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London insurance market downgraded by one of the big three

Credit rating agency, Fitch Ratings (“Fitch“), has revised its outlook for the underlying fundamentals of the London insurance sector from stable to negative.

Downgraded outlook

According to Fitch, “business transacted in the London market typically relies heavily on face-to-face interaction, and this could be significantly disrupted if the COVID-19 outbreak is prolonged“. Further, the ongoing pandemic threatens the credit quality of London market insurers.

Fitch have explained they are assessing the London insurance market ratings relative to assumptions with respect to the impact of COVID-19 disruption on capital markets volatility, interest rates, market liquidity and insured claims/reserves. Fitch said that its outlook for ratings in the sector remains stable but it will revisit the rating outlook following further analytical work related to COVID-19 advances. In a market commentary published on 23 March, Fitch stated that London market insurers will likely be less affected by the COVID-19 outbreak than European life insurers, whose rating outlooks were recently revised to negative.

Lloyd’s Commitment to modernisation

The downgrading by Fitch follows the unprecedented closure of Lloyd’s underwriting floor due to the coronavirus pandemic, as we reported here, earlier this week.

Fitch have expressed concern that the corporation’s 2020 modernisation program, which involves making it simpler for new syndicates to be established, could be disrupted. Furthermore, measures to attract insurance-linked securities to the market could also be unsettled. Fitch have said, “the rapid spread of COVID-19 could increase operation risks for implementation of the Future at Lloyd’s project, which aims to modernise the market and make it more cost efficient.”

Lloyd’s have stated that up to 70% of business had moved over to electronic placement before the pandemic. Lloyd’s also reaffirmed the commitment to the corporation’s modernisation program: “It is a multi-year program, with profound levels of support and engagement from stakeholders across the marketplace.”

Comment

As one of the ‘big three’ credit ratings agencies, Fitch’s assessment may strike a nerve within the London insurance market.

The news of this downgrade could forecast worse yet to come for the UK’s economy. Indeed, it will not bode well to investors’ who use Fitch’s rating as a guide as to which investments will not default and subsequently yield a solid return. However, perhaps these figures reflect the teething problems brought about by the shift to online platforms and, in time, as the uncertain circumstances brought on by COVID-19 begin to form a new norm, the market may regain its stability.

© Copyright 2020 Squire Patton Boggs (US) LLP

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About this Author

Garon Anthony, Squire Patton Boggs, litigation attorney
Partner

Garon Anthony is a partner in the Litigation Practice Group. He has specialised in dispute resolution work since he qualified as a solicitor and has considerable experience in general corporate and commercial litigation work, acting for both private and public sector clients.

Garon regularly resolves disputes for clients in the financial services/insurance sector. That encompasses professional negligence, fraud issues/recovery processes, dealing with claims and complaints by customers of the mis-selling of retail products, handling insurance policy coverage disputes for corporate...

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