London Market must prevail in ILS & cost initiatives for margin success

The London Market, both Lloyd’s and the unaffiliated players, should deliver on efficiency initiatives and third-party capital platforms as part of the plan to stay ahead of rising costs from climate, inflation and reinsurance markets, the  AM Best ratings agency has indicated.

By the bottom line, the AM Best outlook for the London Market remains at ‘stable’, as the pricing environment and higher investment yields support improving underlying margins.

Pricing appears sufficient to the task for the near-term, ever uncertain thereafter, but with hard markets bringing some forms of lasting relief.

“Against a backdrop of a challenging global macroeconomic environment and heightened geopolitical risk, AM Best expects strong pricing in key classes to be maintained through 2023, supporting further improvements in underlying performance,” analysts wrote.

Some features of the current hard market will carry their benefits further forward. “Positive changes to terms and conditions are likely to be longer-lasting.”

But analysts likewise have a long-list of threats to London Market players, both the Lloyd’s syndicates and the unaffiliated players.

And they all speak to the cost side: social and economic inflation can question rate adequacy and reserve sufficiency; climate trends speak to claims frequency and severity; reinsurance costs are pinching portions of the market and the global economy & armed conflicts bear yet another layer of uncertainty.

The apparent AM Best advice: control what you can control best.

“The London market is known for its stubbornly high cost of doing business,” analysts noted. Some of it is justified on the level of underwriting expertise on hand and the requirement for broker intermediation. But “inefficiencies associated with placing business and the length of the distribution chain also play a role.”

Cost and efficiency programmes like Blueprint Two are a must.

“Failure to deliver on these initiatives successfully over the longer-term may reduce the attractiveness of the London market as capital providers choose more cost-effective insurance hubs to operate in.”

Also on the list of manageable factors is access to third party capital. The legal framework for London-based ILS, the UK's 2017 Risk Transformation Regulations “should help the London market compete for third-party capital with established re/insurance hubs.”

Syndicates leveraging Lloyd’s platform London Bridge “could benefit from reduced set-up times and lower transactional costs.”

Climate trends are presented only as threats for active exposure management, all as “major loss events are expected to occur more often due to changing climate trends.”

Inflation and the question of reserve adequacy has seen much action to date, but “uncertainty around the adequacy of rate increases and sufficiency of these reserves persists.”

The spike in reinsurance costs is comparatively fresh and it remains “too early to fully assess” the aggregate impact of the “severe” reinsurance market hardening. But some smaller carriers with weaker performance records could face “serious questions” on the feasibility of their business plans.

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