By LEN WILKINS
Lloyd’s annual report for 2020 shows a $1.2 billion loss as net COVID-19 claims reached $4.42 billion which caused the market to hit a combined operating ratio of 110.3 percent against 102.1 percent for 2019. The $1.2 billion loss in 2020 compares to the $2.93 billion profit in 2019.
Without COVID-19 adding 13.3 percent to the market’s combined ratio, Lloyd’s underwriting result would show an underwriting profit of $1.006 billion and a 97.0 percent combined ratio.
COVID-19 claims totaled $8.25 billion; reinsurers are left with some $3.83 billion to pay. Apart from COVID-19, there were losses from worldwide natural catastrophes which added $3.325 billion in claims.
A few years ago, Lloyd’s published one set of results after the expiry of each underwriting year. This meant while Lloyd’s reported on what happened three years ago, the rest of the world used more up-to-date figures. Lloyd’s now publishes two sets of figures: the traditional underwriting year results and the annual results, which represent results for the aggregate Lloyd’s market and include release of previous years’ reserves and investment income; whereas, the underwriting year figures are straight premium against claims. The underwriting year figures sway the aggregate figures.
Premiums reached $47.14 billion in 2020 against $47.75 billion a year earlier, partly due to rate fluctuations and Lloyd’s decision not to renew underperforming business. With increases of 10.8 percent, rates were on the rise during 2020 and continued the trend into 2021.
Lloyd’s net resources grew to $45.14 billion from $40.75 billion a year earlier. Its central solvency coverage ratio fell to 209 percent from 238 percent, and its market-wide solvency ratio is now 147 percent, down from 156 percent a year earlier. As expected, investment income continues to disappoint and returned 2.9 percent, or $3.06 billion, which is off 2019’s $4.65 billion.
In May 2020, Lloyd’s told the market its estimate for COVID-19 claims net of reinsurance was $3.32 billion to $4.65 billion, an increase over initial estimates due to lockdowns in the U.K. and elsewhere. In addition, there were losses imposed by the High Court and Supreme Court judgments.
In this annual report, Lloyd’s estimates that net of reinsurance the loss to the market will be around $4.79 billion, and then adds that, with social distancing expected to continue in the U.K. until July 2021, the final figure could rise to $5.05 billion. Lloyd’s calculations are based on figures that suggest 67 percent of the losses are on an IBNR basis and cannot be considered certain. Of the $2.66 billion claims notified, $1.60 billion have been paid to date.
With Lloyd’s producing underwriting losses for the fourth consecutive year, one would expect gloom and doom; instead, there is optimism in Lloyd’s and the rest of the London market. Excluding COVID-19 losses, Lloyd’s made an underwriting profit of $1.06 billion. The underlying combined ratio dropped (that’s attritional loss ratios, expense ratio and prior year releases) to 87.3 percent.
Add the double-digit premium increases at the 2021/2022 renewal season, and one can see why the Lloyd’s market is quietly confident. Lloyd’s has reported 13 consecutive quarters of rate increases, and these increases exceed Lloyd’s plan for each quarter. Lloyd’s said all classes of business and geographies achieved positive rate increases, and the first quarter of this year saw double digit rate increases.
While COVID-19 is still with us, its loss exposure is dwindling as the renewal of each policy sees new and comprehensive pandemic exclusions added. Major losses caused by claims for event cancellation have been paid, and premiums for these risks increased substantially while cover was reduced. The final cost of COVID-19 might still increase, but it will be well within the market’s ability to handle. Without the cost of additional COVID-19 claims, underwriting profits should boom.
Ever Given to hit Lloyd’s two ways
Lloyd’s underwriters will pay at least $100 million for their share of the losses caused by blocking the Suez Canal, and the tab could be a lot more. It’s too early to pick a figure, but Lloyd’s Chairman Bruce Carnegie-Brown said Lloyd’s is on the hook for between 5.0 percent and 10 percent of all losses, and the market expects a “large loss” from the Suez Canal disruption and from all the other vessels trapped in the canal. Apart from direct claims, Lloyd’s can expect to pick up a loss from the reinsurance of the Protection and Indemnity Club that insures ship owners’ liabilities.
Ever Given’s owners insured their liability exposure with the U.K. P&I Club. These clubs are specialist mutual insurance clubs that cover ship owners’ liabilities and one quarter of any collision liability that the ship might incur. The major P&I clubs have grouped together in an association known as the International Group of P&I Clubs. The group has a joint reinsurance policy, believed to be the largest in the world, which buys cover up to a limit of $3.1 billion. Reinsurance recoveries cannot be made until a claim exceeds the $100 million deductible, but this loss is going to go way north of that. The concern for Lloyd’s is that a major share of the policy is placed in both Lloyd’s and the London market. Each individual P&I club pays the first $10 million of each claim itself, but losses above this figure, up to the deductible, are pooled across the international group members.
The loss is probably going to keep lawyers happy for months. Ever Given’s owners can expect to receive claims for every ship and cargo impacted by the delay, and there were over 400 of them. These claims will be hurriedly passed on to the U.K. P&I Club.
The Suez Canal Authority was first in line with a claim for $1 billion in compensation. The authority lost a week’s income and incurred expenses in freeing the vessel. While under the standard condition of carriage Ever Given’s owners are not liable for any delays to the cargo their vessel was carrying, this doesn’t apply to the other vessels impeded by the incident. Insurers can expect claims from ship owners for loss of income and cargo owners for damage caused by delay and the supply chain interruptions from the loss of use of their cargo.
