A myriad of factors including upward rate momentum, greater clarity around COVID-19 losses, a focus on modernisation, and improved access to alternative reinsurance capital have led AM Best to maintain its stable outlook for the London insurance market segment.
For several years now, the London market has welcomed rate increases with every class of business showing positive momentum. While rate rises have varied by business line, AM best says they have averaged in the low double digits, with cyber being the standout exception with some substantial increases.
As noted by the ratings agency, the classes potentially most impacted by rising economic and social claims inflation, as well as loss-impacted business, have seen the strongest rate movements.
“Nevertheless, there continues to be some uncertainty as to whether rate increases are sufficient to offset claims inflation and rising catastrophe losses,” says AM best.
On reinsurance, which accounts for a material portion of London market premiums, AM Best says that pricing has moved in line with its expectations, improving for most lines of business at the January 1st, 2022, reinsurance renewals.
More broadly, scrutiny by the Lloyd’s performance management directorate has led to improvements in attritional loss ratios across the marketplace, which has also helped to bolster underwriting performance.
Alongside improving the performance of syndicates, Lloyd’s has also been on a modernisation mission for some time now, and AM best says that this could reduce costs in the future.
Away from upward rate momentum and the expected better underlying performance, AM Best notes that COVID-19 uncertainty is fading. Of course, losses related to the pandemic are still emerging within life operations, but P&C losses are now non-existent or negligible.
However, as losses from COVID started to fall dramatically, Russia decided to invade Ukraine, and there’s undoubtedly some uncertainty around how this will play out for London market players, in terms of losses, although the tightening of terms at recent renewals is expected to dampen any impacts.
Another positive factor highlight by the ratings agency is the London market’s improved access to third-party, or alternative reinsurance capital, which has been supported by recent efforts of the Bank of England’s Prudential Regulation Authority (PRA) to bring greater flexibility and speed to the regulatory process.
While this all sounds very positive for the London market, with the exception of the war in Ukraine, the ratings agency does see a number of factors moderating the trends outlined above.
This includes changing climate trends and the challenges this presents for modelling exposures. As 2021 showed, so-called secondary perils such as floods and wildfires are driving high losses for insurers and reinsurers. Although it remains unclear exactly how climate change is impacting certain adverse weather events, many feel the changing climate is resulting in more frequent and severe events of this nature, and this needs to be priced into models as accurately as possible.
Additionally, AM Best warns of adverse claims inflation trends prompting U.S. casualty reserve adequacy concerns, as well as heightened losses for lines affected by supply chain disruptions, labor shortages and rising general inflation.
“Together with a challenging macroeconomic environment involving the post-pandemic economic recovery, heightened geopolitical risk, rising prices, and low interest rates, these factors are likely to support the continued hardening of the market during 2022,” says AM Best.
