November 10, 2017 / 9:57 AM / a month ago

Fitch: FCA Study May Help Trim London Market Insurers' Costs

(The following statement was released by the rating agency) LONDON, November 10 (Fitch) The Financial Conduct Authority's review of the wholesale insurance broker market could help counter the trend of rising expenses for London market insurers, Fitch Ratings says. This could make London more competitive with smaller hubs in other parts of the world, which have been gaining market share in recent years. But the outcome of the review is highly uncertain and will not be known until at least autumn 2018, when the FCA intends to publish an interim report with preliminary conclusions. The FCA's review will examine three topics: whether brokers have the ability to raise the price of their services beyond normal market levels; how conflicts of interest affect competition and client outcomes; and how certain broker practices, particularly "broker facilities", may affect competition. If the FCA ultimately finds evidence of anti-competitive practices, this is likely to be more negative for the larger brokers. Broker facilities are a system via which underwriters commit capital in advance and the broker then groups a large number of risks together to place with those insurers. Insurers have continued to commit capital, but many have recently criticised the higher commissions on facilities and the FCA has highlighted that placing business via facilities rather than the open market may exclude smaller insurers and harm competition. Rising broking commissions have contributed to pressure on insurers' underwriting results and any steps by the regulator that help reverse this trend could therefore be positive for London market insurers in the long term. Data from Lloyd's of London shows average acquisition costs, which are predominantly fees to brokers, rose from 17% of gross premiums written in 2005 to 22% in 2016. This has been in part driven by the prolonged soft market as falling premium rates put pressure on brokers' commissions. However, acquisition costs are not the only cause of rising expenses, as insurers have also faced higher regulatory costs and have invested heavily in IT infrastructure in recent years. Lower commissions could also help increase volumes by making the market more competitive with international rivals. The relatively high cost of doing business means London's share of emerging-market business has shrunk in recent years while local hubs in Singapore, Bermuda and Zurich have grown. The biggest impact has been in Asia, where London's market share fell 1.2 percentage points between 2013 and 2015, according to data from the London Market Group. Many brokers are international, placing business in insurance markets worldwide, and it is therefore possible that aggressive measures from the FCA could prompt them to try to route more business to other markets. But we think the risk of this is limited because there is strong underwriting expertise for more complex risks in the London market and this is unlikely to change, at least in the medium term. Contact: Ekaterina Ishchenko Associate Director Insurance +44 20 3530 1532 Fitch Ratings Limited 30 North Colonnade London E14 5GN Graham Coutts Director Insurance +44 20 3530 1654 Simon Kennedy Senior Analyst Fitch Wire +44 20 3530 1387 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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