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Lloyd’s market falls to £2bn pre-tax loss on catastrophes

21st March 2018 - Author: Steve Evans

The Lloyd’s of London insurance and reinsurance market fell to a £2 billion pre-tax aggregated loss across the market in 2017, due to the impact of the major catastrophe loss events.

Lloyd's of London insurance and reinsurance marketThis compares to a pre-tax profit of £2.1 billion achieved in the more benign catastrophe year of 2016.

The hurricanes and other major catastrophes in the second-half of 2017 resulted in major losses of £4.5 billion at Lloyd’s, up significantly on and more than double its 2016 major loss load of £2.1 billion.

The Lloyd’s market’s underwriting loss for 2017 came in at £3.4 billion for the year, compared to a £500 million underwriting profit in 2016, as the combined ratio rose to 114% (up from 97.9% in 2016).

Bruce Carnegie-Brown, Chairman of Lloyd’s, commented on the catastrophe activity that Lloyd’s faced in 2017, saying, “After a number of relatively benign catastrophe years, the second half of 2017 demonstrated the precarious nature of the world in which we live.

“In addition to Hurricanes Harvey, Irma and Maria, among other events, there were also devastating wildfires in California, an earthquake in Mexico, monsoon flooding in Bangladesh and a mudslide in Colombia.

“The impact on communities and businesses has been immense, and the Lloyd’s market is working hard to ensure we are paying claims to policyholders as quickly as possible. To date, the market has paid more than 50% by value of the claims notified in relation to Harvey, Irma and Maria, and is in the process of paying the rest.

“The significant claims the market incurred this year have contributed to turning last year’s £2.1bn profit into a £2bn loss in 2017. This is not a surprise. Last year it was clear that the benign claims environment was masking the impact of tough trading conditions and so it has proved.”

However, Carnegie-Brown continued to explain that the market weathered the impacts of the catastrophe events, saying, “Despite these losses, Lloyd’s capital position remains strong.”

The Lloyd’s market and its syndicates paid out a stunning £18.3 billion in claims gross of reinsurance in 2017, as the insurance and reinsurance provider helped the affected regions to recover through provision and acting on its risk capital promises.

As Carnegie-Brown said, the impact while significant has not significantly dented Lloyd’s capital base, as the market come out the other side and into 2018 with total resources remaining at £27.6 billion.

Lloyd’s Chief Executive, Inga Beale, commented on the results, saying, “The market experienced an exceptionally difficult year in 2017, driven by challenging market conditions and a significant impact from natural catastrophes. These factors mean that for the first time in six years Lloyd’s is reporting a loss.

“Lloyd’s is here to support customers when it matters most, providing the financial support to enable businesses, governments, and most importantly people to recover and rebuild their lives as quickly as possible and I’m proud of the market’s response.”

Carnegie-Brown noted that the market’s response provided evidence of the value of risk transfer, “The focus on paying claims in the second half of the year has provided us with an opportunity to advocate for the purpose of what we do, and to evidence Lloyd’s important role in helping nations, businesses and communities to recover quickly post disaster and to reduce risks in the future. The market’s response to these crises continues to be exemplary and demonstrates the important social value of insurance.”

Chief Executive Beale noted that Lloyd’s continues to find growth opportunities, despite market conditions, saying, “While pricing remains under considerable pressure, gross written premiums have seen 6% growth, excluding the effect of foreign exchange movements, to £33.6bn (2016: £29.9bn). This is in line with Lloyd’s continued focus on measured and sustainable growth, and is driven in part by the development of new products such as cyber and growth in the US.”

Beale said that Lloyd’s has built up significant trust over the years, through being there to pay claims when needed.

But she explained the market cannot sit on its laurels, “We cannot take that trust for granted. Every day we have the opportunity to either earn trust, or lose it – depending on the decisions that are made at every level in the Lloyd’s market.”

Beale cited the need for the market to remain competitive, saying that it must, “Speed up the adoption of the market’s modernisation programme, which will digitise processes, reduce unsustainable expense ratios, and make Lloyd’s more attractive to do business with.”

Lloyd’s expense ratio remains higher than its competitors, driving the market towards modernisation ever more urgently.

One of the ways it intends to address this is through embracing different distribution models over the coming years, which could see technology playing an increasingly key role in how the market sources its business.

Shirine Khoury-Haq, Chief Operating Officer, explained, “While technological change and automation is disrupting the insurance industry generally, Lloyd’s also faces distinct challenges as its expense ratio remains materially higher than that of its competitors. We must adapt in order to remain relevant. Placing and processing business must be made easier and more efficient in order to make Lloyd’s more attractive; both in London and in local markets.”

Administration expenses did drop slightly at Lloyd’s in 2017, to 12.5% from 14% in 2016, but acquisition expenses remain high at 27% and are in fact up on 2016’s 26.6%.

Going forwards it is going to be vital to reduce the expense ratio in the market, in order to be able to sustain the lower rate environment over the longer-term.

The next few years will be absolutely key for the Lloyd’s market and as a result its steps taken to modernise are likely to become ever more vigorous.

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