Lloyd's bemoans lack of natural disasters

You'd be forgiven for thinking the lack of tsunamis recently was a good thing. Not according to Lloyd's...

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Last Updated: 31 Aug 2010

Insurance business Lloyd’s of London reported another record annual profit today: £3.85bn in 2007, up 5% from the previous year’s figure of £3.66bn. However, it moaned that the outlook for 2008 was a lot more gloomy – apparently there just aren’t enough ships sinking, aeroplanes falling out of the sky or large geographical areas being devastated by floods. Doesn’t your heart just bleed?

This lack of catastrophic natural disasters or man-made accidents is a double-edged sword for the venerable insurer. In the last two years, it’s allowed it to avoid the enormous pay-outs of previous years (as after Hurricane Katrina), allowing it to generate record profits. But the problem is that after a while, insurance premiums start coming down (by 5 to 20%, apparently) – which means Lloyd’s profit margins start shrinking too.

To prevent this equally catastrophic outcome, chief executive Richard Ward says its 75 underwriting syndicates ‘must, must be disciplined in the business they write’. In other words, the insurer will be better off refusing some customers altogether rather than underwriting their low-margin business. We can’t help wondering where these people will go for insurance instead if Lloyd’s turns them away, but we suppose that’s not Ward’s problem.

Further proof of Ward’s caution comes from Lloyd’s ‘combined ratio’, which shows what proportion of the money it took from premiums was paid out to cover claims – last year this rose slightly, to 84%. In some areas of the business – notably motor insurance – Lloyd’s actually paid out more than it took in. This might please everyone outside the insurance industry, but it doesn’t do Ward’s numbers much good.

One possible  area of solace for Lloyd’s could be its international expansion into emerging markets – it has big plans for China, where it opened an office last year, and it also plans to crack Brazil. Ward will no doubt be crossing his fingers that there’s a typhoon gathering over the South China Sea even as we speak, to make sure he can keep his profit margins up to scratch...

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