Behind the Headlines: LMG’s Caroline Wagstaff on why London must not stand still

With £187bn of premium written in 2024, £61bn contributed to UK GDP, and a revitalised reinsurance ecosystem, is the London market in danger of getting too comfortable?

According to Caroline Wagstaff, CEO of London Market Group, strong performance is no excuse for complacency.

In the latest episode of Behind the Headlines, Wagstaff argues that London insurers must continually develop new products to maintain their reputation as innovators, while also addressing demographic challenges by attracting a new generation of talent.

In the fortnightly news discussion, Abbie Day, senior reporter at Insurance Insider, takes a deep dive into what the data centre boom really means for insurers.

Transcript

Sam Casey 0:04

Hello and welcome to Behind the Headlines, brought to you by Insurance Insider. Remember, you can subscribe to the podcast on all major streaming platforms as well as on our website. I'm your host Sam Casey, and in today's episode we have a packed discussion about the London market, how it contributes to the UK economy, and some of the challenges it faces for the future. Our guest is Caroline Wagstaff, CEO of the London Market Group. Every two years, the organisation produces its London Messenger Report, a broad and in-depth statistical overview of the insurance business done within the Square Mile. This year's edition reports on a market in rude health, with strong growth and notable advances in reinsurance, an area where London has somewhat lost its way in recent years. Though the awens are positive, Caroline told me that the London market must not stand still if it is to retain its reputation as a global innovator.

SPEAKER_01 0:56

We know that what happens in cycles is that London will develop a new product. You've seen it with medical malpractice, you saw it with DNO, you've seen it with cyber. But as those products mature, they tend to redomesticate. And we need to be thinking what's the next new new thing that we can be looking for as a genuine centre for risk transfer and innovation.

Sam Casey 1:22

First up to our news discussion. I'm joined by Insurance Insider, Senior Reporter Abby Day, who has been undertaking in-depth research into the data center phenomenon. Abby, welcome back to the show.

SPEAKER_00 1:32

Hi Sam, thanks for having me again.

Sam Casey 1:33

So we were discussing data centers in a great deal last week with Aeon when they're on the show, and you yourself have been writing about the subject extensively. It seems like it's something insurers are very keen to talk about at the moment.

SPEAKER_00 1:47

Yes, some are really excited, some are not so excited, but it's definitely on everyone's mind.

Sam Casey 1:51

As you took a broad look about what this means for the market, which classes of business are getting most heavily involved in this data center boom? And which insurers did you identify which are really displaying the most appetite?

SPEAKER_00 2:05

Yeah, I mean it's an interesting topic because it's touching lots of classes of business, but construction is really the one that I covered and it has hit the ground running. Obviously, these buildings need to be constructed before they can be operational and have all the other lines of business come in. But but carriers are also thinking about lines like property, cyber, cargo, you've got energy, liability, techie, you know, and that's only just some of them. There's a lot that could come into this kind of asset class. We've also seen that there are kind of some leaders in the space: Zurich, Star, Chubb, Allianz and Liberty are some of the ones that keep popping up as names who are really involved. And there's also some brokers that are really kind of leading the way. The Aeon Lifecycle Facility and Martin Limbers Facility, which are really key in the space as well.

Sam Casey 2:55

And part of what's got everyone talking so much, I think, is the size of data centers is just growing so vastly and the accompanying insurance limits. How has the structure of the market been changing as it tries to accommodate the sheer scale of the projects which are being seen?

SPEAKER_00 3:16

Yeah, this has been really interesting. We've been told that the construction market is able to write around three to four billion dollar programs. But as we reported previously, there are kind of $8.5 billion towers emerging now. There's two from Aeon that we reported on. So obviously that's quite a big leap. And we're seeing that the conventional construction capacity isn't quite there. So markets are looking to use capacity from other carriers that don't traditionally write construction through consortia. You've got facilities and reinsurance bag lines. And we're also seeing brokers branching out and utilising domestic carriers and international marketplace to manage those really large-scale risks.

Sam Casey 3:57

And risk is obviously the operative word there. What are the kind of threats which underwriters are concerned about and the modelling and think about when they look to insure these mega projects?

