Emerging Risks: no problem of human destiny is beyond human underwriters

Published in Insurance Insider's Data Room

John F. Kennedy once said that human kinds’ problems are “man-made, therefore they may be solved by man. And man can be as big as he wants. No problem of human destiny is beyond human beings.”

Kennedy’s optimism, which was legendary in the 1960s, is probably not shared by too many Lloyd’s Underwriters operating in the Casualty, motor and life classes, which produced an underwriting loss, with combined ratios of 100.1 percent, 102 percent and 104.4 percent respectively as reported by the Corporation of Lloyd’s recently.

Man’s capacity for self-harm increasingly appears be outdoing Mother Nature as a source of human loss of life and financial catastrophe. Lloyd’s notes that there have been few notable insured natural catastrophe events with the largest losses arising from winter weather in the US while in terms of man-made losses, the offshore energy sector was affected by a series of large events.

So far, claims from China's Tianjin Port explosion have been largely marine related, but there were also several large specialty class losses in the aviation and space sectors, including the tragic Germanwings airline disaster.

I have been warning for some time of the increasingly interconnected – often man-made - 21^st perils that confront Underwriters in an operating environment where Corporation of Lloyd’s profits fell by almost a third from £3bn in 2014 to £2.1bn last year.

As this publication itself reported, in addition to the increased costs from major claims, the profits were affected by lower investment returns, which fell sharply from 2 percent to 0.7 percent, resulting in a return of just £402mn against £1bn a year earlier.

It seems that the total investment return is the lowest recorded by the Lloyd's market since they began producing annual accounts in 2001. In my conversations with Underwriters I am frequently struck by their resolve, which is maintained despite evidence pointing to the emergence of new complex and often inter-related risks that impact their balance sheets.

Why shouldn’t the market be optimistic, however? After all we have a proud history of responding to crises and delivering bespoke solutions to clients around the world. As Lloyd's CEO Inga Beale said in the Corporation’s latest press release: "Lloyd's is pursuing its strategy to deliver risk solutions to a fast moving world. Industry looks to the Lloyd's market to underwrite policies too complex for others to handle. Protection from cyber-attacks, terrorism and climate change are needed now more than ever."  

These are emerging risks and equally compelling new market opportunities. One general trend is that a lot of reinsurance companies, which have been for many years Nat cat driven, with a strong focus on Nat cat and property insurance are diversifying into the Specialty classes in search of new more profitable revenue streams.

We are witnessing a strong trend towards casualty, which seems to be more interesting than the seemingly endless soft Nat Cat market. Let’s call it a flight to Casualty. The optimists among us will share my view that our market is well equipped to respond to new man made threats.

To paraphrase John F. Kennedy, no problem of human destiny is beyond human Underwriters! We will need to develop a better understanding of the perils that we are creating, however, and it may be time for our sector to invest at least as much of its time and financial resources in new Specialty class models - starting with Aviation and Casualty – as it currently does in the Nat Cat space.