Lloyds of London & General Insurance Market – a stormy position developing?

Lloyds of London & General Insurance Market – a stormy position developing?

You only have to watch TV news to see the damage that has been caused across the world as a result of storms, earthquakes, fires and other natural disasters. At the end of the day, someone generally has to pay for the cost of the losses incurred. These, of course, mostly fall on the insurance and reinsurance markets.

In simple terms, Re-insurance companies (such as Munich Re, Swiss re) are the insurers of the general insurers we are all more familiar with (such as Aviva, AXA, Hiscox). Re-insurers play a critical role in ensuring financial stability in the insurance markets.

Dominik Hoare of Munich Re Syndicate recently gave his views on the state of the market and the impact these losses may have. He feels that the insurance markets face a very changed and difficult market going forward and one that may impact of the cost of insurance to UK businesses, and more worryingly a failure of some insurers.

His key comments are:

  1. A combination of market opinion and modelling agencies are suggesting that global insurance market will suffer an aggregate insured loss of between $100bn and $125bn over recent hurricane events. This compares to an unindexed insured loss of $41bn for Katrina in 2005. The losses of 2005 heralded a market change.
  2. Lloyd’s has announced a net incurred loss of $4.5bn for Harvey and Irma. This is likely to increase significantly once Maria is included. I believe the recent events will certainly have material implications on the re-insurance and general insurance markets.
  3. A $6bn combined hurricane loss for Lloyd’s will deliver a significant market loss for the 2017 year. This is a significant capital event for Lloyd’s, and impacted syndicates will have to replace this capital deficit by 1.12.17 in order to “come into line” for the 2018 underwriting year. This will be very challenging for many syndicates.
  4. This challenging Lloyd’s situation will be shared by many other insurers.
  5. There could be a material number of insurer failures, and in addition to many insurers will have to retract their underwriting due to capital constraints.
  6. The 2017 losses hit a global (re)insurance market that, after many years of continuous rate reductions, was break even at best.
  7. Reserve releases are running out. Lloyd’s H1 reserve releases were only £190m (2016 H1 £600m). Even before the hurricane losses the global (re)insurance market was very fragile.
  8. The worldwide (re)insurer market is effectively underpinned by a single interconnected (and now significantly diminished) capital base. As impacted lines see significant adjustment in rates, the effect will lead to all lines of business (both US and international) to secure their capital requirements to continue trading. In short order, this will certainly have tremendous implications on the insurance/reinsurance markets in terms of prices and conditions.

 

There are still a two more months to go before the year ends but I believe 2017 will be an interesting year to look back on. It is important that the overall market manages this cycle change prudently, but also with appropriate robustness.