Insurance bosses say London falling behind in market for in-house cover

Senior insurance industry executives have said the UK is falling behind in the growing market for in-house insurance, as more companies choose to create their own entities to cover corporate risks.

London’s specialist commercial insurance and reinsurance market — where underwriters and brokers negotiate policies covering everything from cyber attacks to shipwrecks — contributes about a third of the City’s economic output and at present has record employee numbers and growing sales.

But at last week’s FT Global Insurance Summit, David Howden, founder and chief executive of insurance broker Howden, told delegates the market needed to be “smarter” about innovating in response to the growing use of in-house or “captive” insurers, where large companies set up entities to cover some of their risks, rather than buying external cover.

For some large companies, he told delegates, as much as half of their insurance was now done through captive rather than external providers. “How do we make sure we are ahead in that market?”

Caroline Wagstaff, chief executive of the London Market Group, which represents businesses across the industry, said London “can’t be complacent” about its leading market share in specialist insurance and reinsurance.

She highlighted government plans for new regulations to encourage captive insurers in the UK. Ministers had promised a consultation by the spring, but this did not happen and an election has now been called for July. “We’re sort of a fly in amber at the moment,” she said. 

Companies that work with a broker to set up a captive insurance arm pay premiums into it to cover business risks such as management liability. Often the captive entity will buy reinsurance from an external provider.

It can be an attractive strategy when commercial insurance prices are high and also allows the business to benefit from any investment and underwriting returns. However, it also means more exposure to the cost of risks.

London has fallen behind in the market, as lower-tax and more lightly regulated centres such as Bermuda and Guernsey have encouraged companies to set up their captive entities. There are about 7,000 captive insurance companies around the world, according to industry estimates.

LMG research has suggested that rule changes such as lower capital requirements could lead to almost 700 such entities either moving to or setting up in the UK, bringing jobs and business to London.

Dame Susan Langley, UK chair of insurance broker Gallagher and a senior figure in the body that governs the City of London, said that in recent meetings in Singapore and Japan to discuss the market, London was described as “very traditional”.

She added: “We’re strong, we’re stable and we’re traditional, but we’re not perhaps at the forefront of innovation.” 

In recent years, new products such as insurance-linked securities — a form of reinsurance provided by investors — and captive insurance have powered rival centres such as Bermuda and Singapore, which according to LMG data have grown faster than London since 2014. 

In a statement, Lloyd’s of London said it had received “significant interest” in captives from multinational groups, and Apollo, one Lloyd’s syndicate, this month announced a captive syndicate with an unnamed global client.

An important factor in the London market’s recent growth has been a rise in reinsurance prices, particularly for property catastrophe cover that protects primary insurers from the worst of losses on extreme weather such as hurricanes.

Property catastrophe reinsurance prices rose significantly last year because of a mixture of large claims and cost inflation, feeding through to higher prices for households.

Patrick Tiernan, head of markets at Lloyd’s, told the Financial Times summit there was “no chance” of prices falling again when contracts renewed in January next year, given the market was playing catch-up after years of poor returns on capital. “The restructuring that happened in 2023 is here to stay,” he said.