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Catastrophe risk has a home at Lloyd’s, but more realistic loss picks required

3rd March 2022 - Author: Luke Gallin

Executives from the Lloyd’s insurance and reinsurance marketplace have called on certain managing agents to “have more realistic catastrophe loss picks” in their plans as actual results have significantly fallen short over the last five years.

Lloyd'sAfter another $100 billion+ of insured nat cat losses in 2021, it’s clear that catastrophes losses have been on the rise and when you consider the impacts of climate change, will likely increase further in the future.

In light of consecutive years of above-average losses from natural disaster events, executives from Lloyd’s held a market meeting this afternoon, which focused on ensuring sustainable performance as the marketplace continues to adapt to the evolving landscape.

A focus of the meeting was catastrophe loss picks, and specifically the need for some syndicates to show improvements amid heightened volatility.

Patrick Tiernan, Chief of Markets at Lloyd’s, explained that over the last five years, cat loss picks in plans have averaged 12%. However, actual results have ranged from 18% to as high as 28%, which is unsustainable.

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“We recognize volatility and absolutely don’t expect the experience for cat exposed classes to land at the average value provided in the plan,” said Tiernan. “But likewise, consistently falling short of plan by a significant margin is not acceptable. We need to have more realistic catastrophe loss picks in our plans.”

Tiernan was joined by Kirsten Mitchell-Wallace, Portfolio Risk Management Director, who agreed there’s work to be done on loss picks against a backdrop of more exposures, many of which are in riskier locations.

She highlighted the growing number of Floridians living in coastal areas, the heightened exposure to wildfires in the U.S., and also the fact that millions more people are now exposed to floods than in the past.

“These increases in exposure amounts and distribution are all amplified by social and economic factors. If these trends continue, it is very likely that there will be more and higher absolute losses in the future, even without the added threat of climate change,” said Mitchell-Wallace.

On loss picks specifically, Mitchell-Wallace added that “it’s absolutely key the models are appropriate for the current risk environment, both appropriate and complete.”

She went on to state that Lloyd’s is now going to ask market participants to “articulate the differences between the catastrophe loss ratios you submit as part of your planning, those that are modeled to experience.”

Ultimately, this will help Lloyd’s to “understand these differences and focus on them to ensure that future plans are realistic and achievable.”

According to Mitchell-Wallace, the accuracy of cat loss picks will become “increasingly important as human behavior, macro-economic factors, and climate change continue to put upward pressure on the absolute value of catastrophe losses.”

But while losses from natural disasters have been elevated and are expected to rise in the future, Mitchell-Wallace emphasised that “catastrophe risk has a home at Lloyd’s.”

“We have already granted flexibility on the catastrophe risk appetite ratio constraints, and we’ll continue to do so for those who understand and manage the risk best. Many of you possess some of the most advanced cat underwriting and exposure management capabilities in the industry,” she said.

The meeting ended with a reminder from Tiernan that Lloyd’s does not want participants to cut their cat risk at all, “we just want them to improve the methodology and the robustness, and how they underwrite it.” Adding that for a lot of the market this is a “meaningless message because they already do it really well.”

After falling to a net loss of £900 million in 2020 as a result of substantial COVID-19 losses and impacts from large catastrophe events, ongoing transformation efforts came to fruition last year as the market returned to profit in the first half of 2021.

Lloyd’s is scheduled to release its full year 2021 financial results towards the end of March, and it will be interesting to see if the improved underwriting performance seen in H1 persisted, given the catastrophe experience witnessed in the second half of the year.

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