The future’s ours to win

Nigel Roberts, Head of Distribution — AEGIS London.

2021 has the potential to be an outstanding year for the London insurance market, says AEGIS London’s Nigel Roberts. But only if businesses invest time and money in adapting to a post-pandemic world.

Usually at this time of the year, insurance industry pundits form an orderly queue to present their thoughts on what the coming 12 months will hold for the market. This year, that queue may be a little shorter. After Covid-19 tore up most 2020 predictions within two months of the start of the year, it’s likely that many formerly forthright commentators will be keeping their cards close to their chests.

For anyone keen to form a firm opinion on what 2021 has in store, the clues all lie in the last 12 months. Changes that would normally have taken 10 years to play out were condensed into just one. Most were cultural. London and Lloyd’s have been relatively fortunate that the effects of the pandemic were mitigated by the hardening market. This helped us all to ride out the storm. Indeed, the pandemic has done much to firm up conditions and increase the hard market’s duration. This, in turn, will increase the number of opportunities open to London market businesses. The challenge now is how businesses choose to capitalise upon them.

For the immediate future, the impact of the post-pandemic hard market fall into two main categories: underwriting and the way in which we manage our businesses.

From an underwriting perspective, 2021 is set to be a very positive year. Fundamentally, it’s going to be all about risk selection. With the Lloyd’s market set to grow around 13% and rates up by a similar number there’s relatively little scope – or, indeed, imperative – to chase new business. Merely by continuing to service an existing book, it will grow at a similar rate to the market. The key will be portfolio optimisation. At the bottom end of portfolios, poorer performing business is likely to be shed, making it difficult for brokers to place some risks.

For the short-sighted underwriter, the temptation will be to make hay while the sun shines. Simply riding the wave may suffice for 2021, but the prudent underwriter will consider other facets of his or her business in order to future proof themselves for 2022 onwards, when the market may not be so buoyant. As we learned in 2020, fortune favours the well prepared.

When it comes to the way in which we do business, the impact of this year’s move to remote working has had a profound effect culturally as well as financially. Whether it will reduce businesses’ cost bases in the long term is still a matter of debate. Salaries are one area in which it certainly could. Traditionally, salaries in the insurance market have been high due to London weighting and the need to be in easy commuting distance of the City. If staff are able work more from home, then salaries are likely to be tempered. This could be a positive thing for the market as the need to maintain competitiveness through a lower cost base is critical to London’s future.

Operating models will also come under scrutiny in 2021. In the hard market, we will see many new entrants with very different ways of working while existing businesses adapt and evolve. This is a moment in which new technology will really make a difference as syndicates aim to write good businesses by having lower frictional costs associated with it. The LMA’s panel working to reimagine the future of delegated authority underwriting could also have a profound effect on the market’s results.

An investment of time and money now into operating models will open the door to a new world for the London market. Traditional facultative underwriting will be just one option open to insurers. In addition, we can opt for a data-driven portfolio-based approach or online distribution using algorithmic underwriting. These techniques do not contradict one another; they are about providing customers with choice. As a private consumer, we buy from shops and we buy online. Our clients deserve the same.

If I do have a wish list for 2021, top of it is the desire for brokers and underwriters to work together more closely. In short, I’d like to see us doing it with one another, not to one another. If we all work together to write business cost effectively, we all benefit. In reality, the only effective way to cut costs without reducing services levels is to cut operational cost.

London and its insurers have a once-in-a-generation opportunity in 2021. Reputationally, we remain very strong. We’re a hugely important player in a global market. But we can’t continue to sustain combined ratios of more than 100 for much longer without putting a big dent in our shiny image. If Lloyd’s isn’t able to turn in a combined ratio below 100 in 2021, that will be a cause for concern.

London ended 2020 in a strong position – but not as strong as it should be. We certainly have the potential to correct that in 2021.

Opinion voiced, I’ll return to the back of the queue.

First published in Insurance Day 8 January 2021.