Changing dynamics and intense competition are challenging the London insurance market, according to an AM Best report.

Global economic uncertainty, an influx of alternative capital and changing buying habits are making trading conditions difficult, the ratings agency says.

Competition, most notably in reinsurance, is squeezing margins and forcing a loosening of terms and conditions.

London market insurers entered this year with strong balance sheets after three years of good underwriting results, but full-year results will depend on the frequency and severity of large losses. Strong underwriting discipline and prudent management of capital and aggregate exposures will determine which companies can absorb catastrophe losses.

“Premium rates are under pressure and a return to a more normal level of catastrophe losses could push this year’s technical results into the red,” Director of Analytics Catherine Thomas said. “With interest rates set to remain at historically low levels, investment income will provide limited earnings support.”

London’s competitive position is also under threat from the growth of other (re)insurance hubs across the world.

Despite this, the Lloyd’s market remains attractive to investors, the report says.