Study: London Market Could Withstand $200 Billion Loss

A recent stress test on the financial condition of the London insurance market shows that it could withstand a $200 billion loss without crumbling.

The test, led by Robert Childs, Chairman of Hiscox, was designed to examine how prepared the London market is to support its clients in the event of a major catastrophe. The scenario used to examine market conditions consisted of a substantial cyber-attack, a highly destructive hurricane, and a massive stock market decline.

Results showed that an extreme loss, such as one that could be sustained by these events, would dip into the companies’ reserves, but would not cripple the market.

According to Childs, the London market has not been severely tested since the major U.S. terror attack on September 11, 2001. Since then, developments in the marketplace have changed how insurance and reinsurance companies manage such market-turning events. However, this test simulated the largest loss that the insurance industry has ever experienced.

The test was developed with input from catastrophe-modelling firm RMS and Lloyd’s of London. Lloyd’s, the top performer in the market, is essential to the London market, and it is important that its high-achieving position is not affected.

Prior to the stress test, the Surplus Lines Stamping Office of Texas conducted its own analysis on the condition of Lloyd’s of London and produced an infographic on the results in April 2016.

In Texas specifically, Lloyd’s of London is a major insurer in the surplus lines market, consistently ranking highest in terms of premium. In 2016, Lloyd’s was responsible for 26% of the filings in the state.

In addition, Lloyd’s writes a majority of the policies for certain classes of business in Texas. It wrote 44% of Texas flood premium, 64% of cyber liability premium, and 60% of terrorism premium in 2016.

This study reaffirms the strength of Lloyd’s and the London market as a whole. It is encouraging to see that insurers have evolved over time and that the industry is capable of sustaining itself in the event of a disaster.