While liability underwriters are looking with horror at the situation, there also are some claims heading to the marine market for the recovery and damage to the Ever Given. The vessel is insured with Japan’s MS&D Insurance Group for around $140 million and reinsured in the world’s marine market. The initial loss will be for inspecting the vessel’s hull for any damage, and the cost of any repair will be added. The big loss here is expected to be the salvage award made to SMIT Salvage, probably by arbitration, with the award based on the skill of the salvage company, the time taken, the equipment used and the degree of expertise needed.
While salvage losses in the Suez Canal are notoriously expensive, the ship’s insurers will be relieved to know the Ever Given’s owners have declared General Average. This is a marine principle which ensures the cost of any salvage is shared by the ship and the cargo owners.
Meanwhile, the Ever Given is anchored in the Great Bitter Lake, roughly halfway along the canal. The Suez Canal Authority said the Ever Given could remain in Egypt until the ship owner agrees to pay compensation.
Delegated authorities to remain popular
AM Best has reported that coverholders are attractive to Lloyd’s managing agents, particularly those who handle quality specialist risks. AM Best warned that reforms at Lloyd’s to improve results could restrict capacity and that renewing programs on the same terms may be difficult. One advantage of the delegated authority model, said AM Best, is it largely avoided mega COVID-19 losses.
At the end of last year, Lloyd’s still had 4,030 coverholders.
Reinsurance rate hikes continue
Following the rate increases that the market secured in the 2020/2021 renewal season, reinsurers were anxious to see if the trend of premium increases continued during the April renewal season. Apparently, the trend continued. While some increases were less than hoped for, Japanese and U.S. catastrophe reinsurance premiums jumped by double digits. The rest of the market remained firm across the board in virtually all classes and territories. Brokers were relieved that, at the offered prices, there was plenty of capacity, and primary carriers accepted reinsurers’ changes to wordings reflecting current pandemic concerns.
U.K. and EU deal could be imminent
The relationship between the U.K. and EU has not been good since January. Like the aftermath of a fractious divorce, the two sides seem to be in an unhappy relationship. The U.K.’s successful COVID-19 vaccination program didn’t help with EU citizens angry at how the U.K. managed to obtain vaccine and carry out its vaccination program while the EU was stuck in the starting blocks. The question of a happy relationship and the long-awaited deal on financial services seemed a long way off, but an agreement may have been reached that could secure trade in financial services between Europe and the U.K. Nonetheless, some caution that the agreement is for talks about talks.
The rumors circulating the City of London are that discussions between the two sides resulted in an agreement to the text of a memorandum of understanding on regulatory cooperation in the sector.
The U.K. Treasury said the MoU “creates the framework for voluntary regulatory cooperation in financial services” following the U.K.’s departure from the EU.
Details of the agreement are sketchy, but U.K. sources said a joint U.K.-EU financial regulatory forum will be established to house all future dialogue on financial services. The word in the market is that the MoU is not expected to address the crucial issue of equivalence, and it remains unclear how both sides will take this question forward.
AAJ takes on Lloyd’s
The American Association for Justice, the largest U.S. association of plaintiffs lawyers, took on Lloyd’s for denying a $1 million coverage claim after AAJ’s annual 2020 convention, set for July last year, was canceled due to COVID-19, according to a lawsuit that Lloyd’s removed to federal court on March 29.
Lloyd’s hasn’t substantively responded to allegations by the AAJ, and Lloyd’s lawyers, Troutman Pepper Hamilton Sanders, haven’t commented on the case. The association says it had to cancel the convention because its intended location, the convention center in Washington, D.C., had been taken over as a temporary medical facility. Lloyd’s argued the cancellation was due to COVID-19; the association says the relevant exclusion in the policy does not apply.
EU plays games with Aon and Willis
The EU has yet to decide whether to object to Aon’s proposed takeover of Willis. A month has gone by since the EU suggested it would require some sort of remedy to allow the deal to go through. The EU could extend the deadline for approval or demand changes to allow for transparency, but so far, no details have emerged.
Talks between the two parties continue, and both sides hope the go-ahead or a statement of objections will be made within the next fortnight. Aon reportedly has considered a number of different scenarios that will enable the company to get approval for the deal with the minimum of nuisance. The last thing Aon wants to do is pull out or sell part of its empire, but it will look at what can be cut without hurting the company.
The word in the market is that the EU is concerned about Aon becoming the largest broker in the world, and that there would not be sufficient competition on large accounts, reinsurance, and specialty lines insurance.
Lloyd’s partners with Bounce
This odd mixture is a New Zealand partnership between Lloyd’s and insurance start-up Bounce, which uses cutting-edge technology and real-time GeoNet data to automatically pay customers within five days following a strong earthquake.
The new product Bounce designed should provide affordable earthquake insurance and fast claims payments. Bounce does this by tracking peak ground velocity (PGV) which triggers payment at levels of 20 centimeters per second and above.
Bounce was developed by Paul Barton in partnership with Lloyd’s, Guy Carpenter, Marsh and Jumpstart Insurance.
Bounce does not replace conventional earthquake insurance that covers significant loss but is designed to provide immediate cash flow to kickstart financial recovery.
The product uses data from GeoNet/GNS Science, the government agency responsible for measuring earthquakes, to objectively identify areas where customers have experienced a strong earthquake. Claim payments are based on the strength of any earthquake; the stronger the earthquake the larger the payout.
Lloyd’s underwriting room reopens
After several closures due to the pandemic, the Lloyd’s underwriting floor will reopen on May 17. There were concerns that some staff would be worried about returning on public transport, but Lloyd’s Chairman Carnegie-Brown said surveys show most market employees expect to return to the office for at least three-plus days a week.