15 September 2015 Insurance

Lloyd’s considers forming ‘incubator’ syndicate to write experimental risks

The Lloyd’s Market could form a new syndicate funded by a consortium of Lloyd’s players dedicated to writing new and innovative risks, Inga Beale, the chief executive of Lloyd’s, told Monte Carlo Today.

The project could be run in conjunction with a leadership programme Lloyd’s runs with London Business School (LBS), designed to develop leaders within the market with the skills to anticipate and respond to the changing nature of the global insurance industry.

“We have been asked to look at the possibility of forming what would be an incubation syndicate,” Beale said. “The idea is that a number of capacity providers might participate adding different brains and ideas in an attempt to get a better handle on some of the new and emerging risks facing the industry.

“We have some excellent people going through the LBS programme and this could be an area they work on as part of that. It would be a way of innovating and experimenting with what might be possible while also having a substantial safety net in place in the form of the market.”

Beale said that the seed of the idea came from feedback received in the aftermath of the issuance of the Lloyd’s City Risk Index, a report issued by the market on September 3, which presents the first ever analysis of economic output at risk (GDP at risk) in 301 major cities from 18 manmade and natural threats over a 10-year period.

Based on research by the Cambridge Centre for Risk Studies at the University of Cambridge Judge Business School, the index finds that a total of $4.6 trillion of projected GDP is at risk from manmade and natural disasters in these cities around the world.

It found, however, that many of the perils that preoccupy the re/insurance industry are rapidly slipping down the list of the biggest threats that face society.

Manmade risks such as market crash, power outages and nuclear accidents are becoming increasingly significant, associated with almost half the total GDP at risk.

A market crash is the greatest economic vulnerability—representing nearly a quarter of all cities’ potential losses.

New or emerging risks, such as cyber attack, are also increasingly significant. Together, they account for more than a third of the total GDP at risk with just four—cyber attack, human pandemic, plant epidemic and solar storm—representing more than a fifth of the total GDP at risk.

Beale said the report brought home to her the extent to which the industry needs to innovate and change if it is to keep pace with the changing nature of the threats facing society. She hopes the report will act as a catalyst for governments, re/insurers and other stakeholders to start to collaborate and work together in a way that will ultimately help society better manage these threats.

She feels Lloyd’s is uniquely positioned to take a central role in this process, and the creation of a so-called incubation syndicate would be a tangible step in the right direction.

More innovation

Beale is also driving innovation in other ways. The market’s Emerging Risks team, which is responsible for identifying and assessing new and/or developing risks, is working on a project designed to help the market get a better handle on business interruption risks.

“We have embarked on a project to gain a holistic understanding of this risk, examining all the different effects it could have on a business,” Beale said. “I don’t think we are very good at understanding the impact on the supply chain.”

A separate project has also been kick-started. This will ultimately apply Lloyd’s Realistic Disaster Scenarios (RDS), which stress-test both individual syndicates and the market as a whole in relation to different risks, specifically cyber risks for the first time.

Beale said the project will take six months to complete but the aim is that the market will eventually have a sense of the probable maximum loss (PML) in relation to cyber risk. In turn, this will help the market better understand this risk and, ultimately, better underwrite it.

Beale said part of her motivation around such projects stems from a frustration that the market is so sophisticated in its understanding of certain risks—such as wind and earthquake—and spends so much time looking to understand them better, yet so little on new risks, which are increasingly the biggest society faces.

“The fact is that the industry invests millions on catastrophe risk models and analysis to better understand risks such as US wind or earthquake but a fraction of that on new risks.

“Especially in recent years, when margins have been squeezed, innovation and investing in research and development has not been at the forefront of people’s minds.

“That needs to change now and I want Lloyd’s to take a front seat in driving innovation forward.

“The risk landscape is changing and governments and the re/insurance industry both need a wake-up call so that real innovation can start to take place that will ultimately help manage these new threats.”

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