Natural catastrophes (nat cats) continue to divide opinion, with some companies such as Lancashire and Hannover Re pushing the longer-term profitability of the line, but with others like Hiscox and SCOR opting to remain at best agnostic about its rate adequacy.

Berenberg highlights that the benign nat cat development in Q2 is also a positive for the H1 numbers assuming there are no big losses between now and quarter end.

COVID-19 excess mortality losses

And furthermore, COVID-19 excess mortality losses in life and health (L&H) reinsurance should be much diminished in Q2 as the data has vastly improved since March.

On investment income, the shorter duration portfolios of the London market names should mean that investment returns will benefit from the rising rates relatively quickly.

And on an economic perspective, rising interest rates are also positive for solvency which should continue to be robust at the H1 2022 results.

Analysts at Berenberg have said that:

There is a lot for reinsurers and London Market participants to be excited about, despite the challenges of a difficult macro environment.

The drought in Brazil also continues, which is likely to be a headwind for SCOR’s Q2 results, while there may also be some revisions to loss estimates from prior large claims due to the higher claims inflation in the system.

Unrealised gains in the balance sheet

Unrealised gains in the balance sheet have diminished due to rising rates, which reduce the ability of reinsurers to manage earnings, Berenberg points out, although higher reinvestment rates mean this should be partly offset in earnings.

Berenberg notes that pricing was even better than expected when companies reported at Q1 and the market is expected to remain hard, especially in certain lines where capacity continues to be constrained, such as aviation and cyber insurance.

Specialist lines have also gained in appeal to some reinsurers. But how much of the increased costs to pass on or retain will be a source of competitive differentiation for direct carriers.

Reflecting on the January 1 renewal period, analysts at Miller have noted that casualty business became relatively more attractive to reinsurers in the London Market, following another year of elevated losses in the property catastrophe space.

Large insurance loss events of the past year

In addition to the large loss events of the past year, climate change is seen as a potential factor in forward capital costs calculations for carriers as the escalating social inflation environment is for casualty.

For primary insurers, analysts reported that underwriting discipline is still apparent in terms of what is within appetite, with carriers only gradually beginning to broaden their scope away from tightly constrained parameters in their business plans.

Analysts at Bank of America (BofA) have warned that the scale of losses incurred by London Market insurers and reinsurers during the first quarter of 2022 will remain uncertain for some time yet due to the ongoing uncertainties around exposure to the conflict between Russia and Ukraine.

Although the key area of uncertainty is in aviation, BofA cautions that a number of other war exposures present potential issues, and may add to a Q1 loss period that has already been over-budget for natural catastrophe costs.

Insurance losses to the London Market will be manageable

Analysts assured that the unambiguous losses to the London Market from Russia invasion of Ukraine will be largely manageable, with costs mainly set to be recorded across political risk and credit, aviation and marine lines.

However, the fate of some 500 Western-leased jets stranded in Russia still remains unclear, and is likely to cast a shadow over the London Market for some time, due to the size and complexity of the potential loss.

BofA believes that the range of potential outcomes for this issue is wide, ranging from minimal losses if planes are successfully repatriated to significant losses if planes are unrecoverable.

With the conflict showing no signs of de-escalation, analysts also expect war losses to continue to hit balance sheets through Q2, adding further pressure following an active start to the year for nat cat and other man-made losses.

Insurance Industry Regulators

The UK Industry and Regulators Committee has written to the Economic Secretary to the Treasury to express concerns about a “lack of proportionality” in the regulation of the London Market.

In a letter, the Committee charges that the “one-size-fits-all” approach to the regulation insurers and reinsurers by the Financial Conduct Authority and the Prudential Regulation Authority has proved overly demanding and burdensome.

Specially, it charges that the inflexible culture within the regulators may have inhibited the development of new forms of business within the UK commercial insurance and reinsurance industry, such as insurance-linked securities (ILS) and captives.

The Insurance-Linked Securities (ILS) market ended another year on a high note as the annual new issuance record was broken once again.

This milestone was achieved in spite of a challenging year of catastrophe losses and with most market participants working from home.

ILS market continues to demonstrate its resilience

The ILS market continues to demonstrate its resilience with bonds issued in every month of last year and almost USD 13 billion of total new issuance for the calendar year.

According to Swiss Re ILS Market Insights, most encouraging was the number of new sponsors and ESG developments in the asset class.

The Committee emphasised the need for the Government’s proposal to introduce a secondary competitiveness and growth objective for the financial regulators to be reinforced with clear criteria and appropriate performance measures for the regulators to report on.

The Committee agrees that there are strong arguments in favour of the Government’s proposal of a secondary competitiveness and growth objective for the financial regulators, enabling them to consider to a greater extent their impact on the industry in addition to their impact on the safety and soundness of firms.

However, to ensure that regulators’ behaviour is genuinely responsive to the secondary objective the Government and regulators must formulate clear performance measures that will be reported on annually, ensuring that this Committee and others can hold the regulators to account for their performance.

The London Market Group (LMG) also endorsed the calls for regulatory reform made by the Committee, and argued that it is “possible to have a properly functioning competitiveness duty without compromising safety and soundness.

This inquiry was an opportunity for the industry to show Parliament its value to the UK economy, but also the challenges it faces. We are delighted that the Committee agrees with us on the impacts that regulation can and does have on the future success of the market.

said Caroline Wagstaff, CEO of the London Market Group.
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