Lloyd’s set for massive payout, COVID-19 to result in record losses for industry

By Amir Sadiq

Lloyd’s yesterday revealed that it expects to pay out in the range of $3bn to $4.3bn to its global customers as a result of the far-reaching impact of COVID-19, although losses could rise further if the lockdown measures continue into another quarter.

The scale of losses would be on par with 9/11 in 2001 and the combined impact of hurricanes Harvey, Irma, and Maria in 2017, all of which led to similar pay outs by the Lloyd’s market.

It also added that once the scale and complexity of the social and economic impact of COVID-19 is fully understood, the overall cost to the global insurance non-life industry is likely to be far in excess of those historical events.

Getting a better understanding

To understand the impact of the pandemic on the global non-life insurance industry, Lloyd’s undertook an economic study of the potential losses. This looked at both underwriting losses through the Profit and Loss Account, as well as the reduction in the value of investments which insurance companies hold to fund future claims payments. The economic study took account of the current pay out estimates assuming continued social distancing and lockdown measures through 2020, as well as the forecast drop in GDP globally.

The estimated 2020 underwriting losses covered by the industry as a result of COVID-19 are approximately $107bn, on par with some of the biggest major claims years for the industry, such as when three catastrophic windstorms have struck in single year (2005: hurricanes Katrina, Rita and Wilma; 2017: hurricanes Harvey, Irma and Maria).

Importantly though, these natural catastrophes were geographically contained events, occurring over the course of hours and days – vastly different in nature to the global, systemic, and longer-term impact of COVID-19.

In addition, unlike other events, the industry will also experience falls in investment portfolios of an estimated $96bn, bringing the total projected loss to the insurance industry to $203bn.

“The global insurance industry is paying out on a very wide range of policies to support businesses and people affected by COVID-19. The Lloyd’s market alone is currently expected to pay claims amounting to some $4.3bn, making it one of the market’s largest pay-outs ever,” said Lloyd’s CEO John Neal.

“What makes COVID-19 unique is not just the devastating continuing human and social impact, but also the economic shock. Taking all those factors together will challenge the industry as never before, but we will keep focused on supporting our customers and continuing to pay claims over the weeks and months ahead.”

“Alongside making record pay outs, we have been turning our attention to what more we can do to support business and society through this incredibly difficult time. In addition to our £15m ($18.3m) package of charitable donations, we have set aside £15m in seed capital to explore how the industry can create or house structures which support economic recovery and mitigate against future events of this magnitude. We are also working with our advisory committees to develop a number of initiatives to support our customers and economic recovery in the short, medium and long-term.”

Initiatives for the present and future

In addition to managing wide-ranging pay outs across sectors and geographies, the experts, entrepreneurs, and innovators drawn together by the Lloyd’s market have already started creating new policies to support the immediate health response as well as the longer-term exit strategy.

This includes the search for diagnostics, treatments, and vaccinations, where one Lloyd’s syndicate is insuring more than 100 individual clinical trials taking place around the world investigating all stages of COVID-19.

Sitting alongside the £15m package of support for charitable organisations responding to the pandemic, Lloyd’s is also repurposing existing innovation initiatives in its Innovation Lab and Product Innovation Facility to help fast track development of insurance products to support the response to COVID-19.

Lloyd’s plans to announce a series of further initiatives in the coming weeks as it continues to work with government, industry, and business to support the short, medium, and long-term response to COVID-19. One initiative under consideration includes establishing a ‘Recover Re’ insurance vehicle offering “after the event” cover for pandemic related business recovery, including the current COVID-19 pandemic.

Asia Insurance Review

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