Lloyd’s of London is bracing for a £1.25bn hit from the grounded planes, stranded cargoes and bad debts caused by Russia’s war in Ukraine, as the specialist insurance market starts to feel the losses caused by the conflict.
John Neal, Lloyd’s chief executive, said there was still significant uncertainty over the level of insurance claims from Ukraine, but the market had a good idea of the exposed areas so far and had calculated a “very firm financial reserve”.
“Our view has always been — get your arms around what you think the loss could be and reserve it,” Neal told the Financial Times, pointing out that only 4 per cent of expected claims had been received.
A big part of the uncertainty comes from a legal struggle between aviation insurers and their policyholders, which has meant some insurers have shied away from predicting claims levels. Aviation accounts for roughly a quarter of expected Lloyd’s payouts, with losses also expected from insurance lines such as marine and credit.
Neal said the Ukraine war was not a “critical” event for the market itself, damping earlier fears of a multibillion-dollar loss. He predicted Ukraine-related losses could reach £10bn to £15bn across the insurance sector.
Lloyd’s also has to cope with a growing list of sanctions arising from the war, where restricting access to the global insurance market is being used as a key policy tool against Moscow.
The market, which published aggregate half-year figures on Thursday, said it had taken £1.1bn of the Ukraine hit, net of reinsurance, in the first half. Despite that, and other headwinds such as inflation in claims costs, it posted an underwriting profit — an aggregate figure for the more than 50 insurers that operate in the market — of £1.2bn, up from £1bn in the same period last year.
The combined ratio, which measures claims and expenses as a proportion of premiums, was 91.4 per cent, its best level since 2015 and helped by lower expenses and an upswing in insurance prices that has now stretched for five years.
After a huge sell-off in bond markets from rising interest rates, Lloyd’s took a £3.1bn mark-to-market loss on its investments that left it with an overall pre-tax loss of £1.8bn.
Neal stressed the loss would unwind and that higher yields would deliver investment returns of £3bn a year in 2023 and 2024.
Lloyd’s and the wider insurance market is awaiting details of a G7 plan to ban insurance and other services for Russian oil cargoes above a yet-to-be-announced price cap.
Neal said he would “rather [governments] took the time” to get the regulations aligned between the UK, EU and the US. If agreement could not be reached, and the EU was alone with an insurance ban, he said Lloyd’s would need to be cautious with restrictions on the marine sector to avoid falling foul of the rules.
Businesses would find such a scenario “too difficult”, he said. “You’ll find that, for example, ship owners will say ‘it is all too hard’ . . . [They] wouldn’t ship,” he added, citing the considerations of where a ship is registered, who owns the company and the jurisdictions in which they operate. “If we get misalignment, particularly between the EU and the UK, it’s just messy.”