The U.S. excess and surplus (E&S) lines insurance market is proving to be a bright spot for insurers and reinsurers, particularly those in the London market. A recent report from AM Best highlights that this segment is expected to keep growing profitably in the near future, despite some challenges on the horizon.
According to AM Best, the E&S market is a key revenue source for many companies in London. The report, released on April 8, emphasizes that the outlook for this sector remains positive. This is largely due to significant growth and effective use of resources, especially as traditional insurance carriers are pulling back from certain property insurance lines that are experiencing higher losses and costs.
As U.S. admitted carriers shy away from property lines, the E&S market is seeing an influx of business. This includes not just property insurance but also commercial auto, directors and officers liability, and even emerging areas like cyber liability and the legal cannabis industry. A separate report from Conning noted that the U.S. E&S market has grown at an impressive rate of 21% annually over the past five years, reaching over $104 billion in premiums in 2023. This growth is attributed to the E&S market’s ability to handle unique and nonstandard risks that traditional insurers often reject.
However, while the E&S market presents opportunities, AM Best warns of potential headwinds. These include softening rates, increasing climate risks, and rising social inflation affecting certain business lines. As a result, the agency has adjusted its outlook for the London insurance market from positive to stable.
The report discusses the pricing environment in London, noting that while rates have been rising for several years, there are signs of moderation. This softening could impact underwriting profitability moving forward. Insurers are urged to focus on managing their underwriting cycles carefully, especially if rates continue to decline.
Additionally, the London market faces challenges from climate-related risks and other unpredictable events like the COVID-19 pandemic and geopolitical tensions. The costs associated with global catastrophes are climbing, with secondary risks such as wildfires and storms contributing significantly to losses. Recent wildfires in California are expected to lead to substantial claims, which could strain budgets for future catastrophes.
Social inflation is another concern, as it refers to the rising costs of liability claims influenced by societal changes. Insurers have been cautious in their pricing and reserving strategies, but the unpredictable nature of this issue makes it difficult to gauge if current practices will be sufficient.
Despite these challenges, the London market remains an attractive hub for international insurance and reinsurance. The influx of new syndicates and third-party capital, along with a commitment to modernization and cost management, supports its ongoing appeal. AM Best defines the London market as a center for complex insurance needs, where expertise and tailored solutions are essential.
In summary, while the U.S. E&S market shows promising growth for insurers in London, they must also be mindful of the challenges that lie ahead. The balance between seizing opportunities and managing risks will be crucial in the coming years.