Upward premium rate momentum is expected to continue to support underlying performance for the London market, despite mounting challenges connected to climate modeling, claims inflation and the war in Ukraine, according to AM Best.

“London market re/insurers have enjoyed several consecutive years of rate increases, with every class of business showing positive momentum,” said AM Best in a report titled “Market Segment Outlook: London Market Insurance.”

As a result of the tailwinds benefiting the market, the ratings agency has maintained a “stable” outlook. However, it warns that there are a group of factors that are moderating the positives.

In the positive column is the fact that attritional loss ratios across the London market have improved in recent years as a result of the continuing upward premium rate momentum and the ongoing scrutiny by Lloyd’s to manage syndicates’ performance, the report indicated.

“The current rate hardening continues to be led by the insurance sector rather than by reinsurers and follows a prolonged soft phase of the cycle during which performance across the London market was generally unsatisfactory.”

Rate hikes in the London market vary by line of business but have generally averaged in the low double digits, the report added.

Cyber, which has seen higher increases, is the “standout exception.”

“Unsurprisingly, rate movements have been strongest for classes which are potentially most impacted by rising economic and social claims inflation, as well as those that have recently experienced sizable losses,” the report said. “Nevertheless, there continues to be some uncertainty as to whether rate increases are sufficient to offset claims inflation and rising catastrophe losses.”

AM Best explained that a material portion of London market premiums are from reinsurance business, which saw pricing improvements for most lines of business, although at a slower pace than in recent years. “Following the relatively high catastrophe activity in 2021, most notably the floods in Europe and Hurricane Ida in the United States, rate strengthening was strongest in property classes.”

In the report, AM Best described the London market as a hub for internationally traded re/insurance business, encompassing Lloyd’s syndicates and non-Lloyd’s specialty re/insurers, which focus on commercial and specialty business with some geographical bias toward North America, although business is written globally.

Other tailwinds that are benefiting the London market include:

Reduced uncertainty around COVID-19 losses. “Despite the uncertainty embedded in companies’ balance sheets, particularly around the sufficiency of reserves, COVID-19 appears to have been an earnings rather than capital event.”

Ongoing market modernization designed to reduce costs. AM Best said the London market is known for its high cost of doing business, which Lloyd’s has been working to remedy since 2019 when it published its “Future at Lloyd’s” prospectus and detailed in “Blueprint Two.” AM Best said failure to deliver on these initiatives over the long term could reduce the attractiveness of the London market if capital providers choose more cost-effective insurance hubs in which to operate.

Greater accessibility of third-party capital. The UK government introduced insurance-linked securities (ILS) legislation in 2017, but it hasn’t gained much traction and has been unable “to challenge established re/insurance hubs like Bermuda…” However, there are signs that is changing, said AM Best, pointing to the fact that Lloyd’s in 2021 sponsored the creation of an independently owned and managed UK protected cell company (PCC), called London Bridge Risk PCC Ltd. (LBR PCC), which utilized the ILS legislation. If Lloyd’s is successful in attracting new capital through the LBR PCC, it may encourage others, help attract “a greater diversity of capital providers, and support London’s reputation as an international insurance hub.”

Some Challenges

On the other hand, AM Best cited some headwinds affecting the London market, which include:

• Changing climate trends are leading to modeling challenges.
• Adverse claims inflation trends prompt U.S. casualty reserve adequacy concerns.
• Increased losses for lines affected by supply chain disruptions, labor shortages and rising general inflation, particularly for property business.
• Claims uncertainty related to the conflict in Ukraine.

Source: AM Best