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Lloyd’s catastrophe risk exposure declined to £1.4bn in 2020: Moody’s

20th May 2021 - Author: Katie Baker

According to a Moody’s report, Lloyd’s exposure to catastrophe risk has declined significantly in recent years to end last year at £1.4 billion (USD 2bn), or 6% of the solvency capital requirements (SCR).

growth chartThe report noted that at year-end 2016, so prior to the severe and costly natural catastrophe events of 2017, Lloyd’s exposure to catastrophe risk accounted for a material £5.1 billion (USD 7.2bn), or 31% of the market-wide SCR.

As a result, catastrophe risk was the market’s single largest risk category.

However, since then, Lloyd’s has been able to reduce its catastrophe risk exposure as part of its efforts to improve underwriting discipline across the market, notes Moody’s.

Additionally, analysts explain that the lower exposure relative to the SCR was also driven by a material increase in reserving risk.

“The decrease will make Lloyd’s capitalisation less vulnerable to severe shocks. However, as illustrated by the market’s 2020 result, its earnings will remain sensitive to large insured losses,” say analysts.

Throughout the COVID-19 pandemic, Lloyd’s capital position has proven resilient and this is despite its negative result in 2020, and unfavourable financial market movements in the first half of the year.

For the full year 2020, Lloyd’s fell to a net loss of £900 million (USD 1.3bn) on the back of a significant £3.4 billion (USD 4.8bn) of net incurred pandemic-related losses.

Moody’s explained that during 2020, Lloyd’s market-wide Solvency II ratio fell by 9 percentage points to 147%, a level broadly in line with the past five years, driven by an increase in the capital requirement.

Furthermore, the dip in the ratio came despite a £3.5 billion (USD 5bn) capital injection from the market’s members, which boosted the Solvency II ratio by a material 17 percentage points.

As noted by analysts, Lloyd’s also requires each syndicate to incorporate an additional 35% uplift to its SCR.

Moody’s estimates that after removing the uplift, the Solvency II ratio would move closer to 200%, which it views as a robust level of capitalisation.

In line with Government guidance, the underwriting room at 1 Lime Street opened on Monday, May 17th.

Although, those arriving back to the Lloyd’s building were welcomed by protests over the market’s insuring of coal mines, a reminder that as the implications of COVID-19 fades for re/insurers on the back of the global vaccination effort, other challenges await.

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