Natural Disasters Sink Lloyd’s of London’s Profits

Insurance market Lloyd’s of London announced a loss of 516 million pounds ($800 million) for 2011 after paying out a record 12.9 billion pounds ($20.6 billion) to victims of natural disasters.

Vehicles are crushed by a collapsed wall at a carpark in Mito city
Photo: Jiji Press | AFP | Getty Images
Vehicles are crushed by a collapsed wall at a carpark in Mito city

Last year saw the second-highest rate of payouts for natural disasters on record, after the Japanese earthquake and tsunami devastated parts of the country, according to the Sigma report from Swiss Re.

Flooding in Australia in January, the Christchurch earthquake in New Zealand in February, and floods in Thailand also contributed to total claims from natural catastrophes for the insurance industry rising to $107 billion in 2011.

Lloyd’s combined ratio – a key measure for how it is performing – finished the year at 108 percent, up from 93.3 percent in 2010. A ratio of above 100 percent indicates that it paid out more than it received in premiums.

“We have a coincidence of relatively subdued premium rates and low investment returns because we invest generally in very liquid assets: cash and bonds mainly; and then the catastrophes,” Lloyd’s Chairman John Nelson told CNBC.

“If you look at the loss, it’s a big number of absolute terms, but if you compare it with our assets it’s less than 1 percent. Our financial strength is unimpaired. We feel that the quality of the underwriting was extremely well done.”

He issued a cautious outlook for 2012, saying it would “probably continue to be quite difficult” as insurance companies’ investments continue to make relatively low returns.

“The complete unknown is the catastrophe picture, and it would be a brave man to make a forecast for that,” he added.

The events in Thailand were a particularly bad shock for the industry, which had underestimated the number of manufacturing companies affected by the disaster and the value of properties damaged, according to Swiss Re.

The pressures on the industry are likely to lead to increased premiums, Lucia Bevere, senior catastrophe data analyst at Swiss Re, told CNBC.

“For the insurance mechanism to continue to be viable, risk has to be reflected in insurance premiums,” she said.

“Despite this big burden for the industry, it coped well despite a challenging economic environment. It’s well capitalized despite the financial crisis.”