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London market insurers’ 2020 profits canceled by COVID-19 but rates rise

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Losses from the pandemic in 2020 were significant for insurers in the London market and offset most of the underwriting and investment returns, according to a report released by Fitch Ratings.

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

The majority of insurers in the London market reported a loss or only a very small profit in 2020, with losses from the coronavirus pandemic offsetting most of the underwriting and investing profits, the report said, noting that the returns on capital clean were negative or only marginally positive.

“The impact of the new capital on premium rates has been largely mitigated to date: part of the new capital has been consumed by larger-than-expected losses related to COVID-19 and a strengthening of reserves for the activities of the ‘last year.” – AM Best.

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

  • Rising premium rate dynamics which should support better underlying performance
  • Greater consistency and clarity of policy wording
  • 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 rating agency underscored expectations for continued improvement in pricing conditions, which would benefit the underlying underwriting performance.

“However, several challenges remain, including uncertainty over the ultimate costs of claims related to the pandemic, the macroeconomic impact of the recession on the industry and extremely low investment returns,” said Fitch.

AM Best also highlighted a list of negative factors that moderate some of the positives for the London market, including:

  • The continuing impact of the COVID-19 pandemic
  • Uncertainty associated with the adequacy of claims reserves in the United States due to adverse trends in claims inflation
  • An increase in losses from disasters, such as those resulting from secondary risks and changing climate trends
Rate increases Accelerate

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

“This not only reflects the magnitude of the losses caused by the pandemic, but also the extremely low investment returns, which lead to a greater focus on underwriting profitability,” Fitch said, noting that investment returns are falling. recovered well in the second half of 2020 after a spectacular fall in Q2 2020, but these returns were not sufficient to compensate for technical losses.

In its report, titled “Market Segment Outlook: London Market (Re) Insurance,” AM Best said the upward momentum in premium rates should support better underlying performance.

“Re / insurers in the London market have benefited from several consecutive years of price increases, with each category of activity showing positive momentum. This has helped improve reported attrition loss ratios, ”said AM Best, noting that rate increases varied by industry, with double-digit increases in the US surplus and surplus segment. (E&S) in the second half of 2020 and in the first quarter of 2021.

Nonetheless, there is some uncertainty as to whether these rate increases will be sufficient to offset claims inflation, especially for certain property lines, the AM Best report continued.

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

“The impact of the new capital on premium rates has been largely mitigated to date: part of the new capital has been consumed by larger-than-expected losses related to COVID-19 and a strengthening of reserves for the activities of the ‘previous year,’ the report says.

Moreover, a large part of the premiums in the London market are tied to reinsurance and the rate hikes on January 1, 2021 were not as large as initially expected, AM Best said. However, according to the rating agency, programs affected by losses saw significant rate hikes.

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

Sources: Fitch and AM Best

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