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Lloyd’s estimates COVID’s cost to the industry and its own market


May 15, 2020   by Greg Meckbach


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The Lloyd’s market will pay “in the range” of $3 billion to $4.3 billion “as a result of the far-reaching impacts of COVID-19,” the Corporation of Lloyd’s announced Thursday.

Comparing the overall COVID-related losses to the 2001 terror attack in New York and the impact of Hurricane Katrina in 2005, Lloyd’s went on to suggest the pandemic will ultimately cost the global property and casualty insurance industry over $100 billion.

All Lloyd’s figures are in U.S. currency, which closed at CDN$1.41 Thursday, meaning the upper estimate for the Lloyd’s market’s claims costs alone would be in the range of CAN$6 billion.

Lloyd’s did not break down its estimate by geography, nor did it say whether its loss estimate includes business interruption. But it did estimate 31% will come from event cancellation, 11% from credit, 29% from property, and 29% from other classes.

It also pegged 2020 underwriting losses covered by the industry as a result of COVID-19 at about US $107 billion. Lloyd’s said this is “on par” with events like Hurricane Katrina in 2005 and three North Atlantic hurricanes (Harvey, Irma and Maria) in 2017. By comparison, Lloyd’s said the industry lost US$40 billion on the 2011 earthquake and tsunami that hit Japan and US$27 billion on the Sept. 11, 2001 attacks.

The Corporation of Lloyd’s, which oversees the market, is not an insurer. Essentially the syndicates themselves collect the premiums and pay out on claims, with Lloyd’s maintaining a central fund.

Several P&C insurers have said claims will arise in lines such as event cancellation and liability from COVID-19, which the World Health Organization declared a pandemic Mar. 11.

For example, Intact Financial Corp. announced May 5 it set aside $83 million in the first three months of 2020 to cover potential COVID-related claims. For Intact specifically, that could include event cancellation, tuition reimbursement in its U.S. business, liability and business interruption, though Intact officials say 99.5% of the BI policies it writes would exclude losses arising from pandemic closures.

Munich Re recently reported €800 million in COVID-19 related losses in the three months ending Mar. 31, “particularly in event cancellation insurance.” So at the Canadian dollar’s current exchange rate with the euro, P&C reinsurance losses arising from COVID 19 cost Munich Re alone $1.21 billion in Canadian funds.

For its part, The Travelers Companies Inc. reported Apr. 21 it could see higher than normal frequency and severity in its liability coverages as a result of plaintiffs’ lawyers seeking to generate COVID-19-related claim activity against Travelers clients.  Travelers recorded US$86 million in pre-tax charges in Q1 related to the pandemic.

“In construction surety, there is the potential for elevated losses if contractors experience shutdowns, which could negatively impact their cash flows, or experience disruptions in their supply chains, unavailability of labor or increased costs for materials, each of which drives up their costs,” Travelers said in a securities filing discussing its financial results for the first quarter of 2020. At the time, Travelers warned investors it could experience increased exposure in industries with delivery services; elevated fire, water and crime claims at unoccupied or closed businesses; arson; and collisions at faster speeds, among other things.

“There is also a potential for elevated frequency in certain product lines such as directors’ and officers’ liability insurance claims related to alleged mismanagement or other failures, as well as increased securities class actions, and employment practices liability insurance claims related to furloughs and lay-offs of employees,” Travelers said.

For its part, Lloyd’s said May 14 it expects the cost of COVID to the Lloyd’s market will be “on par” with the Sept. 11, 2001 hijackings by Al Qaeda of four airliners (resulting in destruction of the World Trade Center and heavy damage to the Pentagon) and with the 2017 hurricanes.

“Lloyd’s believes that once the scale and complexity of the social and economic impact of COVID-19 is fully understood, the overall cost to the global insurance non-life industry is likely to be far in excess of those historical events.”

Lloyd’s did not release full financial results for the first quarter of 2020, and normally releases results for the first half of each year and for each full calendar year.

In its annual report for 2019 released March 26, Lloyd’s reported a combined ratio of 102.1% in 2019, down from 104.5% in 2018.

The Lloyd’s market’s profit was about £2 billion last year, due in large part to a £3.5-billion investment return in 2019 compared to an investment return of £504 million in 2018.

The British pound closed Thursday at CDN$1.72.

“Several syndicates exited or severely curbed their risk appetites in poor-performing lines” in 2019, Lloyd’s said Mar. 26.

“This resulted in volume reductions of approximately 8.0%. Looking at these pricing increases and volume reductions together, there is an underlying reduction in premium volumes of 2.6% on like-for-like business.”

Despite the closure of syndicates last year, gross written premiums were actually up from £35.5 billion in 2018 to £35.9 billion last year.

Feature image via iStock.com/duncan1890



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