Strong Prices Support London Market Profits, Prompting Revision in AM Best Outlook *Centurion Insurance AFS*

The strong pricing environment for most business lines written in the London insurance market is expected to support good underwriting profitability – factors that have led AM Best to revise its outlook for the segment to positive from stable.

Further, the report said, positive momentum of US excess and surplus (E&S) lines offers opportunities, adding that the improved interest rate environment is likely to support healthy investment yields, commented AM Best in its report, “Market Segment Outlook: London Market Insurance.”

On the other hand, there are factors that are moderating these positive developments, including:

• Changing climate trends and unmodeled risks present exposure management challenges, and
• Social and economic inflation in certain business lines.

“London market re/insurers have enjoyed several consecutive years of rate increases, with most major classes of business having shown positive momentum. This, along with Lloyd’s scrutiny of syndicates’ performance, has supported continued improved attritional loss ratios since 2017,” the report said.

The report noted that market hardening was initially driven by commercial and specialty insurance, while reinsurance price increases lagged behind. However, the reinsurance segment remedied that when it saw “exceptional strengthening at the January 2023 renewals, particularly for property business.”

“Underwriting discipline and rate adequacy remained strong throughout 2023 and into 2024, which is likely to support continued strong underlying underwriting results,” the report said.

While there are signs of rate softening in certain lines, particularly in professional lines business, overall rate adequacy remains strong, AM Best continued.

US E&S Market

“In recent periods, US admitted insurance carriers continued to tighten their underwriting criteria, driving insureds to seek coverage in the E&S market,” the report confirmed. “Given the positive rate momentum in these lines, and the resulting prospects of strong technical profitability, London market companies are expected to continue to deploy capacity in E&S lines over the near term.”

Improved Investment Yields

AM Best said the profitability of London market insurers and reinsurers “are 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.”

Modernization and Cost Management

Modernization and cost management have been key priorities for the market – efforts that have started to bear fruit and are expected to support technical profitability and market attractiveness.

Exposure to Catastrophes

AM Best said the London market typically has had significant exposure to natural and man-made catastrophes across the globe. “The cost of global catastrophes has increased in recent years, and secondary perils—including wildfires, convective storms and droughts—are accounting for an increasingly significant portion of global losses.”

London market re/insurers typically engage in proactive exposure management via comprehensive reinsurance and advanced catastrophe modeling, but the report said that such exposure management is challenged as a result of the uncertainty of rising frequency and severity of major perils.

In addition, the growth of cyber risk within the London market and the lack of experience with systemic cyber losses and the assessment of accumulation risk within this class present challenges to exposure management.

Social Inflation

There are ongoing concerns regarding the potential for social inflation and the consequent increase in the cost of claims “despite London market re/insurers having been increasingly conservative and explicit in pricing and reserving assumptions for several years,” the report said.

“The unpredictable nature of this risk means that only time will show whether the current level of prudence has been sufficient.”

Economic inflation is tempering on both sides of the Atlantic, which reduces the risk of associated mis-pricing and under-reserving, AM Best said. “However, re/insurers remain vigilant as the potential persistence of higher-than expected inflation could prove more costly over the longer term.”

Topics
Trends
Profit Loss
AM Best
London