Lloyd’s estimates non-life pandemic industry loss at $107bn

Lloyd’s of London, the specialist insurance and reinsurance marketplace, has estimated that the non-life insurance industry faces as much as $107 billion of losses from the Covid-19 coronavirus pandemic to the 2020 underwriting year alone.

It’s a massive figure, sitting above the top-end of consensus estimates and reflects the enormous toll that the industry faces, in terms of paying claims to its customer base.

Being non-life only, the true industry loss impact is clearly a lot higher and as this is only based on the 2020 underwriting year, there is also the potential for a tail of claims to flow for some time to come, inflating the figure even higher.

Lloyd’s said this morning that its own portion of the non-life insurance market claims is expected to be from $3 billion up to $4.3 billion, a similar level of loss to 9/11 in 2001, or to the 2017 hurricane season claims.

The figure could rise as well, as Lloyd’s modelling has been based on lockdown continuing through the second-quarter of 2020, but gradually being released thereafter.

Any prolonging of the lockdown, or second waves of the coronavirus, could inflate the claims figures further it seems.

In summary, Lloyd’s said 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.”

John Neal, CEO of Lloyd’s, stated, “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. What makes COVID-19 unique is the 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.”

To better understand the total claims impact to the global non-life insurance industry, Lloyd’s looked at both underwriting losses and investment declines, to ascertain the financial impact to non-life companies.

This study took into account the current pay out rates, assuming continued social distancing and lockdown measures through 2020 that begin to be released after Q2, as well as the forecast drop in GDP globally.

From that study, Lloyd’s forecasts a $107 billion claims burden for the non-life insurance and reinsurance industry, on par with some of the largest catastrophe years on record, including 2005 and 2017.

On top of this, Lloyd’s estimates that the investment hit to non-life insurers is around $96 billion, giving a total loss to the insurance industry of $203 billion.

Just yesterday, analysts consensus was reported to be emerging with an expected industry loss range of $30 billion to $100 billion.

Straight away, Lloyd’s forecast blows through the top of that, demonstrating that the impact could be more significant than thought, particularly as this estimate is for non-life claims from the pandemic only.

Willis Towers Watson had estimated that at the extreme scenario of loss estimates the total would only be $140 billion. Based on what we eventually will know about the impacts of Covid-19 and how it manifests in insurance claims, that figure doesn’t seem impossible now, if Lloyd’s modelling is seen to be accurate.

As ever, the reinsurance and insurance-linked securities (ILS) industry will take their shares. How much flows through to ILS funds and structures remains to be seen, but the quota share market could see itself being called on for significant support, where wordings didn’t exist or weren’t sufficient.

Lloyd’s said that the payouts to its customers are split as follows:

• Geography: US & Worldwide (58%), UK 15%, RoW (10%), Europe (7%), Other (10%).
• Class of business: Event Cancellation (31%), Property Covers (29%), Credit Lines (11%) and 15 Other Classes (29%).

Lloyd’s also said, “Some $28bn is expected to be paid in 2020 across a wide range of policies, including Event Cancellation, Property and Travel. Further pay-outs are expected as the effects of COVID-19 continue to unfold, across classes such as Directors’ and Officers’ policies, Professional Indemnity and Credit insurance.”

It’s estimate for $3 billion to $4.3 billion of Lloyd’s market loss is based on two scenarios:

i. Submitted totals together with estimated downside uncertainty range up to and including 16 March 2020.

ii. Submitted totals together with estimated downside uncertainty range as well as assuming material social distancing rules and restrictions persist regionally and/or globally until 30 June 2020.