Pandemic-related losses in 2020 were substantial for London market insurers and offset most underwriting and investment returns, Fitch Ratings says in a new report, leading to negative or only marginally positive returns on equity.
According to the report, London market insurers incurred substantial pandemic-related losses, leading to combined ratios well over 100% in 2020. For example, the impact of pandemic-related losses on the combined ratio for Hiscox Ltd and Brit Ltd were 17pp and 16pp of net earned premiums, respectively.
The main drivers of losses were event cancellations and business interruption (BI) policies, with the impact on individual insurers dependent on their portfolio composition. Beazley plc and Brit were mainly affected by event cancellation losses, while Hiscox was hit harder by BI claims, including the effect of the FCA BI test case.
Fitch Ratings expects pandemic-related losses to reduce in 2021 given the conclusion of the FCA BI test case and a smaller exposure to BI and event-cancellation claims through policy language adjustments. However, the impact of pandemic on third-party claims is still unknown. We expect these claims to start developing in 2021 and 2022 and these could negatively affect the profitability of the market, but these claims are slow to materialise and even slower to settle.
Looking more broadly, Fitch said that the majority of London market insurers reported either a loss or only a very small profit in 2020 as coronavirus pandemic-related losses offset most underwriting and investment profits. Returns on equity were negative or only marginally positive. Investment returns recovered well in 2H20 after a dramatic fall in 2Q20. However, returns were not sufficient to compensate for underwriting losses.
It added that rates have been increasing for the past three years and increased even more in 2020, with many insurers reporting double-digit rate rises. This reflected the magnitude of pandemic-related losses and the ultra-low investment returns, which lead to increased focus on underwriting profitability.
The report, ‘London Market Insurance Dashboard: 2020 Results’, is available here.