John Neal, Chief Executive Officer at specialist re/insurance marketplace Lloyd’s of London, has warned that the market is a long way out from understanding its full exposure to Russia’s invasion of Ukraine.
During a call prior to his hospitalisation following a car accident over the weekend, Neal warned that half-year reports would likely be “very immature,” while reserves and claims estimates could “even take longer” than the full year to finalize.
The 2021 results represented the best figures reported by Lloyd’s for some time, with an overall profit of £2.3 billion and a combined ratio of 93.5%, against a backdrop of heightened catastrophe activity.
Regarding losses from the Russia-Ukraine conflict, Neal acknowledged that particular attention has been paid to the potential for historic aviation losses, following Russia’s move to nationalise some 500+ Western-made planes that have been stranded in the country since sanctions were imposed.
London Market insurers have been considered as by far the most exposed to this risk, but Neal sought to allay concerns by assuring that the $10 billion asset value of the grounded jets would not translate into an equivalent insurance loss.
“We think the insured values are somewhere between 15 and 20% of the asset value,” he told listeners on the call,” while also noting that Lloyd’s direct exposures to Russia and Ukraine represent “substantially less than 1%” of its total revenues.
The Lloyd’s CEO also highlighted potential issues that could affect how insurance is applied to risks arising from the conflict, such as when a notice of cancellation may by valid or how terms are applied and whether claims will be made at all, that will influence the eventual exposure and loss incurred by the market.
“It will be a major event,” he acknowledged. “There is no doubt that there will be losses of note that will materialize from war in Ukraine. It’ll take quite a long time to evaluate what those might be. We would think it was hard to evaluate COVID losses, this will be a lot harder. And I would suggest even at the half-year, whilst you’ll start to see estimates emerging in the PMLs of various companies, I think it’ll still be very immature, in terms of what the loss estimates will be.”
And asked to comment on whether the war could become a material event for Lloyd’s reserves, Neal again expressed caution over the unknowns still at play, even as significant losses look likely in aviation, political risk, marine and other classes.
“Sadly, as we know, we’ve just moved into the second month of the war, so war is continuing,” he said. “I think as people report their half-year results, let alone their first quarter results, they won’t genuinely know what losses might arise. So, I think you’ll see people tentatively attempt to assess and quantify losses arising from the war.”
“What we do is take a step back and say, right let’s look at credit, and credit runs from asset credit i.e. aviation leasing at one end of the spectrum, to whole turnover trade credit at the other i.e. supply chain impact. What do our scenarios tell us likely losses could be that emerge from those? What do our scenarios tell us for cyber? What do our scenarios tell us for political risk? And there’s nothing in those, and obviously we’ve run those multiple ways in recent weeks, that are suggesting they are outside of tolerance,” Neal continued.
“So from an exposure point of view, we feel comfortable that the exposures that we might anticipate are not greater than we should anticipate. What will the claims be? Way, way too early to say. It will be a major event, there are multiple variables at play. I would suggest even the reserves at the half-year will be tentative. It might be better in the full-year but it might even take longer than that.”