The promise of globalisation – you can do business anywhere, any time. But when it comes to insurance, there’s only one place to be.
Globalisation. Few words provoke such a wide range of reactions. It has become second nature for businesses to bank with global banks, insure with global insurers, submit their accounts to global auditors and employ global consultants to examine their operations. With this new global infrastructure, and the greater mobility of capital and human resources, is there any longer a need for distinct geographical centres, such as the City of London?
A truly global financial centre
New research commissioned by the Corporation of London, shows that the world’s greatest financial organisations are increasingly clustering in just two locations. Conducted with 365 executives in 20 countries, the research concludes that London and New York are the world’s only genuinely global financial centres, with London nudging into first place overall. Michael Snyder, Chairman of the Policy and Resources Committee of the Corporation of London says: “The pre-eminence of the City and Wall Street is, if anything, more pronounced than before.”
London’s status as a financial centre has traditionally been underpinned by a variety of factors, such as its culture of trading, its skills base, the quality of professional and support services, accessible language, convenient time zone and a proportionate regulatory environment.
What’s important for today’s finance executives?
What factors help 21st-century companies decide where to do business? The availability of skilled personnel is the most important consideration; more than 90% of those surveyed say that it is very or critically important. London and New York both scored highly, with 98% of respondents giving each city a rating of ‘good’ or ‘excellent’. Overall, London emerged with a higher proportion of ‘excellent’ ratings, and both Paris and Frankfurt were well behind, where less flexible employment practices and cultures are seen to be detracting factors.
The regulatory environment is the next important indicator of competitiveness. For both London and New York, more than 90% of respondents rated this as ‘good’ or ‘excellent’. Despite some concern about an increase in regulation in the UK and Europe, London again pips New York because of what is viewed as a more flexible principles-based approach, compared to the more prescriptive rule-based approach in the US.
Recent years have seen the emergence of a number of lighter regulatory regimes, frequently with more favourable tax systems, such as Dublin and Bermuda. But corporate tax regime ranks only eighth in importance among the 14 factors explored in the research, and London is seen to be well ahead of the other traditional European financial hubs.
London as an insurance centre
There is no doubt that the London insurance market greatly benefits from the highly sophisticated financial infrastructure that surrounds it.
In the middle of it all, and nurtured by it, is probably the largest concentration of insurance knowledge anywhere in the world. As Swiss Re notes in its report on the London market: “London’s most important production factor is the accumulated expertise of the brokers, underwriters and all the other specialists in dealing with… risks and insurance markets.”
The Lloyd’s market, with its stable security rating, access to global business through a network of worldwide licences, and capacity to underwrite £14.8bn of direct and reinsurance business, is an important part of the whole. But the London insurance market is more than just Lloyd’s alone. Of the world’s 20 largest reinsurance groups, 18 have a physical presence in London. Eight of the world’s top 10 insurance brokers and all of the top 10 reinsurance brokers operate there. And London is also the capital of the world’s maritime sector in general, and P&I insurance in particular, accounting for two thirds of the global market.
London’s market share of the world’s reinsurance and commercial business sectors is estimated at 10% to 15% and is even higher in some important areas, such as marine at 15%, aviation 27% and energy at 60%.
London’s relationship with other insurance centres
Whereas other cities may be recognised as important captive domiciles, regional insurance capitals, or centres for catastrophe reinsurance capital, London’s 300-year track record plus its cluster of talent and expertise make it stand out as the leading centre for global insurance and reinsurance. However, where direct competition does exist with other centres, “it is generally a healthy thing,” says Lloyd’s Chairman, Lord Levene. “Lloyd’s welcomes competition in the insurance market, wherever it is found.”
It’s not simply a question of competition. There is much co-operation too. As Lloyd’s points out, in a global market place you would expect to have a growing relationship with other markets.
US, Bermudian, European and other companies have been investors in Lloyd’s for more than a decade and among the companies seeking to grow their Lloyd’s businesses the most in 2006 are some of the world’s best known insurance brand names – including Liberty Mutual (+27%), AIG (+34%), QBE (+20%) and Munich Re (+37%). In a newer development, Lloyd’s vehicles are now investing in other centres such as the US and Bermuda too – not surprising in an increasingly interdependent global marketplace.
Then there is also the flow of business. Many companies in so-called competitor markets reinsure with Lloyd’s syndicates – and vice versa. As Lloyd’s figures highlight, there is an annual flow of several hundred million dollars of reinsurance business both ways between its syndicates and the Bermuda market, for example.
This does not mean that London is complacent. For Lloyd’s part, Lord Levene says: “We recognise that we must act now to ensure that Lloyd’s offering is as competitive as possible on the world stage. That is why we have just launched a three-year strategic plan to enable us to deliver the best insurance platform for the future.”
The most important thing that London can learn from the rise of other insurance centres, he concludes, is that it will only play a leading role in the future if it is prepared to constantly adapt and change, as it has over the past 300 years.
London: The facts
- There are 264 branches and subsidiaries of foreign banks in London, more than any other city in the world
- The UK banking centre manages more cross-border bank lending than any other country – 23% of the world total
- The London foreign exchange market is the largest in the world, with a daily turnover of $753bn, more than New York and Tokyo combined
- London is the biggest market in the world for derivatives traded over-the-counter, with 43% of global turnover
- The London Metal Exchange is the biggest non-ferrous exchange in the world, handling more than 90% of the world’s business
- London is the most liquid spot market for gold and gold lending
- Along with New York, London is one of the world’s two largest fund management centres, with assets under management of almost £3,000bn
- London offers the most comprehensive range of specialist maritime services in the world and employs more than 14,000 in this field alone
- London accounts for 43% of trading in foreign equities
- Four out of five of the world’s largest law firms are based in London
