Rating agency Fitch says London market must get pricing and underwriting right for 2010

Fitch Ratings says that while the London insurance market has weathered the financial crisis better than many other insurance sectors, underwriting discipline and pricing adequacy will remain critical following expected strong earnings in 2009.

Fitch anticipates that premium rates will remain flat or decline slightly in 2010, and that the London market may benefit from US regulatory developments.

“Fitch views managing the ongoing underwriting cycle as one of the greatest challenges facing the London Insurance Market as it approaches the January 2010 renewal season,” says Chris Waterman, Managing Director in Fitch’s Insurance team.

“Underwriting profitability will be increasingly important as investment income and prior-year reserve releases will not support earnings to the same extent in 2010.”

Fitch expects there will be a significant variation in premium rate movements across different lines of business and geographies, despite the agency’s projection that overall rates will be little-changed or decline slightly.

The London Insurance Market is heading into the January 2010 renewal season with strong balance sheets. The fact that many participants currently hold excess capital, and are expected to seek to deploy that capital in future to enhance returns, is one of the more significant factors that may fuel competition and consequently add negative pressure to premium rates.

To date, claims relating to the financial crisis have been manageable, but more claims are expected to develop. Fitch does not currently view insurance losses from the financial crisis as posing a material threat to the London Insurance Market, although the agency expects recessionary effects - such as increased numbers of smaller claims and claims relating to fraud and other criminal activity such as arson and burglary – to increase.

One of the most significant developments for the London Insurance Market are proposed changes to US collateral requirements for non-US reinsurers. The US represents a major source of reinsurance premiums for the London Insurance Market, and materially reduced collateral requirements would be positive for the business, although an offsetting factor could be that this may fuel competition and negatively impact reinsurance premium rates.