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May 14, 2020

Lloyd's provides initial COVID-19 estimates

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Lloyd's has announced to the LSE this morning its estimated aggregate losses from COVID-19. The announcement which is available here in full states that the market will pay out in the range of £2.5bn (US$3.0bn) to £3.5bn (US$4.3bn).

The announcement puts the COVID-19 estimate into context with previous catastrophe payouts by Lloyd's: "This is on a 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. The estimate of losses (which could rise further if the current lockdown continues into another quarter) is based upon two scenarios submitted by all the syndicates in the market:

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

The estimated COVID-19 impact for the entire global insurance industry is mentioned: "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 (2005: hurricanes Katrina, Rita and Wilma; 2017: hurricanes Harvey, Irma and Maria)."

COVID-19 is however unlike other events as the announcement states "....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" which makes estimating the likely COVID-19 losses more difficult at this time and as the announcement says "We believe 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."

This is because COVID-19 has also effected (re)insurers' balance sheets which the announcement mentions "....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", accounting therefore for about half the total industry estimate at this time.

The announcement provides a split of the estimate by geography and classes of business:

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

John Neal, CEO of Lloyd’s, said: “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."

Reuters and the FT have additional comments from John Neal in articles available here and here.

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.

Syndicates will report their updated 2018 forecasts and a complete set of 2019 Account estimates on the 27th May.

Please read the full Lloyd's announcement for further detail.

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Initial comment: this announcement ties in with the PwC estimate of £3.4bn which was referred to in our recently published presentations.

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