Lloyd’s and the London Market: Writing insurance amidst a pandemic
22 February 2021
In 2020 Lloyd’s experienced the largest loss to a single event in the market’s 400-year history. In its half year report in September, Lloyd’s expected to pay up to £5bn, gross of reinsurance. Our own analysis suggests that the loss will now likely exceed £5bn once recessionary impacts and recent business interruption rulings are considered.
COVID-19 has changed the landscape in which insurance is written. Some lines of business are simply not relevant in a lockdown environment. For example, our analysis reveals business volumes written in accident & health fell 18%* in 2020, driven by the lack of demand for personal accident cover and event cancellation insurance. Property treaty business volumes dropped 10% as reinsurers chose to avoid the uncertainty surrounding business interruption claims. Further reductions are anticipated in 2021. In fact, we’ve observed that only marine and aviation classes achieved planned business volume increases in 2020.
What makes this more surprising is that volumes did not hit targets despite better than expected rate increases. A change in sentiment following major world events is not uncommon and can result in a hardening market. Our analysis shows that overall, real rates are now stronger than they were at the beginning of the last soft cycle in 2012. However, this strengthening is class-dependent with a wide range. For example, our analysis shows direct property business is now 24% above 2012 rates, whereas casualty treaty is still 10% below due to the impact of high claims inflation.
This inflation has helped drive casualty reserve deterioration, already an issue before the pandemic began, and continues to be a concern for regulators. How COVID-19 impacts court settlements and policyholders’ propensity to claim is yet to be seen, but the issue is unlikely to go away any time soon. To remedy this deterioration, insurers need a stricter focus on case reserves and notified claims: much of the exposed casualty business is written on a claims-made basis so reserve deteriorations will develop from issues that have already been reported to the insurer.
Lloyd’s is no stranger to uncertainty but the pandemic, with its resulting economic impact, has further increased risk for years to come. Of the £5bn COVID-19 loss that Lloyd’s is expecting, our analysis shows that only a small proportion of this amount had been reported at Q3 2020 (less than 10%). When all these claims eventually come through, will they be more or less than current expectations? Additionally, will we ever be able to know the full extent of the COVID-19 impact due to indirect secondary losses? This is also uncertain, but what we do know is that reserve adequacy and exposure management have never been so important.
To discuss any of the themes raised in this blog, please get in touch.
* The accident and health class within our analysis includes contingency business, in line with Lloyd's lines of business