Despite the ongoing and uncertain impacts of the COVID-19 pandemic, AM Best has assigned a stable outlook to the London re/insurance market segment owing to positive rate momentum, greater clarity of policy wordings, and continuous efforts to modernise the market.
In recent years, London market insurers and reinsurers have experienced several periods of rate increases, with all lines of business showing positive momentum.
Of course, rate movements have varied by line of business for primary players with double-digit gains in some areas and less impressive rate movements in others.
For reinsurance business, which AM Best explains makes up a material portion of London market premiums, rate increases at the January 1st, 2021 renewals ultimately fell short of expectations despite some meaningful rises on loss-affected programmes.
However, positive rate momentum is expected to persist at the upcoming April and June and July reinsurance renewals, when much of the loss-hit business in Japan and the U.S. comes to market.
Overall, says AM Best, upward rate momentum is expected to continue through 2021.
“Previous hard markets have been driven primarily by the reinsurance sector, typically following major catastrophe losses and reductions in capacity. In contrast, the current hardening is led by the insurance sector and follows a prolonged soft phase of the cycle during which performance across the market has generally been unsatisfactory,” explains the ratings agency.
Additionally, the recent period of heightened catastrophe activity, a decline in favourable reserve development, adverse social inflation trends, the low interest rate environment and uncertainty around pandemic-related losses, are all factors AM Best expects to support continued market hardening.
Alongside the positive rate momentum, the ratings agency also notes greater consistency and clarity of policy wording as a trend which has contributed to its stable segment outlook.
The COVID-19 business interruption (BI) issue has been well documented and will likely persist for quite some time, as the courts, notably in Europe where ambiguity appears more rife, rule on the validity of claims amid government enforced lockdowns.
As we’ve reported previously, the FCA BI test case in the UK actually favoured policyholders on a number of key issues, which adversely impacted numerous London market players.
Owing to all of the uncertainty caused by the pandemic around BI claims, pandemic exclusions are now common, notes AM Best.
“Overall, AM Best believes that greater clarity and consistency in policy wordings will support the London market over the longer term, reducing the risk of unanticipated losses, costly legal action, and reputational damage. The tightening of terms and conditions should be easier to achieve in a hardening market,” says the ratings agency.
Another factor discussed by AM Best concerns the ongoing modernisation of the market and the resulting reduction in costs.
The London market, which encompasses Lloyd’s syndicates and non-Lloyd’s specialty insurers and reinsurers operating in London, is well known for its high operational costs. At the same time, the insurance sector more broadly has been slow to adapt and modernise, which in turn has hindered its ability to become more efficient and ultimately more relevant to the customer.
Against this backdrop, Lloyd’s published its ‘Future at Lloyd’s’ initiative in 2019, which sets out proposals to lower costs and improve the experience of placing business in the marketplace.
“The London market deals with complex and bespoke business with transactions often negotiated on a face-to-face basis. However, the lockdowns associated with the COVID-19 pandemic have accelerated a long-needed culture change in the acceptance of digital solutions, potentially driving permanent changes to the way the market both interacts and transacts its business.
“Reducing resistance to change and moving forward with digital solutions will support the market to become better-equipped to meet evolving customer needs,” explains AM Best.
While the outlook certainly appears more positive for London market re/insurers, the ratings agency warns that numerous forces – such as the pandemic, uncertainty surrounding US casualty reserves and an uptick in catastrophe losses – somewhat moderate the positives.
“AM Best’s Stable outlook is based on the expectation that London market (re)insurers will continue to respond appropriately to market headwinds such as the impact of social inflation on casualty claims, elevated levels of uncertainty in respect to the impact of the COVID-19 pandemic, and changing climate trends.
“A stronger focus on underwriting discipline and exposure management, as well as specialty underwriting expertise, has positioned the segment to withstand these market challenges. Nonetheless, should rate increases fail to keep pace with claims inflation, catastrophe experience fall materially outside of current expectations, or if the pandemic more profoundly affects this segment, then AM Best may revise its outlook,” says the ratings agency.