Rating agency AM Best has raised its outlook on the London market insurance sector from stable to positive in what has been seen as another endorsement for EC3 and while there is much to support optimism, the nature of the market means that challenges remain

There is much to be positive about in the London market at present.

A sustained period of strong premium rates has left the market buoyant – and it has not gone unnoticed by rating agencies.

This week (22 April 2024), AM Best issued a new market segment outlook report on the London market insurance sector, in which it increased the market’s outlook to positive.

The rationale was that the agency noted a “strong pricing environment for most business lines is expected to support good underwriting profitability.”

The report also referenced 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.

It explained: “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 rations since 2017.”

The rating agency added that market hardening was initially led by commercial and specialty insurance,  with reinsurance price increases lagging. 

Best also recognised that underwriting discipline and rate adequacy remained strong throughout 2023 and into this year, which was likely to offer more support to underwriting results.

Alongside Best’s re-evaluation, last month also saw Lloyd’s announce a 2023 underwriting profit of £5.9bn – a £3.3bn increase on the previous year.

It was the market’s third consecutive year of double-digit growth, with Lloyd’s gross written premium (GWP) increasing by 11.6% to £52.1bn, driven by volume growth of 4%.

With price increases of 7% offsetting inflationary trends, the Lloyd’s market has now seen 24 consecutive quarters of positive price improvement.

The place to be

The positive outlook has not surprised those in the market.

An International Underwriting Association (IUA) spokesperson told Insurance Times: “The latest statement on the London market from AM Best indicates a strong pricing environment for most business lines, expected to support good underwriting profitability.

“This trend has certainly been reflected in the IUA’s own research focusing on the company sector of the London market. Our annual survey of premium income showed total business for companies was £44.1bn in 2022, an increase of around one quarter on the previous year when an aggregate of £35.7bn was recorded.

Indeed, since 2016 – when the figure stood at £22.7bn – premium income for the London company market has virtually doubled.

The IUA added: “Of course, income does not correspond directly to profitability and our survey does not include claims data. It is clear, however, that London remains an attractive hub for capital providers. New companies continue to be established whilst many others have ambitious growth plans and IUA membership continues to grow.”

And the London and International Insurance Brokers Association (Liiba) chief executive Chris Croft added: “You will see from published results that now is a relatively prosperous time for many London market firms. But the question remains as to how much is this driven by rate rises and how much driven by genuine growth.

”We welcome AM Best upgrading its view of the market but this is no time for complacency. We must maintain focus on the work we have been doing to enhance London’s position in the global market.”

Increased confidence

Jonathan Turner, chief executive of Gallagher Specialty, said London’s performance was good news for its clients around the world.

“AM Best’s move to a positive outlook is a fair reflection of what we are seeing across our customer base,” he explained.

“Many of our insurer partners operating in the London market have ambitious growth targets this year and we have seen a marked increase in competition for new business.

“The increased confidence and broader underwriting appetite is good news for clients as they have more choice and can find cover for even the most distressed risks.

”The current market conditions are also allowing our brokers to look at how we are supporting clients and their risk exposures, with discussions turning to additional cover or enhanced limits, particularly for accounts which have been impacted by high levels of rate increases exacerbated by the underlying inflationary environment of the last 18-24 months.”

However, while the outlook is currently positive, the market’s scale and the volatility of the risks it underwrites provide a challenging backdrop that can change its fortunes in a matter of days.

AM Best said the positive outlook can be impacted by a range of risks and explained that changing climate trends and unmodelled risks presented exposure management challenges. These could be coupled with concerns regarding social and economic inflation in certain business lines.

The rating agency explained: “The London market typically has significant exposure to natural and man-made catastrophes and has historically paid a material portion of losses arising out of major global events.

“The costs of global catastrophes have increased in recent years and secondary perils – including wildfires, convective storms and droughts – are accounting for an increasingly significant portion of global losses.”

The growing threat of cyber risk and the potential exposure that come with it is also cited as a cloud on the horizon, with Best issuing a warning over the risk of “sizeable systemic exposures”.

Interestingly, the market’s modernisation efforts, which have been the subject of hundreds of millions of pounds in investment in recent years around the Blueprint Two initiative could be a force for good, as it is expected to support what Best describes as “technical profitability and market attractiveness”.

Market modernisation and digitalisation will be viewed as a positive and there is little doubt that a reduction in the frictional costs of doing business in London is a must have in the face of competition from rival insurance centres.

However, like many others, Best has not been deaf to concerns that have been raised in the market over its progress.

“Failure to modernise in good time could potentially reduce its appeal,” it added.