London Views
By LEN WILKINS
London Correspondent
Years ago, there was an organization called the Lloyd’s Brokers’ Committee. When Lloyd’s decided it would no longer approve Lloyd’s Brokers, the organization changed its name to the London and International Insurance Brokers’ Association. LIIBA’s main job is supporting brokers who use the London market.
Occasionally, LIIBA does something notable, and its latest headline-catching moment is an analysis showing that the global transition to Net Zero will provide brokers the opportunity to double the size of the London market.
LIIBA CEO Christopher Croft revealed the figures during a presentation to the All Party Parliamentary Group on Insurance and Financial Services. He quoted the London Market Group’s 2020 report, London Matters, which shows that the market’s total written premium is $110 billion. He said that LIIBA’s analysis shows that the move to Net Zero would produce the need for $125 billion of additional insurance premiums.
In making the analysis LIIBA members worked alongside the Oliver Wyman international management consultancy which specializes in green matters. According to data supplied by Oliver Wyman, achieving Net Zero will necessitate $5 trillion of global investment in green energy projects annually until 2030. LIIBA used the insurance expertise of its members to establish the average ratio between insurance premium and total investment for these relevant capital projects.
“For the first time, LIIBA and its members have been able to quantify the level of insurance growth produced by the race to achieve Net Zero, and it’s a huge sum,” Croft said. “If a significant proportion of that $125 billion came to London, it would transform our market and London’s standing for decades to come. It will also help deliver growth in U.K. export earnings, U.K. GDP and employment.”
LIIBA believes that London’s brokers have a unique combination of skills and expertise that will enable their clients to make the changes necessary to achieve the net reduction in carbon emissions required. They believe the key for London is to ensure it seizes upon this once-in-a-century opportunity for brokers and risk carriers by working together to give clients the guidance and the capital backing they need.
From Russia with love
When the Lloyd’s community is asked what the market’s largest ever loss is, they usually reply the $3.7 billion damages caused by hurricanes Katrina, Rita and Wilma almost 20 year ago.
It now appears there is a new kid on the block, and this loss could reach $10 billion plus, courtesy of Russian President Vladimir Putin.
The loss relates to the seizure of 500-plus foreign-owned aircraft that were leased by Russian airlines to operate both internal and international flights. Russia seized the airplanes as retaliation against Western sanctions and unilaterally transferred ownership of the aircraft to the Russian aircraft register, which stops the leasing companies from taking the aircraft back.
Until now, the loss was a potential problem for the future, but during the last few days both sides in the dispute appointed lawyers, and formal claims are expected to be deposited shortly.
The way the leases operated is that the Russian airlines paid the leasing companies (mainly based in tax havens) a monthly hire fee for the use of the aircraft. The airlines insured the aircraft locally. With the aircraft seized, the leasing companies requested that local Russian insurance companies pay them the lost aircrafts’ value.
London aviation policies use an exclusion known as AV48B that excludes loss for confiscation, nationalization or detention. Unfortunately for Lloyd’s, the aviation market also sells aviation war insurance, and the cover provided by LSW555D picks up the AV48B exclusions.
To protect themselves, the leasing companies in turn buy contingency insurance from Lloyd’s. Cover is for aircraft not in the care custody or control of the leasing company. While the policies cover the risks excluded by AV48B, there is a general exclusion that state’s confiscation, nationalization and detention by the government of registration or local authority with jurisdiction is excluded, and Lloyd’s will be relying on this exclusion.
The leasing companies now want either their aircraft returned or their money back from Lloyd’s.
The lawyers’ advice is that, effectively, Russia stole the aircraft. Lloyd’s asked a U.K. law firm, Clyde and Company, for advice on whether it can deny liability for these losses. While Lloyd’s is looking for deniability, the policyholders believe they have a valid case, so it looks as if these claims are headed for the U.K. courts.
All of which means that a potential major loss could run for years, and Lloyd’s will incur large legal fees.
Another major concern is that aviation insurers reinsured each other and re-created the LMX reinsurance spiral which nearly destroyed Lloyd’s in the late 1980s and early 1990s. Fortunately, some of the exposure is covered by reinsurers such as the Munich Re and Swiss Re.
Naturally, Lloyd’s says this is not a major problem. Even though Lloyd’s concedes the market is facing some of its biggest ever losses, Chief Executive John Neal insists these losses are manageable.
Best and Fitch stable on London
AM Best recently gave the London market a stable outlook. Even though the rating agency may not have been able to crystal ball the full effect of the Ukraine conflict, it believes London’s loss from the war will be manageable.
Best liked the continued upward premium movement in the market; the reduced uncertainty over the cost of Covid-19, and the effort being made to modernize the market, which should reduce costs and offer third-party capital greater access to the market.
Best didn’t like that climate change makes life difficult for catastrophe exposure modelers; adverse claims inflation makes accurate reserving more difficult; supply chain difficulties increase losses, and the Ukraine conflict creates claims uncertainty.
At the moment, it’s difficult to argue with any of Best’s findings. The market had satisfactory January and April renewal seasons, and, apart from Russia, no one is doing anything stupid.
Rating agency Fitch also went for a neutral stance on London, but that is a downgrade from improving. Fitch sees problems with claims inflation, financial market volatility and weakening pricing.
