London Market prepared to absorb $200bn loss

An exercise led by Hiscox testing the resilience of the London Market showed that it would be able to cope with a never before seen $200 billion catastrophic loss event.

A consortium of leading London insurance market organisations and associated entities tested two fictional loss events happening in quick succession. The events chosen reflect the changing nature of risk; a highly destructive hurricane, an unprecedented cyber event, one of the largest stock market declines, and a major re-insurer default with consequent delays in reinsurance payments. These simulated events resulted in extraordinary global insurance losses of approximately $200 billion. This amount would be the largest loss ever seen; more than twice the size of losses caused by Hurricane Katrina and at least four times larger than the World Trade Center insured loss.

The ‘dry run’ project involved 28 London insurance market organisations and associated entities. The industry steering group found that within the confines of the exercise, participants considered that they would have access to sufficient practical and financial resources to cope with the losses that would result from such an event, and would be able to serve clients and pay claims fairly at the same time as ensuring continuity of cover to further enhance its pre-eminent global position.

This conclusion relies on the robustness of firms’ reinsurance and recapitalisation arrangements, and the ability of firms to implement these arrangements during a turbulent financial environment. There were no significant liquidity challenges highlighted in the exercise, though it was acknowledged that the simplified nature of the exercise means liquidity could be stressed to a greater or lesser extent in a real-world event.

Karl Hennessy, president, Aon Broking, who led one of the project’s two working groups, said: “This dry run is a demonstration of the London Market’s unique value proposition; namely the ability to bring together specialist underwriters, brokers, claims and other professionals to serve our clients at the time of their greatest need and beyond. In an increasingly competitive global re/insurance market, such exercises, alongside the market modernisation work (London Market Target Operating Model), are essential for London to continue to maintain and evolve its position as the pre-eminent centre of insurance expertise serving clients from across the globe.”

Commenting on the White Paper, the Economic Secretary to the Treasury, Simon Kirby MP said: “As the global hub for insurance and reinsurance, the London Market plays an important role in supporting economic activity in the UK and across the world. Thanks to the efforts of government, regulators and industry, the UK’s financial system is fundamentally strong and pro-active industry-led exercises like this one enhance our ability to identify and manage the risks of the future.”

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