Ida could be $40bn, catastrophe allowances must rise: John Neal, Lloyd’s

According to John Neal, the CEO of insurance and reinsurance market Lloyd’s, hurricane Ida has the potential to be a $40 billion industry loss event and recent catastrophe frequency and severity suggest that re/insurers catastrophe allowances must rise.

Neal explained in an online discussion yesterday that 2021 could be another challenging year for performance of Lloyd’s players, with catastrophe losses the main issue.

He explained that the US winter storms earlier this year may result in as much as a $20 billion insurance and reinsurance market loss, while the European floods and storms this summer are seen as a particularly local and “punchy” loss, with estimates of up to $12 billion seeming accurate.

Then, on hurricane Ida, Neal explained that this has the potential to exceed current market expectations.

“Ida could be $40 billion cat, I mean we’ll see as it develops,” Neal said.

“But even taking all those into account, wearing a Lloyd’s hat, we would have exceeded our allowances for Ida, but probably by about a point, assuming full allowance for Q4. So all things being equal you’re still looking at a sub-95 combined ratio for the market for the full-year,” he explained.

He then went on to explain what needs to happen longer-term, to ensure loss trends are being accounted for and to keep the market profitable, with a particular focus on catastrophe risks.

“I think there’s a reality that the allowances that people set aside for cat have got to go up,” Neal said.

“I mean they’ve just got to go up. We’ve got numbers, we’ve got such a great data set at Lloyd’s, it’s a 25 year dataset and is the envy of many, so we know mathematically what the allowances should be.

“But when you look at trends of frequency and severity, your cat allowances have got to go up.”

Neal then explained how with allowances and budgets for catastrophe losses needing to rise, the industry has to do its bit to keep insurance and reinsurance more affordable.

“You’ve got to do two things. One, you’ve got to reduce the cost of doing business, because we’ve got to take cost out to ensure that the product can be priced at a level the customer wants to buy. But we’ve got to keep working on that additional loss ratio, so for us it’s hovering around 50%, it probably needs to be around two or three points better, with a bit more provision going into the cat allowances,” Neal said.

Neal’s comments align with our recent discussion about catastrophe capital charges and the fact rating agencies may adjust their cat loading factors, in the wake of recent loss activity and under the threat of climate change.

If catastrophe allowances need to be increased, one other way underwriters at Lloyd’s can help to moderate how this impacts their businesses and the ultimate costs of insurance and reinsurance, will be by tapping into capital market investor appetite for catastrophe risk, so sharing a portion to enable them to bear the higher loads.