London as a hub for insurance market opportunities

Shepherd Compello Directors Mel Alexander and Chris Hatt, were recently interviewed by the Insurance Insider’s, Insider Quarterly magazine. The Q&A session discusses a number of topics, including why London is best placed to take advantage of insurance market opportunities.

Below is the article.

Insider Quarterly (IQ): As a new employee of Shepherd Compello, but a veteran of the industry, what do you see as the main challenge to the London market?

Mel Alexander (MA): Shepherd Compello believes there is a place for combining traditional values with what clients need in a digital world. That makes sense to me and the clients I work with. So I have seen both huge changes and huge opportunities in the market.
There is a real appetite from the clients I work with for a more personal approach. They all appreciate that we live and work in an increasingly sophisticated insurance environment, but this does not mean that they welcome a one-size-fits-all approach.
This is where the London market can capitalise on opportunities, as it has the history, the capacity and the most experienced people to deliver exactly what our clients need.

Chris Hatt (CH): John Shepherd our CEO, speaking in the Winter 2014 issue of IQ, referred to the recent London Market Group report, which warned that the £60bn market is under serious threat.
Like John, I take the glass-half-full standpoint that we need to embrace this threat and turn it into an opportunity. Ignoring it is not an option, the world is changing dramatically, but if you read the report it details the strengths of London – not least its ability to innovate and act as a hub.
So, if you turn it around and imagine how hard it would be to create a clone of London, you start to see the strengths more than the weaknesses. Of course, we need to adapt and listen to client needs, but we should be confident in our ability to face up to new markets.

IQ: What are clients asking for that London needs to be aware of?

MA: In the last two decades we have seen consolidation in both the carrier and broker market. The pace has quickened again more recently with Catlin, Brit, Miller and RKH. There is no sign that this is going to change any time soon. In fact, it’s reasonable to expect this trend to increase.
We could have a long discussion about whether this is good for clients or not. What is clear from those we talk to is that an aggregator model does not benefit them. Bigger is not better, they have no desire to be swallowed up in a business model where their individual needs are ignored in favour of simplifying the process – what you might call vanilla underwriting.
So my message is that there is a real chance for London to differentiate. Yes, we need to embrace modern technology, but we also need to treat clients as individuals and remember to underwrite. Believe me, the underwriting message is a serious one. We see many cases elsewhere in the world where staff do not really understand insurance and are, frankly, not expected to.

IQ: How is aggregation affecting your markets?

MA: We know many coverholders who do not want to be grouped together to support poorer coverholders in an amorphous block just to suit some of the large players.
The real concern is what happens the next time the wind blows. Binders are naturally very popular in a soft market where they provide a steady flow. However, in the same way it is reasonable to expect more consolidation, it is fair to expect natural catastrophes and the subsequent market cycle. What happens then?

IQ: Could you provide a tangible example of how London can help, and deliver on client needs?

CH: Our clients want a choice, they don’t want to be dictated to. A great example of how London has differentiated and been proactive was with the US National Flood Program, which provided protection for homeowners and was in debt to the tune of $24bn.
As a result there was a change in legislation, the Biggert-Waters Act, then the market opened up. Specialists in London acted quickly to assess the situation and provide solutions. London could provide wordings which satisfied mortgage lenders and the capacity required.
This combination of large capacity coupled with a niche underwriting approach meant clients had a viable, alternative option.

IQ: Where else can the London market’s size and specialism be brought to bear?

CH: Rather like the flood example, Florida has experienced political and market pressure to give homeowners affordable protection. Millions of new homes have been built in a few decades in a region where a single hurricane could cause billions of dollars of damage. Yet the local market is not fit for purpose.
There are 50-plus undercapitalised insurers in the state that simply could not handle a major loss. In fact, some observers have questioned if the state of Florida itself could handle a major loss. Meanwhile, many of the larger players in the US market have walked in and then out.
Again, the London market can help as it has the underwriting ability and the capacity to step in.

IQ: But natural catastrophes have been fewer and at the same time market capacity is huge…

MA: That is undeniable, but we do not have the ability to see what is around the corner. To draw an analogy, did anyone really see the drop in fuel prices coming? Certainly not the Russians, and their economy is in freefall as a result.
From 2010 until mid-2014, world oil prices had been around $110 a barrel. But since June last year prices have more than halved and are now below $50 a barrel. Many of the low cost airlines have been caught out because they understandably hedged against ever rising prices.
The point is that none of us can really know what will happen. What I do know is that I have been in the market for long enough to have seen many cycles and we quickly forget until the next crisis happens.

IQ: So if you could summarise why you think London is ‘in the box seat’, what would you say?

CH: Players come into and out of the market and there are going to be more coming to the stage. In the final analysis, whenever there has been a crisis, London has been there. As an industry we have a tendency to commoditise our offering to the point where price is king. Yet our ability to understand, innovate with the right wordings and underwrite properly is London’s strength – all underpinned with robust capacity.

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