Recent solid performances from London insurers are unsustainable and companies must adapt their soft-market strategies to remain competitive, according to AM Best.

In a report on the London market, the ratings agency says traditional business models are under threat from consolidation, alternative insurance structures and changed buying patterns.

While insurers’ capital positions are generally strong, underwriting profitability faces pressure from lower premium rates and higher expenses. 

Despite deteriorating market conditions, companies which significantly invested in the London market, such as Aspen Insurance, Beazley, Hiscox and Novae Group, performed well in the first half, according to AM Best.

Aspen’s pre-tax profit for the half was $US183.1 million ($240.02 million), while Beazley reported $US150.2 million ($196.92 million), Hiscox £206 million ($356.62 million) and Novae Group £63.8 million ($110.44 million).

While combined operating ratios for the first half deteriorated, they remained comfortably below 95%.

AM Best Senior Director and report author Catherine Thomas says despite these solid results, premium rates are continuing to fall as traditional and alternative capital competes for business.

“Large property and energy risks, particularly those that are catastrophe-exposed, remain under the most pressure,” she said.

Insurers should adapt their traditional soft-market strategies such as shrinking their businesses during difficult underwriting periods.

“A more granular segmentation of portfolios, supported by strong data analytics, is increasingly necessary to identify pockets of profitable business,” Ms Thomas said.

“In the property sector, a higher proportion of insurers’ catastrophe budgets are being allocated to binder business, where prices are proving more resilient to competition than in the reinsurance and open-market segments.”

There is an increased focus on casualty business because it is less vulnerable to competition from capital markets.

AM Best says insurers need to expand their global footprints to find profitable business, and pressure on expense ratios will probably call for increases in scale.

For other insurers, superior niche expertise and strong relationships with clients, brokers and managing general agents may be enough to remain competitive.