SPEAKER_00 4:08

So I'd say first off is the aggregation risk. As you said, we've got these huge towers on single projects, which just carries a huge aggregation risk with it. Sources have told us that carriers are paying a huge amount of attention to this. So one way that they're kind of mitigating that is adding a breadth of insurers to any one program. But then there's also geographic diversification and cat sub limits as well. Then you've got physical risks. So water damage, like with a lot of construction projects, is a really big concern. But for these specifically, there's also a fire risk. They're on every construction. But for data centers, a lot use battery energy storage systems, which can undergo a process called thermal runaway. When a battery reaches a certain temperature, it can release really flammable gases that have a sort of uncontrollable self-heating fire. So that's obviously a huge concern. That also kind of leads to the energy concern where you've got some hyperscalers or large-scale cloud service providers, think Amazon, Meta. Now they're developing their own data centers and taking the energy provision away from the grid and onto themselves. But that leads to business interruption risk because they could be left with no backup source if something go wrong. We've been told there's a years-long waiting list to get back on the grid if something does go wrong. So it's not like flipping a switch and everything goes back.

Sam Casey 5:33

Data centers aren't actually new. I think they're just growing massively inside. So insurers have been covering these for a while. What is the loss experience that has been seen to date, which provides some lessons?

SPEAKER_00 5:47

Yeah, I mean, they're not new. The scale of them, I think, is quite new. But we do have some information from people on losses. Um, one broker told me that the largest loss they've seen comes from the water risk that we said about earlier. They said that was around a $20 million to $25 million loss. But they also spoke about hail loss during the construction phase, which I think was estimated to be between $60 and $70 million as well.

Sam Casey 6:13

A fascinating and ever-changing subject. So I really appreciate you coming on and speaking to me today.

SPEAKER_00 6:19

Thank you so much.

Sam Casey 6:22

The London Market Group is a strident representative of the insurance businesses within the Square Mile, engaging with governments and regulators to promote the industry and working to promote insurance as a destination career. The latest edition of its biannual report on the scale and trajectory of the market has recently landed. And to discuss its findings, I am delighted to be joined by Caroline Wagstaff now. Caroline, thank you for coming on the show.

SPEAKER_01 6:46

My pleasure, lovely to be here.

Sam Casey 6:48

We're speaking in the aftermath of a big bit of research which the London Market Group puts out every two years, your London Matters report, which really quantifies just how much insurance business is being done here in the square mile, its trajectory and whether it's been growing, which luckily the market has been, and also its impacts on the UK economy as well. From this latest report which you you brought out last week, what are the kind of key highlights for you?

SPEAKER_01 7:19

Well, I think the really interesting thing about the London Masters report now is this is its sixth edition. So it's, you know, it's well over a decade. And I think the interest which we see every time it comes out proves its value to the market. And I think that's a it's a really good litmus test of doing something. And I think what we've got better at is deciding what is important data, what we can do something about, and what might just be a red flag to the market. So for me, I think there were three really sort of important bits of new intelligence, as it were. So, first of all, as you say, really good growth. We've had a decade of growth in premium in the market, which I think is really good. I think there was very nice that we see that some of that's from volume, not just price, because obviously what they call it in retail, you know, like for like sales, so that you're sort of seeing what is genuine growth as opposed to just a rising tide carrying all ships.

Sam Casey 8:16

Because the market increased its global share, didn't it?

SPEAKER_01 8:19

Yeah, and that was good because it's been pretty static. But I think what was even nicer was it came from reinsurance. Reinsurance has been the area where for a number of years we've looked at it and thought, oh, it's been declining or it's been static. So really nice to see quite a significant uplift in reinsurance, and good to see that London's still attractive to those businesses. And then the third thing for me was really about what our working population will look like in 10 years' time, which is a piece of work we've never done before. I've always been concerned about the makeup of our demographic, the fact that there is pretty much static, it's been as many people over 50 as under 30. And so this year I said, okay, so let's kick the tires on that. What if we model that forward? And that to me is a big red flag for the market. Different businesses have different demographic makeups, but at this point, I think that's enough that people should be saying, okay, we need to take a look at what our future workforce looks like.

Sam Casey 9:18

And in terms of some of the intelligence you're getting from people's compiling reports through the report, was there any driving factors in why London was growing in reinsurance?

SPEAKER_01 9:28

I don't think so, but I think you can look at businesses that have been setting up Oak, Global, people like that, who've obviously decided that London is a good place to bring a reinsurance business, and Lloyd's is a good place to bring a reinsurance business. And maybe that wasn't true seven or eight years ago. Maybe it's people are doing business differently. I mean, one of the reasons that was always been put forward as to why London had lost market share, and I think your colleague Adam McNestry has written about this a lot, was just the inability to write the sort of line size you need in reinsurance. You know, you need a big global balance sheet to be doing that. I think what this shows us is maybe some of that is changing and people are willing to do a number of smaller line sizes or just different needs. And I think it's hard to know whether it's going to continue at this point, but it's green shoots of recovery.

