{"id":7810,"date":"2016-10-30T18:29:53","date_gmt":"2016-10-30T22:29:53","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/is-lloyds-of-london-protecting-itself-from-climate-change\/"},"modified":"2016-10-30T18:29:53","modified_gmt":"2016-10-30T22:29:53","slug":"is-lloyds-of-london-protecting-itself-from-climate-change","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/is-lloyds-of-london-protecting-itself-from-climate-change\/","title":{"rendered":"Is Lloyd\u2019s of London Protecting itself from Climate Change?"},"content":{"rendered":"

Who is Lloyd\u2019s?<\/em><\/strong><\/p>\n

Lloyd\u2019s of London is the world\u2019s oldest insurance market. It is not an insurance company, rather members can form syndicates, which write insurance business. Syndicates interface with a broker, which place the insurance to the end client. Lloyd\u2019s requires syndicates to hold a certain amount of capital (usually about 40-50%[1], though higher for less diversified syndicates) against the insurance risk they write. In addition, syndicates must contribute to the central fund, which is a mutual pool to cover losses at Lloyd\u2019s after the syndicates exhaust their capital.<\/p>\n

Threat to business model<\/em><\/strong><\/p>\n

The syndicates at Lloyd\u2019s write all types of insurance, much of which could be affected by climate change. The most obvious one affected is property risk, specifically in areas like Florida which have increased risk of wind and flooding damage. Insurers rely heavily on catastrophe models to price insurance; the largest two providers of such models are RMS and AIR. The models are based on historical data and while they do contain some trend information from recent years, they generally do not project those trends into the future. Furthermore, these models are only highly accurate for more developed parts of the world.<\/p>\n

Another threat is due to Lloyd\u2019s\u2019 unique mutual structure. If a few syndicates are not careful in underwriting \u2013 of any risk, inclusive of climate change \u2013 the mutual pool can be wiped out to fund payouts to policy holders. The remaining syndicates will then need to pay to re-build the mutual pool [2].<\/p>\n

Current action<\/em><\/strong><\/p>\n

Lloyd\u2019s carefully monitors the risk of its syndicates. Lloyd\u2019s uses Realistic Disaster Scenarios (RDS) to quantify all risks and to help determine how much capital each syndicate must keep on hand. While there are not RDS for climate change in general, Lloyd\u2019s does evaluate windstorms in Florida and Mexico in which it considers recent research on effects of warmer ocean temperatures [3].<\/p>\n

Lloyd\u2019s has also been fostering conversations to improve the catastrophe models its syndicates and other insurers rely on. It has backed Oasis, a not-for-profit building an open platform for catastrophe models. Each modeling company is seeking to create the best possible models individually. Proponents of an open platform instead argue that if the best information is shared from each catastrophe model, everybody has access to multiple view-points of risk, and the reliance on the model lessens, allowing for better underwriting of insurance risk. Lloyd\u2019s has actively sought to add more providers to the platform [4]. Separately, RMS partnered with the Risky Business Initiative in an attempt to bring scientific research on expected climate change into its catastrophe model, rather than to rely solely on historical data. [5]<\/p>\n

Lloyd\u2019s is also particularly careful with reinsurance. After a scandal in the 1990s, syndicates are limited on how\u00a0 much reinsurance they provide to other syndicates \u2013 generally syndicates are required to go outside of Lloyd\u2019s for reinsurance. While not specific to climate change, this does limit the risk of Lloyd\u2019s to that which is not reinsured or is reinsured within Lloyd\u2019s. However, reinsuring outside of Lloyd\u2019s simply offlays the risk to other parts of the industry, rather than eliminating the risks entirely.<\/p>\n

Recommendation<\/em><\/strong><\/p>\n

To date, Lloyd\u2019s actions have focused primarily on property and catastrophe risk, which are the most obvious insurance lines to be affected. However, Lloyd\u2019s is a specialty insurer and its syndicates write quite a bit of risk in other areas which are likely to be affected, such as agriculture \u2013 which is likely to be affected by changing precipitation patterns – and animal husbandry \u2013 which could be affected by regulation as meat production is a large producer of greenhouse gases. Lloyd\u2019s should investigate potential impacts to these areas and determine how to write policies to mitigate some of the risks of climate change as well as appropriate prices to charge as premiums as the risks change.<\/p>\n

Lloyd\u2019s should also reevaluate the amount of capital it requires its members to hold against premiums written. Infrequent catastrophes are becoming more frequent, and climate change has the potential to increase rapidly. Given the heightened level of risk, Lloyd\u2019s should increase the amount of capital required in order to ensure it will be able to continue to pay its liabilities. Lloyd\u2019s currently adds an \u201cuplift\u201d to the capital requirement determined through the RDS process. It should start simply by increasing the uplift. At the same time, it can evaluate how climate change will impact its RDS, as it would be better in the long run to include the capital requirement of writing business affected by climate change main evaluation process rather than simply through an uplift.<\/p>\n

Word count: 771<\/p>\n

 <\/p>\n

[1] Lloyd\u2019s of London Corporate Website<\/p>\n

[2] Ibid<\/p>\n

[3] Ibid, see \u201c2016 Scenario Specifications.\u201d<\/p>\n

[4] Insurance Business Mag: http:\/\/www.insurancebusinessmag.com\/uk\/news\/breaking-news\/lloyds-and-lma-announce-groundbreaking-deal-37958.aspx<\/a><\/p>\n

[5] RMS press release: http:\/\/www.rms.com\/blog\/2014\/06\/24\/rms-and-risky-business-modeling-climate-change-risk\/<\/a><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

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