Reinsurance News

Claims and inflation trends could threaten London market: AM Best

22nd June 2022 - Author: Matt Sheehan

Analysts at AM Best have warned of the financial impact of social inflation on London market re/insurers as the rising cost of claims becomes increasingly severe.

The rating agency notes that the impact on the London Market is most clearly evidenced by the strengthening of US casualty technical provisions.

In 2020, court closures due to local and national lockdowns slowed the resolution of legal cases, and, at the same time, economic uncertainty helped drive faster and lower settlements.

Together, these contributed to a reduction in large verdict volumes and pay-outs, but this proved to be a temporary reprieve rather than a reversal of the trend.

AM Best believes that the trend towards increased attorney involvement in claims, higher loss expenses, as well as higher demands and jury awards, will continue throughout 2022.

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“Many London market (re)insurers have been increasingly conservative in their casualty pricing and reserving assumptions to account for the pre-pandemic uptick in class action suits and outsized court awards, particularly in the United States,” analysts stated.

“However, uncertainty around the adequacy of rate increases and sufficiency of these reserves persists.”

AM Best expects that increased oversight at Lloyd’s from the PMD, which supports greater underwriting discipline, will encourage more prudence from members writing casualty lines.

But loss cost inflation trends are also being observed in property classes, and the increase in commodity prices and supply volatility, coupled with labour shortages as the global economy restarts, have added to property loss cost inflation.

Rising rebuilding costs have contributed to the difficulties experienced by the property market, with notable price spikes for household materials and supplies in the aftermath of winter storm Uri and Hurricane Ida, and further pressure due to the conflict in Ukraine.

“The path of inflation is difficult to predict and will depend heavily on the actions of central banks and policymakers, along with wider geopolitical and economic conditions,” analysts acknowledged.

The rating agency continues to consider the conflict in Ukraine is likely to be a major, albeit manageable, loss for the London market, with aviation, political risk, political violence, marine and trade credit lines expected to be most affected.

However, it adds that there is material uncertainty associated with the magnitude of potential direct and second order losses, particularly as claims will be highly complex and could be litigated for many years.

“The high degree of uncertainty associated with ultimate exposure is likely to be long lasting and fuel rate strengthening in affected lines for some time to come,” analysts concluded.

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