Sam Casey 10:17

Yeah. And the areas where London certainly statistically really retained a dominance is those very specialist classes, isn't it? Where people are coming from all over the globe for underwriting expertise.

SPEAKER_01 10:31

Look at marine, look at aviation, look at energy, what we call real specialty insurance has really retained its global dominance. We have lost a bit of share in uh in casualty, but that you know, losing market share and thinking insurance isn't always a bad thing because you might want to walk away from it if the price isn't right. And maybe that shows good market discipline in what has been a softening market. So I think it's always interesting when you look at those market share numbers, is to sometimes I remember some ebb and flow. I went back to the first London Matters report, and actually we'd seen very little growth when that was published. And that was again in a sort of softening market cycle, and it was flagged as a sign of good market discipline. So market share is a double-edged sword.

Sam Casey 11:18

I was interested in the press release accompanying the report, the quotes that came with it. Although lots of the findings seemed very positive, a key message that you had was about not resting on your laurels and avoiding complacency. So it seems like that's a key key focus.

SPEAKER_01 11:34

I think so. I mean, there is nowhere like London. So the comparisons are not always perfect. But nevertheless, and if you look at other centres like Bermuda, or you look at Switzerland, or if you look at the US ENS market, if you index their growth rates, our growth is not as fast as theirs. Now, of course, that's statistically going to be true because we're much, much bigger. But nevertheless, I think these are things that are just worth keeping an eye on. Because we know that what happens in cycles is that London will develop a new product. You know, you've seen it with medical malpractice, you saw it with DNO, you've seen it with cyber. But as those products mature, they tend to redomesticate. And we need to be thinking what's the next new new thing that we can be looking for as a genuine centre for risk transfer and innovation. So I think looking at those relative growth rates, it's just good to not be too complacent about where we stand in the world. And we know that other people are trying to grow their centres too.

Sam Casey 12:35

Yeah, some of the areas that you flagged up in the report, I think, you know, there's cyber is still a big growth area, risks linked with AI and energy transition, all things where the market's trying to get a foothold.

SPEAKER_01 12:47

Yes. And you can't look at the world today and not think it's becoming a riskier place at all sorts of levels. And therefore, the opportunity for innovative and energetic businesses such as you see in London to be thinking about those new risks, I think is there is lots of opportunity. And so what we were trying to look at is where does growth come from? We've had 10 years of growth. Where does the next 10 years come from? And do we therefore have the right capital and talent, sort of human capital and financial capital, to support that growth? I think you have to look at both sides of the equation there in order to make sure you've got all the bits in place.

Sam Casey 13:25

You touched on earlier the findings you you had around the demographic makeup of the market, which were pretty stark, especially there was at one end the growing of the more older people in the workforce, but also a big decline in the share of people under 30. Why is it you feel the market is shifting in that way? Is it people not hiring enough young people?

SPEAKER_01 13:48

So we're not unique. If you look across the city and you look across FS, you see an aging working population. And often when I talk about these things, I get quite a lot of people sort of going, you know, you don't want to get rid of older people. And I definitely don't want to get rid of older people. You know, we've got a fantastic amount of expertise and experience sitting in the London market, but we do have to look at both ends of the kind of working population because what the data tells us, if we model forward, is that the number of people over 60 will double and the number of people under 30 will go from 24% to 7%. And that's that is quite scary. Who's going to manage the businesses five to 10 years from there if you've got such a sort of shrinking employment base? What is the cause is I think we're at a moment in time where one, people are thinking about literally what does the future of work look like. You have AI, you've got outsourcing, you've got lots of different ways of working. And I'm not sure people have quite landed on what that means for their businesses yet. I'm sure they're doing lots of thinking about it. The second thing is in our market, is we're beginning to see a very distinct softening cycle where people start looking at their operating costs and their PL. And the tendency, therefore, I think, is to reduce hiring of young people, particularly if you don't know quite what you're going to do with them. But that I would say is a very short-term answer to a long-term problem. Because where will they be? And what we've seen, if you go back seven or eight years to the beginning of the last soft cycle and you saw the same thing happen, the consequential problem now is you can't find an underwriter or a broker in their early 30s. And the wage inflation we've seen has been really, really dramatic. So you can see that being repeated over the next decade.

Sam Casey 15:45

Which is nice if you're a beneficiary, but on an overall level, it's it's it's obviously an issue for the market.

