AM Best: London sees reduced COVID-19 loss uncertainty

Rating agency AM Best is maintaining its outlook for the London market insurance segment at Stable, with reduced COVID-19 loss uncertainty a significant factor.

Other contributory factors include a continuing upward premium rate momentum expected to support better underlying performance; a focus on market modernisation, which should reduce costs; and greater accessibility of third-party capital to the London market

Factors moderating these positives include changing climate trends present modelling challenges; adverse claims inflation trends prompt US casualty reserve adequacy concerns; increased losses for lines affected by supply chain disruptions, labour shortages and rising; general inflation, particularly for property business; and claims uncertainty related to the conflict in Ukraine.

For London market (re)insurers, AM Best said that pandemic-related underwriting losses stemming from short-tail exposures (such as event cancellation, business interruption, and accident and health lines) have been material, albeit manageable.

Despite the uncertainty embedded in companies’ balance sheets, particularly around the sufficiency of reserves, COVID-19 appears to have been an earnings rather than capital event, it suggested.

In AM Best’s view, London market companies generally took a prudent approach in establishing COVID-19 reserves, and material portions are still held as incurred but not reported (IBNR) reserves. The large majority of business interruption and event cancellation losses were identified in 2020 and settled in 2021, with related reserve development having been relatively modest.

However, it stressed, some uncertainty remains over the ultimate costs of COVID-19-related claims, including the impact of third-party claims in lines of business such as directors’ and officers’ insurance, as final settled amounts may take many years to develop and could vary from initial estimates:

“As COVID-19-related claims started to emerge in 2020, there was uncertainty whether certain losses would be covered by reinsurance given some ambiguity in policy wording. For some insurers, the nuances of reinsurance structures and wording have meant that discussions continue with their reinsurance partners over the eligibility of reinsurance protection.”

The rating agency also noted that the London market’s focus on specialty risks means bespoke (re)insurance contracts are common, with the market’s ability to structure bespoke terms and conditions favours clearly defined coverage exclusions. For example, it pointed out, pandemic exclusions are now common

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