Good results conceal underlying challenges for London Market insurers
London market insurers performed well in the first half of 2016 and entered the second half of the year with strong balance sheets. But recent good performance conceals fundamental challenges to the market’s competitive position and prospective profitability, AM Best has said in a report.
Pressure on underwriting results is increasing due to the combined effects of changing buying habits, plentiful capacity and global economic uncertainty. Meanwhile, investments are providing scant earnings support, with interest rates at historically low levels and equity markets volatile, the report said.
AM Best’s special report, titled ‘London market insurers adapting to an evolving operating environment’, found that London market insurers particularly, Aspen Insurance, Beazley, Hiscox and Novae Group, have all performed well financially in the first half of 2016 and produced strong balance sheets coming into the second half.
The report said: “Insurers also benefited from further improvements in terms and conditions, such as expansion of hours clauses, with programmes placed early generally able to achieve the most favourable terms.
But the pace of rate deterioration is slowing, especially for the higher layers of programmes. At the half year, AM Best noted that there was only a modest increase in the supply of alternative capital and there is evidence that the market’s very quantitative approach to underwriting peak catastrophe business is supporting pricing discipline.”
It was also mentioned in the report that combined ratios have declined for the first half of 2016 compared with the same period of last year, but remained below 95 percent.
“This result was achieved in spite of large losses relating to wildfires in Fort McMurray, Canada, as well as a Japanese earthquake in April, European floods and US storms,” the report stated.
“Investments performed better than in the first half of 2015, helped by capital gains on fixed income securities, as yields fell in June following the announcement of the result of the UK referendum on its membership of the European Union. For insurers reporting in sterling, results benefited from foreign exchange gains.”
However, it also said that this year has proven to be a challenge for underwriting results, with increased pressure due to “the combined effects of changing buying habits, plentiful capacity and global economic uncertainty.”
The report concluded: “In AM Best's opinion, the operating environment for London market insurers is set to remain difficult. Traditional business models are under threat from consolidation, alternative insurance structures and changing buying patterns.
“Although companies’ capital positions are generally strong, enhanced by several years of positive earnings, underwriting profitability is under pressure from lower premium rates and higher expenses.
“With investment earnings set to remain low, a return to normal catastrophe experience and a lower contribution from prior-year reserve releases could push some insurers into the red this year, leading to an erosion of capital.”
