Latest Lloyd’s forecasts indicate the pandemic will cost the insurance industry more than $200bn. Just over half of the costs relate to claims, with insurers expecting to pay out for event cancellation, business interruption and trade credit cover. The Lloyd’s Market itself is expecting to pay out $3bn to $4.3bn in claims based on the latest estimates. All eyes are set on how impacted insurers respond to their clients to not only contain claims and litigation costs, but mitigate potential long-standing reputational damage. We look at three key operational elements that must evolve for the industry to survive.
In early March the square mile around Lloyd’s of London was a hive of activity, with brokers, insurers and re-insurers buoyed by 2019 financial results. Fast forward three weeks: who would have predicted the solemn last ring of the Lloyd’s trading bell on Thursday 19 March?
For the first time in its 330-year history, Lloyd’s shut its underwriting floors and moved to electronic trading instead. It has been John Neal’s mission as CEO to move the market into the digital era, but it has taken a global pandemic to force the shift from a ‘handshake and rubberstamp’ culture into digital adoption.
The Lloyd’s Market provides insurance cover for people and businesses in over 200 countries worldwide, with £35bn in written premium and £23bn claims paid in 2019. Risks insured include accident, aviation, property and casualty, financial loss, legal expenses, travel, motor, marine, transportation, amongst other risks impacted in a global economic recession. So when the pandemic struck, the Market braced itself for an untold level of risk exposure.
In a recent FT article, John Neal stated “This is a loss of a magnitude that none of us have seen in our lifetime”. Latest Lloyd’s forecasts indicate the pandemic will cost the industry more than $200bn. Just over half of the costs relate to claims, with insurers expecting to pay out for events cancellation, business interruption and trade credit cover. Another $96bn comes from investment losses where turmoil in financial markets has hit the assets that insurers hold to fund claims. The Lloyd’s Market itself is expecting to pay out $3bn to $4.3bn in claims based on the latest estimates.
Immediate London Market impacts
The response from our London Market clients has been one of rapid action. Since lockdown we have seen brokers and insurers deploy business continuity plans with immediate effect, put remote working measures in place and reconsider non-critical operational change. Brokers, Underwriters and Claims teams are working together like never before to evaluate their client portfolios by line of business and forecast their exposures. Business lines particularly exposed include Business Interruption (BI), which has seen several large insurers come under FCA scrutiny for not honouring claims. All eyes are set on how impacted insurers respond to their clients’ BI claims to not only contain litigation costs, but mitigate potential long-standing reputational damage.
Post Covid-19 predictions
Economists are now forecasting a global recession with countries’ GDPs contracting by 1% to 10%, resulting in thousands of companies folding. Inevitably this will lead to a reduced global demand for commercial insurance and increased price sensitivity, impacting premium income while many overheads remain. Some insurers with diversified portfolios will benefit from recent rate hardening and lower commercial risk exposure created by lockdown, but the net impact is that London Market balance sheets will be hit hard and there will be casualties. Over half of the syndicates at Lloyd’s will have to raise fresh capital to increase their reserves for forecast claims .
We believe there are three key areas that could help the industry evolve and survive this and future pandemics:
Re-insurance will play a crucial role in the ability for Lloyd’s syndicates to weather the storm. Already we are seeing Lloyd’s in discussion with government and regulators to set up ‘Pandemic Re’, a possible backstop to cover future pandemics, fuelled by business interruption exposure concerns. Catlin and Pool Re have come together to set up the first industry steering group on Covid-19 response. Commercial risks post COVID have changed, so we expect to see a greater degree of product innovation to factor in lessons learnt over the last 3 months. Lloyd’s Product Innovation Facility, with over £100m of capacity and designed to speed up (re)insurance product development for new and emerging risks, is an encouraging signal that the London Market is taking stock and evolving.
There will always be a place for non-electronic placement, but digital trading must be the ‘new norm’ for the majority of business. Just this week Lloyd’s announced it will re-open it’s 1 Lime Street Underwriting floors in September, but only at 45% operational capacity, supported by new virtual underwriting rooms to continue to foster digital, collaborative ways of doing business.
When the pandemic struck, the saving grace enabling the Market to stay open for business was the PPL e-trading platform and the recent build-out of broker, coverholder and delegated authority systems (e.g. SDC, DA SATS, Lloyd’s Workbench etc). Since the pandemic, Lloyd’s was quick to announce that the ‘Future at Lloyd’s’ digital strategy will continue with 3 initiatives still planned for rollout this year:
a complex risk platform (next generation PPL)
a Lloyd's risk exchange (digital coverholder solution)
a digital claims payment solution.
These digital platforms, as well as a deprioritised ‘Syndicate in a Box’ initiative, which we hope will receive attention again soon, will be critical to enabling more flexible working in a period where geographic proximity cannot be relied on. The London Market is still at the start of its digital journey, and self-congratulation would be too early, but Covid-19 has shown what is possible, providing impetus and energy for further technological development and adoption.
3. Know your customer
The biggest change for the industry will be that client needs are likely to be significantly different post Covid-19. The past 12 weeks have driven a period of accelerated change in all industries globally. There will be few organisations that emerge unscathed and remain operating in the same way. Commercial and specialty risk management priorities have changed and the insurance industry must adapt. The unique selling point of the London Market has always been the combination of deep industry specialism, flexibility, innovation and ability to tailor risk management solutions to clients’ needs. The single biggest factor for success over the next two to three years will therefore be the extent to which insurers and brokers are able to draw on these core capabilities to reset their business, regain clients’ trust, and offer innovative, expert specialty risk solutions to manage their clients’ risk exposures.
Now is the time to consider how predictions for post-Covid priorities apply to the insurance industry and specifically how your organisation can evolve to stay ahead, exploit the rapid digital transformation and survive the pandemic intact.
Reach out to Christine Frendo, Director or Alex Gurr, Partner and head of Baringa’s Insurance practice if you would like to explore any of these suggestions further or would like to discuss how to make them work in your organisation.
About the authors:
Christine Frendo is a Director in Baringa's Insurance practice, and leads the London Market sector.
Alex Gurr is a Financial Services Partner and head of Baringa’s Insurance practice.
The authors would like to thank Adam Tyrrell for his contribution to this article.