SPEAKER_01 15:50

And I think, you know, if you looked at what an over-60-year-old is going to cost you, you can get quite a few under 25s for that. So it's all about balance. Because the other thing is, eventually our over 60s will retire. You know, everyone's going to want to go and spend more time with their families at some point. We need to make sure that there's people for them to pass the battle to and to share that amazing legacy of experience and expertise that they've got. Otherwise, it's just lost, lost, and that would be terrible for the market.

Sam Casey 16:20

And the LMG does a lot of work as well about trying to promote specialty insurance as a real destination career. When you're engaging, say with graduates, graduate employers in that whole world, what do you feel like the perception insurance has? Is it improved at all?

SPEAKER_01 16:39

I think it has improved. I think once people get under the bonnet, they think it's a really interesting place to work. And it's our job to do a better job about making us look as exciting as, in fact, we are. You know, as you say, for the last four years, we worried about the supply side of the equation. We worried about have we got enough young people? Have we got clear pathways into the market? Do they know what they might be doing? And I still think that's really important because we're coming at it slightly on the wrong foot, as it were. We're not where we want to be. But unless we've got demand, then I would argue that we're getting a lot of people excited about a career where they're going to find it increasingly difficult to get a job. And that's what I hear from young people. I've made 10 applications, I haven't yet got beyond an instant rejection letter.

Sam Casey 17:29

Which can be very disheartening when you're in that situation.

SPEAKER_01 17:32

Really disheartening. I mean, I can still just about remember applying for my first job in rejections letters, and they were really miserable. But the other thing I want to sort of say to people is it's not an application problem. If you ask any HR person, what happens when you run a job advert is a tsunami of applications. And that's like, but it's been weaponized by AI because it's so much easier now for AI to help you get out a lot of applications. And what I say to HR people is how can we think about better ways to create some pre-qualified pools of talent that you can fish in rather than you all getting inundated with CVs, which were the best will in the world from an 18-year-old, they're all going to look quite the same because they're 18. They've got no experience. So how can we do better? And that's why we've got things like our talent hub program and our Pathfinder program, where we're just saying, your job is not to sift through a thousand undifferentiated CVs, your job is to come and interview some pre-qualified young people that we found from you. And that also helps us with diversity because we know that a lot of those applications will tend to be more from people who look like people who are already in the market, and we need to get better at reflecting the society we serve.

Sam Casey 18:49

And do you feel like all that work's starting to gain some traction and seeing the results flow through?

SPEAKER_01 18:54

I do. We've taken 250 young people through our Futures Academy program. So that's when they come and do two weeks' work experience with us over three years, or two completed years rather. 50 of those people are now working in the market. And that's a statistic I'm really, really proud of. Those are 50 young people who probably would never ever have thought of our industry otherwise or found a pathway into it. But every year we have to start again because there's a whole new crop of 17-year-olds. It's not like building a soap powder brand where, you know, you hopefully take your customers with you throughout their lifetime. Every year, new set, don't know anything about insurance, and we have to start again. I always describe our work as being a mixture of repeating ourselves, we're being a bit on rinse and repeat, because that's important, and then trying to add some new elements to think about different solutions to different challenges as we go along.

Sam Casey 19:50

One of the really important things the LMG does is engage with regulators and the government as well as well about how the market and insurers are regulated. With the findings in the report, you know, the London market is contributing over 60 billion pounds to UK GDP. It must give you some added clout when you're sitting down in those conversations.

SPEAKER_01 20:14

It does. I think one of the things that I'm really pleased about is the airtime that the London market has achieved with government and with regulators as a separate part of the insurance market. And the demonstration of that for me was that Lucy Rigby, the economic secretary to the Treasury, came to our launch, spoke about the importance of specialty insurance to the UK economy. You know, that is a tangible evidence that they at least know who we are, which I would have said five years ago was not a given. And government turnover, shall we say, doesn't help. I mean, Lucy is the eighth economic secretary to the Treasury with whom I have dealt, and I've had this job for just under five years. So that's quite a turnover that we've had. And every time it feels like snakes and ladders, you just feel you're getting some traction and they know who you are. And there's a reshuffle, and you go back down the snake and you start again. And the fact that the Chancellor, you know, hosted a breakfast round table for specialty insurance businesses in November, these are all good things. And they've recognized us as one of their priority areas in their industrial strategy. So I think those are all great evidence, and we need to keep making sure that we're really clear about what we're asking for and that the government can see why we need it. That's why our asks of government have been pretty consistent. You know, we want proportionate regulation, proper recognition of wholesale business, we want it to be nimbler, we want it to be more responsive. And I think as I go back to the first document I produced when I became CEO about what we wanted from government, pretty much we've ticked everything off the list. It's not done, but the FCA is consulting on a proper definition. For wholesale insurance. Captive regime is well underway. ILS regime has improved. We got a secondary growth and competitiveness objective in the Financial Services and Markets Act. You know, that is all good evidence that we've been listened to and people have recognised that we're being sensible. We're not asking for the moon and we generally come up with a good practical ask.

