Lloyd’s of London warns insurers climate-related pain is still to come

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Lloyd’s of London has warned insurers that the full impact of climate change has yet to translate into claims data despite annual natural catastrophe losses borne by the sector topping $100bn.

Insurance prices are surging as companies look to repair their margins after years of significant losses from severe weather to insured properties, exacerbated by inflation in rebuild costs. A warming planet has been identified by insurance experts and campaigners alike as a key factor. 

But at a private event last month, one executive at the corporation that oversees the market told underwriters that it has not yet seen clear evidence that a warming climate is a major driver in claims costs.

Kirsten Mitchell-Wallace, the market’s director of portfolio risk management, predicted that this effect will however magnify future losses — and called for urgent action from firms to invest in modelling and improve their underwriting.

“Losses are already increasing, so climate change is likely to amplify these increases,” said Mitchell-Wallace, according to a transcript of her remarks seen by the Financial Times. “By the time we can definitely see the impact in claims, it will be too late.” 

The prediction suggests that a sharp rise in home and property insurance prices, which has already created an affordability crisis for households and businesses in at-risk areas, has yet further to go.

Lloyd’s, a centuries-old marketplace where brokers and insurers come together to agree coverage for a range of risks, is one of the global hubs for property catastrophe reinsurance, which pays out when a home or business is damaged by hurricanes, storms, wildfires and other events.

US thunderstorms, floods in New Zealand and other natural catastrophes left the global insurance sector holding an estimated $50bn of losses in the first half of this year, the second worst start to a year since 2011, according to data from reinsurer Swiss Re. Years of $100bn in annual losses have been described as the “new normal” due to a mix of factors including urban sprawl. 

The prices charged by reinsurers, who share losses with primary insurers, rose by as much as 200 per cent in January. The move has already caused ructions among direct insurers, contributing to the decisions of insurers such as State Farm to stop underwriting new home cover in California. Last month, California’s insurance commissioner announced a series of executive actions intended to stabilise the local market.

Acknowledging that the impact of climate change varies by region and each so-called “peril”, such as wind, fire and flood, Mitchell-Wallace called for a “well-considered” approach from the market with investment in analytical technology weighted towards those threats that pose a bigger threat to portfolios.

The next key test for the insurance market will be the coming January renewals. Analysts and executives generally describe a more orderly build-up than last year, where discussions were strained as reinsurers demanded tougher terms and conditions and substantial increases in premiums.

But some predict reinsurers’ appetite for taking on natural catastrophe exposure will remain restrained. “Capacity is still likely to be restricted due to global [catastrophe] losses continuing at record levels,” Adam Gerrard, head of corporate risk and broking at Willis Towers Watson, one of the world’s biggest insurance brokers, told the FT.


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