London Views
By LEN WILKINS
London Correspondent
It is just July, but Lloyd’s senior management already is thinking about next year.
Managing agents are about to prepare their business plans for 2022. At this time, Lloyd’s usually sends a market message to steer them on where Lloyd’s wants the business plan and the market to head in 2022.
This year’s message came from Lloyd’s CFO Burkhard Keese and the new Chief of Markets Patrick Tiernan. The message focused on where the market is today in terms of performance and continues with what Lloyd’s wants in the managing agents’ business plans so syndicates can get their 2022 plans and necessary capital approved. The syndicates’ plans must be logical, realistic and achievable.
At a recent meeting of managing agents John Neal, the Lloyd’s CEO, said that the business plans for next year must indicate that profitability will continue to take priority over growth. Once again, Lloyd’s light-touch syndicates, which have a track record of superior performance, will be allowed to grow their account, while syndicates, which delivered losses to their investors, were contacted by Lloyd’s to remind them that their plan for 2022 must show a return to profitability for the syndicate.
Lloyd’s is not short of investors, and next year’s underwriting will be underpinned with more capital. At the meeting, Keese explained that Lloyd’s can find capital promptly, which helps to support the market’s favorable credit rating. He said a robust capitalization of the market is essential, and he confirmed that “like-for-like, more capital will be needed next year for the same risk.”
One concern for everyone is that the trading conditions in the market are the most favorable in years. That may sound odd, but history shows that, in the past, underwriters have gone hell for leather in acquiring new business and brought the market back to uneconomic rates within months. Lloyd’s is aware of this, so will not allow a free for all for every syndicate.
Backup policy for Central Fund
Lloyd’s is proud of its chain of security that protects policyholders. There are three links to the chain – syndicates’ assets, the deposits Lloyd’s investors make when joining Lloyd’s and the Central Fund. Lloyd’s April 2021 results showed its net resources were $44.12 billion, of which the Central Fund represented $3.84 billion, but Lloyd’s decided to back up the fund by purchasing a $1.625 billion five-year cover which supports sustainable, profitable long-term market growth.
Lloyd’s isn’t expecting a rush of claims and said the purchase is “just in case.” Cover started on Jan. 1, 2021. The structure is intended to provide increased protection for Lloyd’s customers and the market against severe tail-end events and to improve the quality and financial strength of Lloyd’s balance sheet.
It seems a good bet for the reinsurers. The last claim made against the fund was during the 2007 underwriting year. Go back even further, and in all circumstances, there never have been aggregate claims in any one year to exceed the $780 million retention that applies to this contract.
The new multilayered cover will reimburse aggregate payments from the Central Fund in excess of $780 million up to $1.625 billion and will serve as a key component in Lloyd’s chain of security. The Central Fund is available, only at the discretion of the Council of Lloyd’s. Its aim is to meet valid claims that any member’s resources cannot meet. Should a syndicate need additional money to pay claims, the three chains of security are there to meet their liabilities and ensure the syndicate’s members have the additional resources available to pay policyholders. In the rare event that a member’s capital is insufficient and that a member is not able to provide further assets to the relevant syndicates, Lloyd’s central capital provides further financial support to ensure valid claims are paid.
Aon structured and placed the $1.625 billion protection. It is a layered structure supported by newly created cell company, Constellation IC Limited – financed by investment bank J.P. Morgan, as well as eight reinsurers, namely Arch, Berkshire Hathaway, Everest Re, Hannover Re, Munich Re, RenaissanceRe, Scor and Swiss Re.
In addition to protecting the Central Fund, the cover will create a significant buffer against adverse solvency developments and is expected to increase Lloyd’s central solvency ratio. The capital buffer will facilitate growth opportunities against the backdrop of current favorable market conditions.
EU plays hardball
Instead of a new friendly relationship, the EU and U.K. are at odds over a number of issues, including financial services. Since the U.K. has the same rules as the EU, the U.K. expected an equivalence deal where both sides would allow access to each other’s domestic market. This hasn’t happened.
What the EU expected was that the control of Europe’s key financial centers would move to Europe, and London would lose its banking and insurance power. This hasn’t happened. The EU introduced new rules and regulations which they expected to result in the end of the City of London as a banking and insurance center. Unfortunately, it didn’t work because the bankers and insurers found the rules easy to work around. For example, Lloyd’s and London insurers set up subsidiaries in Europe and reinsured the business back to London.
The EU now wonders how to get its hands on London’s financial business. Fortunately, the EU still believes threats are better than incentives, so London should be safe for a few years yet. What concerns insurers and reinsurers is whether the EU is going to introduce new, tougher rules to force Lloyd’s and London insurers out of Europe. So far, the EU has not done so, but the concern is that eventually the EU bureaucrats might figure out the carrot works better than the stick.
The rejection of an equivalence deal could be one of the EU’s biggest insurance mistakes. With equivalence off the menu, the government said it has collected “compelling” and “extensive” evidence to change “overly rigid” Solvency II rules, which the country adopted as part of the EU to regulate insurers since 2010.
So now, it’s Plan B for the U.K., and the HM Treasury suddenly agrees Solvency II’s risk margin is “too high and too volatile.” Evidence indicates changes are needed to streamline reporting, and reforms will be looked at “as soon as possible,” which means early next year.
The EU is terrified that London will cut tax rates and ease regulations to encourage insurers and other businesses to domicile in the U.K. To counter this, experts say that the U.K. should support the Solvency II regime, where it has improved standards of risk management and reporting in the insurance sector.
