Lloyd’s of London: from shoe gazing to premium raising

Accountants are more extroverted than insurance actuaries. The latter stare at their shoes while the former stare at your shoes, goes the joke. Lloyd’s of London, which has unveiled full-year results, has stopped peering down. Risk-takers have increased rates in recent years, adapting to declining investment returns and heightened claims.

Lloyd’s highlighted recent pandemic claims. It swung to a loss of £887m, its third year of five in the red. The outlook is paradoxically positive.

Pain will continue for some time. Covid-19 could eventually lead to nearly £6bn in claim losses. Already ultimate net claims have surpassed the previous record set in 2011. A period of post-pandemic jitters could follow. What should also come is further repricing of risk.

Growing balance sheet resilience provides an insight into how much more risk Lloyd’s can take on. The signs look good. For one thing, despite diminishing investment returns of just 2.9 per cent, capital reserves have picked up for three years running.

The central solvency ratio, covering just Lloyd’s members and its central fund, though down from 2019, sits at a comfortable 209 per cent. Lloyd’s points out that excluding Covid claims, it beat break even. The combined ratio — which registers profits when it drops below 100 per cent — dropped to 97 per cent when adjusted for the pandemic.

Disasters prove insurance is worth buying. Last year was the fifth highest year for natural catastrophes. Premium rates accordingly rose by nearly 11 per cent.

The question is whether further rate rises are sustainable, says Ming Zhu of Panmure Gordon. Excess capacity would mean short-term price jumps were competed away. On the other hand, bottom-up premium increases, with more typical capacity, stand a better chance of sticking. The latter situation holds for now.

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Lloyd’s is finally making progress on reducing costs. Meanwhile, the combination of the pandemic and climate change should provide new insurance products — for offshore wind farms, for instance — rather than just more weather-related cover. Expect less shoe gazing, more shoe shopping for those within the Lloyd’s insurance market.

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