will keep it at the forefront of global re/insurance industry.

Lloyd’s as a market continues to expand, with the £26.1bn of gross written premium it generated during 2013 an increase of $606m compared with the previous year.

“We’ve seen very strong results over the last five years with a strong return on capital over that period of over 16%, making Lloyd’s a very attractive home for capital that’s seeking specialty insurance and reinsurance opportunities,” McGovern told Reactions.

Lloyd’s core markets in Europe and the US have been the backbone for a lot of this growth. In particular, Lloyd’s presence in the US excess and surplus (E&S) lines market has been particularly fruitful.

“In the E&S segment where we saw growth of 15% . That was year on year growth – in 2013 we saw 13% growth in our E&S business. If you look at just our largest segment, which is US E&S, we now have $8bn of premium income and, if you include the exempt classes, we’re at $9bn of premium in the direct space. That’s very significant growth borne out of a strong market position with good distribution relationships.”

Despite this overall increase in revenue, Lloyd’s is well aware that it must keep moving forward, especially in the increasingly competitive market environment. Reinsurance is a significant part of Lloyd’s make up, and the well documented pricing pressure currently impacting that sector means growth is hard to come by.

That is not the only cause for concern though, with the established reinsurance market looking to expand their operations in the hunt for growth. That has meant some companies, for example Swiss Re and Munich Re, are looking to increase their participation in the direct and specialty primary markets as they look to grow their businesses outside of the pure reinsurance space.

According to McGovern, Lloyd’s did manage to increase both its property and property catastrophe business during 2014, but it has also grown in other areas of the market which he said was “all very encouraging”.

The market must ensure it remains at the forefront of the industry if it is to continue on this upward path however. To do this, it has embarked on its Vision 2025 programme which will see it move into new territories as well as continue to offer some of the most forward thinking insurance products on the market.

As McGovern explained, Lloyd’s has proven its forward thinking attitude in the past by providing coverages and protection that others have walked away from. This dynamism means having a Lloyd’s arm is now considered an integral part of a global specialty insurance business.

That alone is not enough to keep it at the forefront of the industry however, and McGovern explained that Lloyd’s push to move into new geographies, as well as investing in innovation, is what is needed to ensure it remains a leading player in the market. This is especially true when considering the level of consolidation currently occurring within the overall re/insurance industry.

According to McGovern, the barriers to entry, especially in the reinsurance space, are as low as they have ever been.

“We’ve seen segments of the market being commoditised and returns being compressed as a consequence. That’s made differentiation more difficult, and seemingly makes scale much more important.

That, combined with an overall decline in demand for reinsurance protection owing to greater levels of risk retention, are only making the situation more difficult for existing players.

“Lloyd’s collectively has got scale – we’re the fourth largest reinsurer in the aggregate, so it’s really a question of how syndicates can leverage that scale and compete in the global market. The differentiator that Lloyd’s has is its knowledge of specialty markets and its innovative approach – that’s what’s going to make Lloyd’s standout, because the syndicates can’t individually compete on scale, so they’ve got to compete on Lloyd’s historic strength which has been in making the market in new risk areas like cyber.”

As such, Lloyd’s is encouraging the market to be innovative in any way it can, with supply chain and cyber risks just two examples of where a lot of

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