AM Best is assigning a Stable outlook to the London market (re)insurance segment

1 April 2021 —
A new Best's Market Segment Report, "Market Segment Outlook: London Market Insurance", suggests 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.

AM Best has assigned a Stable market segment outlook to the London market (re)insurance segment. Key supporting factors include:

  • upward premium rate momentum, which is expected to support better underlying performance
  • greater consistency and clarity of policy wordings
  • the ongoing modernisation of the market, which should reduce costs and make it easier to place business.
London market (re)insurers have enjoyed several consecutive years of rate increases, with every class of business showing positive momentum. This has supported improvements in reported attritional loss ratios.

During 2020, improving market conditions contributed to an uptick of equity and debt raises by existing insurance groups, as well as new entrants led by industry veterans. The impact of new capital on premium rates has been largely muted to date: some of the new capital has been consumed by larger than expected COVID-19-related losses and reserve strengthening for prior-year business.

An important part of London market premiums relate to reinsurance business. Reinsurance rate increases at 1 January, 2021 were not as large as initially expected, although loss-affected programmes did see meaningful rate rises. Increases are also expected at the April and mid-year renewals when programmes in loss-affected regions such as Japan and Florida tend to come to the market.

Overall, 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. As seen in the recent years, the market presented a higher level of losses from less well-modelled perils, a reduction in favourable reserve development, and adverse social inflation trends.

Together with COVID-19-related losses, these factors are likely to support the continued hardening of the market during 2021 and revealed the importance of removing ambiguity in policy wording. 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.

The COVID-19 pandemic is a live catastrophe event. For London market (re)insurers, pandemic-related underwriting losses, stemming from primary exposures such as event cancellation, and accident and health lines, have been material albeit manageable to date. However, there remains uncertainty over the ultimate costs of COVID-19-related claims, including the impact of third-party claims in lines of business such as directors' and officers' insurance.

The London market has significant exposure to US and Japanese catastrophes, which have increased in recent years. The 2020 Atlantic hurricane season was the most active and fifth costliest hurricane season on record. In addition, secondary perils including wildfires, torrential rainfall, and droughts, are accounting for an increasingly significant portion of global catastrophe losses and are beginning to challenge (re)insurers. It has become more important for companies to be able to price these risks accurately and to factor in the additional uncertainty associated with them as they are expected to occur more often due to changing climate trends.

(Re)insurers have traditionally factored secondary perils into their pricing, but given the expectation of increased frequency, many are adding additional premium to capture the heightened uncertainty. Wildfires, for example, are now being remodelled and (re)insurers are charging more for cover than in the past. A focus on appropriate pricing of catastrophe risks and better exposure management should support (re)insurers' profitability.

For more information about the new Best's Market Segment Report, "Market Segment Outlook: London Market Insurance" can be found on the website: .