The London insurance market is entering a soft period. At the latest quarterly market message from Lloyd’s, the message was of a deteriorating sentiment across the market, with risk-adjusted rates falling by 3.3% across the Lloyd's market at a whole account level during the first quarter.
After several years of hardening terms, the pricing peak has passed for most lines of business. This shift is primarily driven by remarkable market stability, resulting in additional capacity entering the market and lower rates. As the market continues to soften, insurers will feel more pressure to be more competitive, price more aggressively, and adopt more flexible underwriting practices.
The timing for this transition is not ideal. It comes at a momentous time for the London market, with practitioners dealing with several concurrent headaches. While overall market performance remains healthy and profitable, challenges abound, including delays to Blueprint Two, workforce problems, and increasing competition from other regions that threaten London’s global dominance. I concur with the view of my colleague Jamie McDonnell, London Market Lead at Guidewire, when he claims that the London market does not have a divine right to be the global hub of insurance.
These market cycles are a long-established reality in insurance. But what should insurers focus on now to ensure that they come out stronger at the other end?
The good news is that the market has new tools at its disposal that were unavailable or in their infancy the last time the market softened. The advent of Generative AI and large language models are enabling businesses of all kinds to do more with less. More specifically for the London market, the use of algorithmic underwriting and smart follow strategies is on the rise. These technologies maximise underwriting efficiency, which is critical in a softening market.
At the same time, the classic tactics for a softening market still apply.
Insurers should enforce strong underwriting discipline. In a softening market, they might be tempted to underwrite more risks that they’re comfortable with to gain market share, but this can quickly become unsustainable if insurers take on too many poor-quality risks or underprice them. Data and analytics play a crucial role in maintaining this discipline. Those who have effectively collected and utilised their data over the past few years are now better positioned to price accurately and select the right risks, ensuring long-term stability and profitability.
Challenging market conditions might tempt insurers to reduce their focus on innovation, but it is essential to resist this urge and instead emphasise product differentiation. By expanding into new lines of business or geographic regions, insurers can mitigate the impact of a softening market in any one area. This diversification not only provides a buffer against market volatility but also creates new revenue streams.
Strong relationships with customers and brokers also play a vital role in a softening market. Insurers should prioritise delivering excellent customer service and maintaining trust and confidence with brokers. These relationships enable insurers to better understand and meet the specific needs of their clients, offer value-added services, and remain flexible and responsive to changing circumstances. Additionally, brokers who trust and advocate for an insurer are more likely to recommend their products.
It’s all about coming out on top at the other end. Once market conditions improve, insurers who have maintained strong underwriting discipline, embraced innovative technologies, and prioritised customer relationships will be the best positioned to capitalise on the upswing.
By leveraging smart follow and algorithmic underwriting, harnessing data analytics, diversifying portfolios, and fostering partnerships, insurers can navigate the soft market effectively and emerge stronger, ensuring the London Market remains the global hub of commercial and specialty insurance.