So far, prices have not weakened, but admittedly, the rate of increase has reduced.
Lloyd’s speeds up Blueprint Two
Lloyd’s has run a number of workshops to help the market understand and operate the second stage of modernization. There are three core activities in stage two of market modernization. They are open market placement, delegated authority placement and claims.
The workshops primarily were aimed at chief operating officers and those working directly at market firms on the planning and implementation of Blueprint Two solutions. The intention is that the information will filter down to other staff. Attendance was online and in person. More than two hundred senior market personnel attended the three workshops.
Interested? The slides and recordings of the workshops are available on the Lloyd’s website.
Decarbonization and climate change
Grinding away in Lloyd’s background is Lloyd’s Lab. Twice a year groups are invited to present their ideas to the expert panel of Lloyd’s and market stakeholders. Dozens of partnerships and new products have been developed that vary from delivering Covid vaccines to measuring carbon footprints.
The groups get access to Lloyd’s building and facilities for 10 weeks. The groups may be start-ups, scale-ups or mature companies. They develop their ideas, test innovative solutions and create insurance products to address the issues and challenges facing the Lloyd’s market.
The next group of InsurTechs was selected based on solutions geared toward four key themes: decarbonization and climate change; supply chains; data and models, and claims.
Beazley reports increase in GWP
One of Lloyd’s most respected managing agents, Beazley, recently reported on its first quarter activities during which Beazley’s gross written premiums rose 27 percent in Q1 to $1.23 billion. The increase isn’t all due to the renewal season boost, because overall renewal rates rose by 17 percent, despite some moderating in some business lines. The carrier expects losses of about $50 million net of reinsurance from the Ukraine conflict, but this excludes aviation claims.
Beazley investments showed losses of $92 million, as U.S. Treasury yields recorded their largest quarterly increase in more than 40 years, generating significant losses in fixed income investments. Beazley expects returns of around 1.5 percent for the rest of the year.
Like most London market operations, Beazley had little property exposure in the Ukraine. It is exposed in its books of political violence, trade credit, aviation and marine business. So far, it has seen only a small number of claims. Beazley reviewed all areas of its underwriting portfolio to identify those classes that may be directly impacted by the conflict. Its review is predicated on the current scope of the conflict and does not contemplate further escalation.
Regarding its potential aviation losses, Beazley said, “The number above does not allow for potential claims for aircraft stranded in Russia as the environment is complex and the outcome uncertain. However, were we to include these our combined ratio guidance would remain unchanged. We have also not included potential second order impacts, such as D&O, within this estimate.” At present, Beazley expects a sub-90 percent combined ratio.
Broker sells for $650 million
Lloyd’s oldest broker has been sold to Australia’s AUB broking and agency group for $650 million. Tysers was the last of Lloyd’s independent brokers and was popular among underwriters for its traditional way of operating. Its revenues last year were $238 million, which doesn’t show the broker at its best. GWP was badly hit by Covid-19 and fell from $3.12 billion to $2.60 billion. At the moment, Tysers employs 1,100 staff, but there are plans to sell off its retail business and concentrate on wholesale business.
The right to work at home battle
Prior to Covid-19 most London insurance staff traveled miles from the suburbs into Lloyd’s and the numerous offices nearby. In March 2020, a national lockdown occurred, and underwriters, brokers and their support staff learned how to work from home. As vaccinations became more available, there was a gradual drift back to work, but many people preferred to work from home saving money and time on traveling to the office. By February 2022, under a Living-with-Covid plan announced by the U.K. government, employers expected their workforce to return. Many haven’t.
Lloyd’s and London employers find that their workforce is bifurcated. Some want to stay at home for most of the week and others are prepared to work in the office full time. Reasons for wanting to work from home vary.
The problem for employers and their insurers is the scope of potential claims that may arise out of the new, evolving work environment. While employers need to be sympathetic to these problems, they may have the right to require employees to return to work.
This system of hybrid working has implications for both sides, and problems are beginning to surface. For the employer, there is fear that putting pressure on staff to return could drive them out the door, and claims for discrimination, constructive dismissal and bullying could also be made.
For Lloyds and London insurers the problems are: finding how to get the best output while avoiding the drawbacks and how to avoid claims if they write employers liability business.
New market development manager
The days when Lloyd’s underwriters sat in their boxes and waited for the business to come to them are long gone. These days Lloyd’s promotes its image and has appointed development managers in many parts of the world, the latest being Central America.
Leading the attempt to boost Lloyd’s business in Central America is Yelhis Hernandez, who already has Lloyd’s experience as country manager for Mexico. She will combine the two roles. Hernandez will keep her base in Mexico City where she has worked since September 2019 improving Lloyd’s market access across Mexico.
In her new role, she is responsible for developing access to Lloyd’s across the entire Central America region, which includes Belize, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua.
Hernandez has 20 years of experience in the insurance and reinsurance sectors and spent the last 10 years working in a variety of roles in risk management, mergers and acquisitions, strategy and business development, in different markets across Latin America, including Argentina, Venezuela, Brazil and Mexico. Before joining Lloyd’s, she was chief operations officer for Willis Towers Watson in Mexico.
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