The Lloyd's of London market expects to pay £5bn in customer claims related to Covid-19, with its combined ratio already pushed into negative territory
Lloyd’s of London expects claims related to Covid-19 to amount to £5bn ($6.5bn), with £2.4bn ($3.23bn) recovered from reinsurers.
The remaining payouts pushed its combined half-year operating ratio up from 91.7% – the figure calculated by excluding Covid-19 claims – to 110.4%.
This contribution of 18.7% that pushed Lloyd’s combined ratio into negative territory – meaning it paid out more in claims than it collected in premiums – dragged what would have been a half-year pre-tax profit of £1bn without the pandemic, to a loss of £400m ($516m).
Lloyd’s CEO John Neal said: “The first half of 2020 has been an exceptionally challenging period for our people, our customers, and for economies around the world.
“The pandemic has inflicted catastrophic societal and economic damage, calling for unparalleled measures to stifle the spread of the virus, and to get businesses and economies back on their feet.
“Our half-year results demonstrate that our robust approach to performance management and remediation has begun to take effect, evidenced by a significant turnaround in the underlying performance metrics, which give the truest indication of our market’s profitability.”
Lloyd’s half-year underwriting loss contrasts with 2019’s £2.3bn ($3bn) in profit at the same point in the year.
Although without the pandemic, the underlying marketplace performance would have been superior, with 2020’s Covid-19-excluded combined operating ratio of 91.7% a stark improvement on 2019’s 98.8% figure.
Lloyd’s remediation plan and Covid-19
After two consecutive years of losses, Lloyd’s reported a profit of £2.5bn ($3.23bn) at the end of 2019, with investment income and cost-cutting digitalisation countering a combined ratio of 102.1% to push it into profitability again.
The results were credited in part to tighter underwriting, owing to the marketplace’s crackdown on unprofitable business and syndicates, which started in 2018.
Syndicates with three consecutive years of underwriting losses were told to come up with a remediation plan, and all were instructed to either fix or exit the worst-performing 10% of their books – both measures were aimed at achieving profitability in 2019.
Having achieved that goal, Lloyd’s expected to build on it with further profitability, but the impact of Covid-19 may not have reached its peak yet, as the UK High Court is set to hand down a judgement related to the disputed business interruption claim decisions of 16 insurers and encompassing the wording associated with 19 different policies on September 15.
As a global insurance marketplace, legal decisions made in other countries, like the US, where judicial decisions on business interruption claims can vary by state, will also affect the ultimate cost of Covid-19 related payouts made by Lloyd’s syndicates.