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Insurance prices in Europe will have to rise, the chief executive of Lloyd’s of London has warned, as insurers respond to the summer’s spate of extreme weather events.
The continent has been hit by a series of natural disasters in recent months, from heatwaves and wildfires to storms and floods, leaving thousands of people devastated.
But while the price of insurance has risen sharply in the US over the past year to cover growing weather risks, the European market has been more subdued.
The prices that individuals and businesses pay are often determined by the cost of reinsurance – the cover that insurers buy to protect themselves. According to John Neal, chief executive of Lloyd’s, reinsurance prices in the US have risen by between 20 and 40 per cent in the past year, while prices in Japan have also risen sharply. In Europe, prices have risen by only 10-12 per cent.
“I think you’re going to see a much stronger price movement for European reinsurance business,” he said in an interview on Thursday, adding that reinsurance price increases would feed through to primary insurance costs, particularly in areas such as property cover.
Neal said extreme weather events were changing the way insurers think about climate risks. “When we look at weather-related losses, the reality is that it’s changing and we need to be much smarter in the way we underwrite and measure risk.”
He added: “Weather patterns, which are a function of climate change, are changing. I don’t think you can just rely on past data and say ‘this is what happened in the past, so this is what will happen in the future’. I think there’s a lot more we need to do to understand what changing weather patterns mean.
His comments came as Lloyd’s reported results for the first half of the year, swinging to a pre-tax profit of £3.9bn from a £1.8bn loss in the same period last year as it benefited from both rising insurance prices and better investment returns.
Underwriting profits more than doubled from £1.2bn to £2.5bn as insurance and reinsurance prices rose by 9 per cent across the market and customers bought more cover.
“There is a recognition that we are living in more challenging and riskier times,” said Neal. “Society – whether individuals, companies or governments – is more inclined to think about how to manage the financial impact of risk by transferring liability.”
The combined ratio – a measure of claims and expenses as a proportion of premiums – improved from 91.4 per cent to 85.2 per cent. “We haven’t been close to that [level] for a couple of decades,” Neal said.
Lloyd’s also benefited from better returns on its £100bn investment book, which yielded 3 per cent as interest rates rose, compared with less than 1 per cent a few years ago. Neal predicted that the yield would rise to closer to 4 per cent.
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