AM Best revises London market insurance segment outlook to positive

Rating agency AM Best has revised its outlook for the London market insurance segment to positive from stable, driven by an expected strong pricing environment for most business lines to support good underwriting profitability.

AM Best also highlights the positive momentum of US excess and surplus (E&S) lines, and an improved interest rate environment that will likely support a healthy investment yield for companies.

Factors that could moderate this positive outlook include changing climate trends and unmodelled risks present exposure management challenges and concerns regarding social and economic inflation in certain business lines.

Several years of consecutive rate increases in the London Market, with most major business classes showing positive momentum, along with Lloyd’s scrutiny of Syndicates’ performance, has supported continued improved attritional loss ratios since 2017.

Market hardening was initially led by commercial and specialty insurance, notes AM Best, with reinsurance price increases lagging. Although the reinsurance segment saw exceptional strengthening at the January 2023 renewals, particularly for property business.

Throughout 2023 and early 2024, underwriting discipline and rate adequacy remained strong to support continued strong underlying underwriting results. Although there are signs of rate softening in certain lines, particularly Professional Lines business, overall rate adequacy remains strong, says AM Best.

“The profitability of London Market re/insurers is likely to be bolstered by improved investment yields compared to the past decade, with interest rates expected to remain higher for longer due to persistent inflation. Although US and European central banks are expected to lower interest rates in 2024, London Market companies will benefit from relatively high-interest yields on their fixed-income portfolios at least over the next 12 months,” explains AM Best.

Modernisation and cost management have been key priorities for the market. However, failure to modernise the market in good time could potentially reduce its appeal.

Further, the London Market typically has significant exposure to natural and man-made catastrophes and has historically paid a material portion of losses arising from major global events. The cost of global catastrophes has increased in recent years, and secondary perils are accounting for an increasingly significant portion of global losses.

AM Best has its concerns regarding the potential for social inflation, and the rising cost of claims due to changing societal behaviour that persist despite London market re/insurers having been increasingly conservative and explicit in pricing and reserving assumptions for several years. The unpredictable nature of this risk means that only time will show whether the current level of prudence has been sufficient.

“With economic inflation tempering on both sides of the Atlantic, the risk of associated mispricing and under-reserving reduces. However, (re)insurers remain vigilant as the potential persistence of higher-than expected inflation could prove more costly over the longer term,” concluded AM Best.

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