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London market pricing in 2022: Is the party over?

A photograph of the Lloyds Building in London from ground up

Planned 2022 rate increases submitted in Lloyd’s business plans suggest that the market is well past the peak of pricing acceleration, following several years of substantial correction.

Multiple sources quizzed by this publication said that planned risk-adjusted rate increases for 2022 on a blended basis were at low to mid-single digits, with those syndicates in the upper range influenced by higher exposure to long-tail classes.

As indications grow that the pricing momentum that has defined the last three years is beginning to wane, attention is turning to the level of pricing adequacy that has been achieved, and whether prospective rating changes are sufficient to outpace burgeoning claims inflation.

Signs of healthy profitability around 2021 results could be one reason behind the more modest rate rises that have been budgeted for 2022.

There is increasing optimism about the strides the market has made to re-underwrite portfolios, with Lloyd’s CEO John Neal confidently proclaiming last month that the Corporation was on course to report a combined ratio of 95% or below in 2021, despite the toll of claims from Hurricane Ida, Winter Storm Uri and Storm Bernd.

John Neal expects a sub october 28 2021 bar chart ID.PNG

Such a result would mark the first time Lloyd’s has turned an underwriting profit since 2016, with heavy natural catastrophe claims and the coronavirus pandemic having driven syndicates to four consecutive years of underwriting losses between 2017 and 2020.

Meanwhile, the market cycle has reached a point where new capacity has entered the fray, and the host of start-ups to have launched in 2020/21 are now actively building books of business, and offering capacity in classes of business where underwriting capital has been constrained.

Inigo, for example, has received approval from Lloyd’s to double its controlled premium to in excess of $850mn in 2022, and other start-ups will be looking to ramp up their scale.

Discussion of the accuracy of planned rating momentum must be caveated against the fact that the Lloyd’s market has a track record of low-balling rate changes in the planning process, as the experience of recent years shows.

lloyds charts 1 april ID 2021

However, evidence is already available that rating momentum in the Lloyd’s market has passed its peak, with price rises in H1 of this year coming in at 9.9%, compared to rises of 10.8% in 2020.

Given that, the question once again arises over whether the Corporation permitted sufficient growth across the market in the “best” years of this current hardening phase – or whether Lloyd’s has largely missed the boat.

Spectre of inflation

Optimists in London will point to a continued rising market, even if it is rising slower than before. But the spectre of ever-rising claims costs is looming.

Across the globe, supply chain issues and labour shortages are driving up repair expenses in a host of sectors, from commercial property to shipbuilding.

In the US, consumer price came in at 6.2% in October, the largest inflation surge in over 30 years. In the UK, inflation is running at a ten-year high of 4.2%.

Sources suggested that the levels of inflation meant that if businesses were not achieving 4-5 points of risk-adjusted pricing improvement, then they were effectively going backwards.

In addition, climate change is widely perceived to be driving up the frequency and severity of extreme weather events, leading property cat underwriters to assess risk models and exposures.

Scepticism also endures in other long-tail classes about future claims trends.

The pandemic has caused a slowdown in court activity in the US, whilst the long-term economic impacts of the coronavirus pandemic remain to be seen, leaving underwriters wary about the potential for casualty claims to sting them in years to come.

With this in mind, the priority of underwriters will be to ensure that the pace of rate rises keeps ahead of loss costs in this decelerating market – however there are a number of factors which could influence their ultimate success in doing so.

Contracting retro capacity and shifting attitudes to cat business among reinsurers point to rising reinsurance costs for cedants at 1 January.

The four major European reinsurers have all hinted that their attitudes to cat business are shifting, following a year of three unusual weather events, and are likely to push for rate at 1 January.

If insurers are faced with steep reinsurance rate rises at 1 January, any deceleration in direct pricing could be stalled – particularly in property, where the cat rate adequacy debate is at its hottest and rate rises have already tailed off substantially.

On the other hand, brokers will be arguing vociferously that clients have paid enough after years of compound rate rises, and leaning heavily on improved market profitability for that argument.

On a Q3 earnings call, Marsh CEO John Doyle noted that “conditions remain pretty challenging” for clients, and that buyers were becoming “frustrated” after successive rounds of increases on renewal.

Pressure to stymie rate increase will only mount if carriers do indeed post healthy profits for 2021, despite a year of substantial losses.

After four years of being in the red, any underwriting profit is ample justification to pop open the champagne, but whether now is the right point to call time on the pricing party remains to be seen.

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