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Senior executives in the insurance industry have said Britain is falling behind the growing in-house insurance market as more companies choose to set up their own entities to cover business risks.
London’s specialist commercial insurance and reinsurance market – where insurers 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 sales.
But at the FT Global Insurance Summit last week, David Howden, founder and CEO of insurance broker Howden, told delegates that the market needed to be ‘smarter’ at innovating in response to the growing use of in-house or ‘captive’ insurers, where large companies create entities to hedge some of their risks, rather than purchasing external coverage.
For some large companies, he told delegates, as much as half of their insurance was now done through internal rather than external providers. “How do we ensure that we are at the forefront of that market?”
Caroline Wagstaff, chief executive of the London Market Group, which represents companies across the sector, said London “cannot be complacent” about its leading market share in specialist insurance and reinsurance.
She highlighted government plans for new regulations to encourage captive insurers in Britain. Ministers had promised a meeting in the spring, but that did not happen and elections have now been called for July. “We’re kind of like a fly in amber right now,” she said.
Companies that work with a broker to set up a captive insurance business pay premiums for it to cover business risks such as management liability. Often the captive entity purchases reinsurance from a third-party provider.
It can be an attractive strategy when commercial insurance prices are high and also allows the company to benefit from any investment and insurance returns. However, it also means greater exposure to the costs of risk.
London has lagged the market as lower-taxed and more lightly regulated centers such as Bermuda and Guernsey have encouraged companies to set up their own entities. According to industry estimates, there are approximately 7,000 captive insurance companies worldwide.
Research from LMG has suggested that changes to the rules, such as lower capital requirements, could see almost 700 such entities move or establish in Britain, bringing jobs and businesses to London.
Dame Susan Langley, British chairman of insurance broker Gallagher and a senior figure in 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, we are stable and we are traditional, but we may not be at the forefront of innovation.”
In recent years, new products such as insurance-linked securities – a form of reinsurance offered by investors – and captive insurance have powered rival centers such as Bermuda and Singapore, which have grown faster than London since 2014, according to LMG data.
In a statement, Lloyd’s of London said it had received “significant interest” in captives from multinational groups, and Apollo, a syndicate of Lloyd’s, this month announced a captive syndicate with an undisclosed global customer.
A major factor in the recent growth of the London market has been a rise in reinsurance prices, especially for property catastrophe cover that protects primary insurers against the worst losses in extreme weather, such as hurricanes.
Reinsurance prices following real estate catastrophes rose significantly last year due to a combination of large claims and cost inflation, which fed through to higher prices for households.
Patrick Tiernan, head of markets at Lloyd’s, told the FT summit that there was “no chance” of prices falling again when contracts were renewed in January next year, 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.