Frictional costs in the capital are still too high, despite credit rating agency listing market positives

By Jon Guy

Credit rating agency AM Best’s review of the London market last month (April 2022) delivered a stable outlook – but like so many such ratings, it came with a catalogue of caveats.

Jon Guy

Jon Guy

Continuing upward premium rate momentum, better underlying performance and reduced uncertainty around Covid-19 losses are all ticked boxes for London.

The focus on market modernisation and the cost reduction it will deliver, coupled with greater accessibility to third party capital in the London market, are also seen as positive for the future.

However, AM Best identified more than a few “buts” too.

As the world’s leading centre for complex and specialty risks, London has a greater exposure to climate change risks than its peers across the globe – as we have seen in recent months thanks to a wave of protest demonstrations highlighting it as the world’s biggest energy insurance market.

North America is by far London’s biggest customer base, so concerns around US casualty reserve adequacy being exacerbated by adverse claims inflation trends can have a tangible impact on the market too.

In addition, the segment faces increased losses for lines affected by supply chain disruptions, labour shortages and rising general inflation, particularly for property business.

The ongoing conflict in Ukraine is likely to be a “major, albeit manageable, loss for the London market,” added AM Best. “However, there is material uncertainty associated with the magnitude of potential direct and second order losses, particularly as claims will be highly complex and could be litigated for many years.”

Eliminating friction

There are a myriad of imponderables around the future of the London market, but there is one issue that is at the heart of everything it is seeking to do.

The implementation of the market modernisations plans is becoming an acute issue for many in EC3.

The cost of doing business in London remains too high. The reduction of frictional costs will enable Lloyd’s to operate its planned non-complex risk platform – using this, risks that attracted previously uneconomical premiums could now become profitable.

The issue for the market is that while its frictional costs remain higher than its peers, it opens the door for rival markets to compete for business that has traditionally resided in London.

The capital may currently be home to the “risks that cannot be placed elsewhere”, but as rates continue to harden, these risks may command a premium which makes them attractive to rival underwriters.

Blueprints and road maps are all well and good, but the market is keen to showcase real momentum on modernisation. While there is no expectation that all its transformation plans will be delivered in a matter of months, some tangible progress would be welcomed.