Rates buoy London market, but key elements still missing: AM Best

Continuing rate momentum and the end of the pandemic could defend the outlook for the London market from a series of negative trends driving losses, but new efficiencies and easier third-party capital are sorely missing ingredients,  AM Best has said.

The key driver, now as in recent years, remains “continuing upward premium rate momentum expected to support better underlying performance,” analysts said in laying out the case for having held the London market's outlook at Stable.

That “positive momentum to date in every class of business” need not have been enough, but was backed up by no small amount of arm-twisting by Lloyd's overseers to tame loss ratios, analysts noted.

Primary carriers have beaten reinsurers at the rate game to date, but both sides of the market can likely count of continued rate hardening, analysts said.

But as the market has slowed and claims inflation has soared, “there continues to be some uncertainty as to whether rate increases are sufficient to offset claims inflation and rising catastrophe losses,” analysts wrote.

Reinsurers can take some comfort from a long long-list of factors “likely to support the continued hardening of the market during 2022.”

The list of drivers kicks off with “elevated catastrophe losses,” including notably on secondary perils where pricing is built on weaker modelling.

But  AM Best is also eyeing "challenging macroeconomic environment" in the post-pandemic recovery and amid the Ukraine war as well as rising inflation and continued low interest rates as rate fodder.

To plug any gap, London market players should start to make good on vows for greater efficiency.

“The London market is known for its stubbornly high cost of doing business,"  AM Best claimed.

Lloyd’s ‘Blueprint Two’ plan for creating efficiencies needs to get back on track. “Failure could reduce the attractiveness of the London market as capital providers choose more coset effective insurance hubs to operate in.”

London's to-date failure to draw in major capital through ILS issuance has also been a hindrance.  AM Best seems to cheer the Lloyd's sponsored London Brisk Risk PCC, but speaks to outlook in rather hypothetical terms: “If Lloyd's is successful ... " the capital “could” flow.

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