Lloyds loses out on natural disasters

Insurance market Lloyds of London has seen its profits halve thanks to flood, fire and, er, oil spill...

by Emma Haslett
Last Updated: 28 Sep 2010
Anyone in the risk business knows that bad years happen – but for insurance market Lloyd’s of London, which has just announced a 50% fall in profits for the first half of this year, this one has been a real annus horribilis. Chairman Lord Levene places most of the blame on nature: with the Chilean earthquake and the Deepwater Horizon oil spill, the natural disaster count for the first six months of the year has been the ‘worst on record’, apparently. Is it just us, or is trying to claim the Gulf oil spill as a natural disaster somewhat scraping the barrel?

The market has paid out a total of £5.9bn in claims over the last six months - £365m more than a year ago. The most damage was apparently caused by the earthquake in Chile in March, which destroyed half a million houses and affected 2m people – costing Lloyds $1.4bn (£886m) in payouts. And at between $300m and $600m, the bill for the Gulf of Mexico oil spill is also expected to be pretty hefty. But it’s not just catastrophes that have cost Lloyd’s dear – more locally, storms across Europe saw a rise in the number of claims, while third-party motor insurance claims in the UK rose, too.

But it’s not just the hand of God putting a squeeze on profits: governments aren’t doing much to help, either, with low interest rates preventing insurance companies from making any significant returns on their investment portfolios. Lloyds admitted its returns have dropped fairly substantially, from £708m in the first half of last year to £597m this year.

Still, in an interview on Radio 4’s Today programme this morning, Lord Levene seemed fairly upbeat about the situation. He pointed out that it’s not Lloyds’ fault its profits are down – indeed, research by Munich Re has shown the total cost of natural disasters to the global insurance industry in the first half of this year has been $22bn – twice the average for the last 10 years. ‘We’ve seen a higher number of catastrophes this year than we have seen for the past 20 years,’ said Levene. ‘We have not had a bad year. We’ve just had more claims to pay.’

In other words, risk is like busses – wait for ages, and half-a-dozen incidents come along at once. The trick is to out-perform the market. And it’s worth pointing out that Lloyds’ model is unusual – instead of being one large company, it is a society of members who underwrite insurance individually through syndicates, so these results are a sort of average of its members’ performances.

And the company finished off by issuing another blow to Commonwealth Games organisers, mere days before the opening ceremony, confirming rumours it had decided not to insure the games because there was ‘not enough information to price the risks involved satisfactorily’. In other words – the event was deemed too risky to insure. With all the controversy already doing the rounds (not to mention buildings collapsing all over the place), that’s got to hurt.

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