A group of major insurers has held a ‘dry-run’ simulation of catastrophic loss events, which resulted in the highest global insurance losses in history – at approximately US$200 billion – and found that the industry has sufficient liquidity to cope.
The scenario, which was designed to test the industry’s resilience, included an unprecedented cyber event that cut the power supply of 93 million people in the US, one of the largest ever stock market declines at 16%, a category five hurricane that swept Miami, and a major reinsurer default with consequent delays in reinsurance payments.
“We have not had a market-turning event since 9/11 and it is important we understand how one might play out in today’s trading environment,” Robert Childs, chairman of
Hiscox Group – which led the exercise – said of the project’s purpose.
The results, released in a whitepaper yesterday, revealed that despite the large losses forecast, there seemed to be sufficient liquidity in the London market to sustain business.
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Participants reported ready access to additional capital, according to the whitepaper, noting that following several years of low loss experiences and capital inflows, the global (re)insurance market is “currently awash with capital and is thus well placed to respond to most future catastrophes.”
The ‘dry run’ involved 28 London insurance market organisations including Lloyd’s, RSA,
Beazley,
Aon, and Willis Towers Watson, and was facilitated by McKinsey & Company.
The report did raise concerns that the London market is facing competition from Bermuda when it comes to raising equity – capital inflows in Bermuda outstripped that at Lloyd’s in both 2001 and 2005, the report said.
“The exercise highlighted that firms would need to consider a number of simultaneous priorities under complex and uncertain conditions,” Chris Moulder, director of general insurance at Prudential Regulation Authority, said.
“They would need to manage the prompt payment of claims; assess and maintain solvency (recapitalising if necessary); and secure appropriate resources to write new business.”
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