Changing climate trends threaten London market says AM Best

It has become more important for companies to price certain catastrophe risks accurately and to factor in the additional uncertainty associated with them as they are expected to occur more often due to changing climate trends, according to rating agency AM Best.

The comments were made as part of its latest market segment outlook on London market (re)insurance, which has assigned a stable outlook to the London market (re)insurance segment, based on upward premium rate momentum which is expected to support better underlying performance; greater consistency and clarity of policy wordings; and the ongoing modernisation of the market, which should reduce costs.

The commentary notes that the outlook could be revised if rate increases fail to keep pace with claims inflation, if catastrophe experience falls materially outside of current expectations or if the pandemic more profoundly affects this segment.

In its commentary AM Best noted that the London market has significant exposure to US and Japanese catastrophes, which have increased in recent years. The 2020 Atlantic hurricane season was the most active and fifth costliest hurricane season on record. In addition, secondary perils including wildfires, torrential rainfall, and droughts, are accounting for an increasingly significant portion of global catastrophe losses and are beginning to challenge (re)insurers:

“London market (re)insurers continue to plan for these types of events through proactive exposure management, strict underwriting guidelines, and comprehensive reinsurance protection. (Re)insurers have traditionally factored secondary perils into their pricing, but given the expectation of increased frequency, many are adding additional premium to capture the heightened uncertainty.”

“Wildfires, for example, are now being remodelled and (re)insurers are charging more for cover than in the past. In the Lloyd’s market, the PMD is encouraging a more disciplined approach to catastrophe risk-taking when reviewing and approving syndicates’ business plans. A focus on appropriate pricing of catastrophe risks and better exposure management should support (re)insurers’ profitability.”

Also highlighted is the uptick in catastrophe losses, including from secondary perils and changing climate trends- especially given the market’s exposure base.

As AM Best notes, the London market is a hub for internationally-traded insurance and reinsurance business, and encompasses Lloyd’s syndicates (including special purpose arrangements) and non-Lloyd’s specialty insurers and reinsurers operating in London. There is a focus on commercial and specialty business, which requires a high level of underwriting expertise and is principally written through brokers. Although London market (re)insurers write business globally, there is some geographical bias towards North America.

In addition, it notes that a lesson learned as a result of the COVID-19 pandemic is the importance of removing ambiguity in policy wording, noting that the UK’s BI test case highlighted the need to improve the clarity of both contract wordings and policyholders’ understanding of what is covered to ensure that their expectations are met, and that “not doing so increases the risk of long-term damage to the insurance industry’s reputation”.