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London Market Insurers: The continuing impact of the COVID-19 pandemic

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Pandemic-related losses in 2020 were substantial for London market insurers and offset most underwriting and investment returns, according to a report published by Fitch Ratings.

The main drivers of losses were event cancellations and business interruption policies, with the impact on insurers dependent on the composition of their portfolios, said Fitch in the report titled “London Market Insurance Dashboard: 2020 Results.”

The majority of London market insurers reported either a loss or only a very small profit in 2020 as coronavirus pandemic-related losses offset most underwriting and investment profits, said the report, noting that returns on equity were negative or only marginally positive.

“The impact of new capital on premium rates has been largely muted to date: some of the new capital has been consumed by larger than expected COVID-19-related losses and reserve strengthening for prior-year business.” — AM Best.

 

In a separate report, AM Best assigned a stable outlook to the London market insurance and reinsurance segment, based on the following factors:

  • Upward premium rate momentum which is expected to support better underlying performance
  • Greater consistency and clarity of policy wordings
  • Ongoing modernization of the market, which should reduce costs

For similar reasons, Fitch said its sector outlook for the London market for 2021 is improving. The ratings agency pointed to expectations of continued improvements in pricing conditions, which would benefit underlying underwriting performance.

“However, several challenges remain, including uncertainty over the ultimate costs of pandemic-related claims, the recessionary macroeconomic impact on the sector and ultra-low investment yields,” said Fitch.

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AM Best also pointed to a list of negative factors that are moderating some of the positives for the London market, including:

  • The continuing impact of the COVID-19 pandemic
  • Uncertainty associated with the adequacy of U.S. casualty reserves due to adverse claims inflation trends
  • An increase in catastrophe losses, such as those from secondary perils and changing climate trends

Fitch noted that rates have been increasing for the past three years – a trend that accelerated in 2020, with many insurers reporting double-digit rate rises.

“This reflected not only the magnitude of losses caused by the pandemic but also the ultra-low investment returns, which lead to a greater focus on underwriting profitability,” said Fitch, noting that investment returns recovered well in H2 2020 after a dramatic fall in Q2 2020 but these returns were not sufficient to compensate for underwriting losses.

In its report, titled, “Market Segment Outlook: London Market (Re)Insurance,” AM Best said that upward premium rate momentum is expected to support better underlying performance.

“London market re/insurers have enjoyed several consecutive years of rate increases, with every class of business showing positive momentum. This has supported improvements in reported attritional loss ratios,” said AM Best, noting that rate increases have varied by line of business, with double-digit increases in the U.S. excess and surplus (E&S) segment seen in the second half of 2020 and in the first quarter of 2021.

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Nevertheless, there is some uncertainty about whether these rate increases will be sufficient to offset claims inflation, particularly for some casualty lines, continued the AM Best report. Although London market re/insurers write business globally, AM Best explained, there is some geographical bias towards North America.

Capital Raises in 2020

The report confirmed that improving market conditions contributed to an increase in 2020 of equity and debt raises by existing insurance groups, as well as new entrants led by industry veterans.

“The impact of new capital on premium rates has been largely muted to date: some of the new capital has been consumed by larger than expected COVID-19-related losses and reserve strengthening for prior-year business,” the report said.

Further, a large portion of London market premiums are reinsurance related and the rate increases seen at the Jan. 1, 2021 renewals were not as large as initially expected, said AM Best. However, the ratings agency added, loss-affected programs did see meaningful rate rises.

“Increases are also expected at the April and mid-year renewals when programs in loss-affected regions such as Japan and Florida tend to come to the market,” AM Best concluded.

Sources: Fitch and AM Best



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