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Senior insurance executives have said the UK is lagging behind in the growing market for in-house insurance as more companies decide to create their own entities to cover corporate risks.
London’s specialist commercial insurance and reinsurance market – where underwriters and brokers negotiate policies covering everything from cyber attacks to shipwrecks – contributes around a third of the city’s economic output and currently has record numbers of employees and growing revenues.
But at the FT Global Insurance Summit last week, David Howden, founder and chief executive of insurance broker Howden, told delegates the market needed to be “smarter” about innovation in response to the growing use of in-house or “captive” insurers, where large companies set up entities, to cover some of their risks rather than buying external coverage.
For some large companies, he told delegates, up to half of their insurance was now done through captives rather than outside providers. “How do we make sure we’re ahead of the curve in this market?”
Caroline Wagstaff, chief executive of the London Market Group, which represents businesses across the industry, said London “couldn’t be complacent” with its leading market share in specialist insurance and reinsurance.
She highlighted the Government’s plans for new regulations to encourage captive insurers in the UK. Ministers promised a consultation by spring, but that didn’t happen and now an election is called for July. “We’re a bit of a fly in the ointment at the moment,” she said.
Companies that work with a broker to set up captive insurance pay premiums into it to cover business risks such as management liability. The captive will often purchase collateral from an outside provider.
This can be an attractive strategy when commercial insurance prices are high and also allows the business to benefit from any investment and underwriting revenue. However, it also means greater exposure to risk costs.
London has lagged in the market as lower-tax, more relaxed regulatory centers such as Bermuda and Guernsey have encouraged companies to set up their own entities. According to industry estimates, there are about 7,000 captive insurance companies worldwide.
LMG research suggested that rule changes such as lower capital requirements could see almost 700 such entities either move to or settle in the UK, bringing jobs and business to London.
Dame Susan Langley, UK chairman of insurance broker Gallagher and a senior official at the body that governs the City of London, said London had been described as “very traditional” at recent meetings in Singapore and Japan to discuss the market.
She added: “We are strong, stable and traditional, but we may not be at the forefront of innovation.”
In recent years, new products such as insurance-linked securities – a form of collateral provided by investors – and captive insurance have fueled competitive hubs such as Bermuda and Singapore, which have grown faster than London since 2014, according to LMG data.
Lloyd’s of London said in a statement that it had received “significant interest” in captives from multinational groups, and Apollo, one Lloyd’s syndicate, this month announced a captive syndicate with an unnamed global client.
An important factor behind the recent growth in the London market has been an increase in reinsurance prices, particularly property catastrophe cover, which protects primary insurers from the worst losses in extreme weather such as hurricanes.
Property catastrophe insurance prices rose significantly last year due to a mix of large claims and cost inflation, which translated into higher prices for households.
Patrick Tiernan, head of markets at Lloyd’s, told the FT Summit that there was “no chance” of another rate cut when contracts renew next January, as the market was catching up after years of poor returns on capital. “The restructuring that took place in 2023 is here to stay,” he said.