Changes to Solvency II rules can only help London. With the new relationship with Europe under stress from disputes over fishing rights and trade with Northern Ireland, Brussels will become more and more concerned about how far the U.K. will diverge from existing EU policies to improve the U.K. attractiveness as a place to do business.
Hiscox reaches agreement
Hiscox has fought with policyholders since refusing to pay claims for Covid-19 losses under its business interruption policies, claiming there never was cover for losses caused by a pandemic. After a fierce battle, it settled a legal action with a group of U.K. policyholders that challenged Hiscox’s stance on BI claims.
Known as the Hiscox Action Group, the 400 or so members claim they are owed $52 million. They initiated arbitration proceedings in July 2020 in respect of losses from businesses that were forced to close during the first pandemic lockdown in the U.K. between March and July 2020. The group was part of the Financial Conduct Authority’s test case against insurers who had refused BI claims. The test case went to the Supreme Court, which gave a favorable judgment to the claimants in January 2021.
As usual, the terms of the arbitration deal are confidential. The only statement from Hiscox was that the settlement was “in line” with the Supreme Court judgment and that the proceedings were resolved to the mutual satisfaction of all parties.
Hiscox now tops the FCA’s list of shame. The figures released in early June show that Hiscox had the highest number of pending BI claims (2,708), as well as the highest number of claims (1,469) where an interim payment was made. To be fair, Hiscox accepted 7,346 claims; whereas, its nearest rival in the list accepted 3,250 claims.
According to the FSA, the value of all outstanding interim and initial payments is $376.47 million, and the total of payments paid for final settlements so far is $607.42 million.
Rates holding firm at midyear
Willis Re reported that rate increases continued for most major lines and territories at midyear renewals. In many cases, reinsurers had to deal on terms below their initial quotes to get a firm order.
Reinsurers’ rate increases were weakened by their decent first-quarter results. There were low catastrophe losses, rising reinsurance premium from January, and the world seemed to be recovering from Covid-19.
The good news is that there has been no rush to produce new capacity. Capacity remained more than sufficient to meet demand, but reinsurers resisted the temptation to compete for top-line revenue, so capacity for poorly performing classes was constrained.
James Kent, global CEO of Willis Re, said, “The global reinsurance market is moving towards an equilibrium. Reinsurers, backed by resilient investors delivering an increasing capital base, are robust and well positioned to provide the long-term support their clients expect and need. These clients recognize the value of a stable and broad reinsurance marketplace so have continued to grant rate increases in most instances. However, we are approaching the top of a cycle, which we believe is unlikely to precede a precipitous and damaging decline in rates. Instead, the market is likely to retain its discipline in order to maintain the balance it has achieved over the past couple of years, especially with the full picture of losses from Covid-19 and prior-year liability lines still to emerge.”
Egypt releases Ever Given
The containership Ever Given left the Suez Canal following the agreement between the owners and canal authorities. Terms of the agreement were kept confidential, but insurers made it known they were prepared to pay $150 million.
The UK Protection and Indemnity Club in London wrote the liability cover. London was concerned that insurers and reinsurers who had written the reinsurance cover would have to pay a substantial part of any compensation claim above $100 million.
Insurers were also concerned with the canal authority’s attitude over the claim. The authority alleged the Ever Given ran aground despite the supports of two escort tugs due to its “very high” speed and that its rudder’s size “was not appropriate.”
The U.K. club said that, even though the Ever Given’s owners and insurers “fully acknowledge that the SCA is entitled to compensation for legitimate claims arising out of this incident,” the club was concerned by the allegations. The ship’s master is ultimately responsible for the vessel, the club acknowledged, but the Suez Canal pilots and SCA vessel traffic management services control navigation within the canal and transit within a convoy. Such controls include the speed of the transit and the availability of escort tugs. With some 50-60 ships using the canal each day, the potential liability for insurers is enormous, and if the canal authorities are going to demand the maximum possible compensation, insurers are worried.
Apart from the compensation claim, the main potential insurance loss was the cargo that the vessel carried, estimated to be worth around $775 million. Fortunately for insurers, there appears to be little or no cargo damage. While some cargoes will have deteriorated due to the delay, the standard Institute Cargo Clause does not cover any losses caused by delay or deterioration.
Event organizers call for action
The British government will announce an insurance scheme in the coming weeks to allow live events, including festivals, theater and sports, to go ahead despite the pandemic, insurance industry sources said.
Having demanded massive Covid-19 claims from London insurers last year, event organizers are now surprised that loses from Covid-19 have been excluded from event cancellation insurance policies, meaning event organizers have no cover if a coronavirus outbreak occurs, forcing them to tear up their schedules.
Even though more than 45 million people in the U.K. have at least one injection, the U.K.’s vaccination program, like most, started top down, so younger people, who are most of the attendees at pop concerts and festivals, are the last to get protection. The result is a major problem for event organizers. They are calling for government help, and a parliamentary committee report recommended a government-backed insurance scheme for live events, similar to the successful $696 million scheme introduced for the film and TV industry last year. The film/TV scheme fills the gap left by the lack of available insurance and covers coronavirus-related losses for cast member and crew illnesses and filming delays or disruptions.
Event insurance is a major earner for Lloyd’s and London insurers, and they would be concerned if this business were threatened. At present, this doesn’t look like it will happen, but insurers will put pressure on the government to protect their interests. Lloyd’s and London insurers have said they would be happy to provide some initial cover, but most would want some sort of a backstop from the government.
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