The challenges of the London Market’s soft market cycle are being amplified by new technologies, according to Jamie McDonnell, Director, London Market at Guidewire.
Jamie expressed the need to consider the impact of AI and LLMs on a soft market, while speaking at the Guidewire Connections 2025 breakout session - The Soft Market Playbook: Protecting Profitability in the London Market - alongside panelists Jeffrey Crawford, Programme Director at Beazley, and Des Burke, Group Chief Operating Officer at Tokio Marine HCC, and moderator Sebastian Company Has, Senior Product Marketing Manager at Guidewire.
Reports of the London Market softening surfaced in late-2024, with major brokers like Aon and Marsh confirming the trend in early 2025. As Jamie outlined, there are four traditional approaches to surviving a soft market, two relating to capacity and two that tackle the expense ratio.
“You might change your reinsurance strategy slightly,” Jamie explained, “buying more reinsurance in certain lines of business. You might look at your retentions in that area as well, so that you're passing on more of that risk.”
Jamie added that some underwriters may step away from certain lines of business completely if rates are heavily eroding underwriting profit.
From an expense ratio standpoint, Jamie outlined that the typical approach would be to look for process-related efficiencies so as to absorb the increased exposure needed to hit the premium results seen in harder markets. He also added: “If you're able to innovate and go into new lines of business, that eases the pressure somewhat.”
However, while new innovations have been playing a key role in managing expense ratios and reducing product speed to market for some time, not all insurers have been able to scale these solutions. This is expected to cause the gap to widen between those that can and cannot thrive in a soft London Market.
“This is probably the first soft market cycle where we've had the prevalence of AI and LLMs being accessible by practitioners in their day-to-day roles,” Jamie said.
“Over the last five years, in the London Market we’ve seen more facilitation of business, with things like algorithmic underwriting.”
He added: “Modern core technology helps underwriting teams to actually innovate and create completely new products, with faster product speed to market, and the ability to really scale the distribution of that new product proposition.”
These innovations have played a significant role in operating ratios, when looking at underwriting performance for 2024 within the London Market - and the disparity caused is stark.
“You have a number who provide operating ratios at 70% - 75%, which is obviously fantastic performance. But you equally have those at the high 90s percentage point, despite writing very similar lines of business. That 20-point differential is not really sustainable, and we certainly haven't seen them in previous soft market cycles.”
During the session, Jamie predicted that the widening gap between the carriers innovating and using new technologies and those that do not could prove to be an existential threat during a soft London Market.
“I think there will be a lot more M&A activity,” Jamie explained. “Insurers who were already operating at combined ratios in the 90s during a hard market, or who can’t mobilise and do that peer-to-peer integration, will feel the pressure.”
Click here for more perspectives on Europe and the changing insurance landscape, and look out for more breakout session reviews in our Guidewire Connections 2025 blog series.