Sam Casey 22:21

In terms of your priorities then for 2026 in that area, is it very much more of the same because lots of these initiatives are in train? Yeah. And so just keep keeping the foot on the gas.

SPEAKER_01 22:31

Yeah, we need to we need to get them over the line. Captives, we should have a consultation from the PRA in late spring or early summer. I love the fact they always choose seasons because seasons are very sort of mobile. Um so that is work that's underway, and I think the government is really committed to making sure that stays on track and on timetable. FCA is consulting under proper consultation of what wholesale insurance is and where their international boundaries lie. One of our other asks we'd been asking for was a welcome mat to make inward investment into our market easier. That has happened. We have the Office for Financial Investment, Financial Services, loss of letters, OFIFS, that's underway. I was talking to them this morning about what their strategy for insurance should be. So it's about no complacency, just keeping pushing on so we can get all of these pieces of work, you know, done and completed as well as we possibly can.

Sam Casey 23:29

And then your role at the NLMG, is it quite domestic on that front, or do you engage a lot more internationally with regulators as well?

SPEAKER_01 23:34

No, I generally stay domestic because most of the businesses, you know, they're either at Lloyd's, which has obviously got its own network of people looking after its license network and so forth, doesn't need me, or the company market and the brokers have got their own domestic, you know, they've got something in France or wherever it is. So we really talk to people just in the UK. I think the area I've had more international conversations is around talent because it becomes evident as you talk to people in Australia or the US or Saudi Arabia, even I had a conversation, is talent is a global problem for the insurance industry. Nobody has solved it. We all have the same problems. And so actually, I think the London market has been a bit of an early mover in this, in the terms of what we have done collectively. And so people are coming to us and saying, How did you do it? How did you get it done? We have some unique advantages. The fact that we sit in what I describe as an insurance village means we can come together much more easily and do things. So things like our Lime Street Festival, it's quite difficult for in the US to replicate 50 businesses coming together on one street in London to promote careers and insurance. But you can have a website, you can have online programs, you can you can take some of our ideas, I think, and expand them. And so those are the conversations I tend to have internationally.

Sam Casey 25:00

If someone was tuning into this podcast, either a young person considering career insurance or someone in banking or whatever who may be switching across into our market, what is it that you would say to those people to say, come on over, you're gonna have a good time here?

SPEAKER_01 25:14

I always say three things. The first is that this market is endlessly interesting because everything touches insurance. My dad always used to say to me, I would be talking about something going on. He'd say, Well, how does that cross over into insurance? I'd be saying, Ah yes, but planes aren't flying or something. You know, there's always an intersection. And I think that means that the market is never dull. And so I always say to young people, or people think of insurance, you'll never be bored in insurance. There's always something going on. The second is the community we work in, which I think is unique and fantastically important. The fact that you can walk down Lime Street and bump into three people you know. There is no other bit of financial services that has retained that geographic proximity that we have. And I think that's hugely important for the way we do business and the collaboration that we see. And I think that's a real joy. I mean, I love the fact that I'm still working with people who I was working with when I first came into the market. I'm not going to say how long ago that was, but let's say it wasn't yesterday.

Sam Casey 26:19

Well, on that positive note, Carol, I think that's more or less all we've got time for. But it's been uh great to have you on the show. So thanks for speaking with me.

SPEAKER_01 26:25

Brilliant. Thank you very much for asking me.

Sam Casey 26:30

Before you go, here are some of the other top stories of the past fortnight. Startup insurer Pinion Insurance has announced its launch. The business is led by Neil McConashy and Philip Van Donning and has secured $180 million of capital commitment from Bearings to provide capacity for MGAs. Meanwhile, several large losses have emerged in the specialty market, with space insurers facing up to a $420 million claim from a Spanish satellite incident, and downstream insurers expecting a $300 million loss from a Repsol refinery explosion. And CFC has lined up bankers to explore a potential $5 billion sale or IPO. That's all for today, but we'll be back again with more news and analysis in two weeks' time.