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AM Best gives London market stable outlook

Continued upward premium rate momentum expected to support better underlying performance but Ukraine losses could trigger a review of the market outlook if claims expectations ‘materially worse’ than expected

AM Best has maintained its stable outlook for the London insurance market but warned losses arising from Russia’s invasion of Ukraine could change that. 

The rating agency said it expected continuing upward premium rate momentum would support better underlying performance. But it cautioned there continues to be some uncertainty as to whether rate increases are sufficient to offset claims inflation and rising catastrophe losses.

AM Best pointed to reduced uncertainty around Covid-19 losses from “greater clarity and consistency” in policy wordings “will support the market over the longer term”.

In addition, the continued focus on market modernisation should help to reduce costs, AM Best said.

But the rating agency warned these positive factors could be moderated by a number of challenges.

Claims uncertainty related to the conflict in Ukraine could trigger a review of the market outlook if conflict-related claims expectations were to change “materially for the worse”.

There is “material uncertainty” associated with the magnitude of potential direct and second order losses from the conflict, particularly as claims will be highly complex and could be litigated for many years, AM Best said.

But 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, it added.

“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,” the rating agency said. 

Other negative factors for London market include changing climate trends, which present modelling challenges for carriers.

In addition, there are also concerns about US casualty reserves as a result of adverse claims inflation trends.

“The market has seen elevated catastrophe losses in recent years, including a higher level of claims from less well-modelled perils, as well as a reduction in favourable reserve development and adverse social inflation trends,” AM Best said.

“Together with a challenging macro-economic environment involving the post-pandemic economic recovery, heightened geopolitical risk, rising prices and low interest rates, these factors are likely to support the continued hardening of the market during 2022.”

On US casualty, AM Best said: “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 US. However, uncertainty around the adequacy of rate increases and sufficiency of these reserves persists.”

Increased oversight from Lloyd’s is expected to encourage “more prudence” from members writing casualty lines, AM Best added.

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