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Insurance prices in Europe will have to rise, the chief executive of Lloyd’s of London has warned, as insurers react to the spate of extreme weather events over the summer.
The continent has been hit by a range of natural catastrophes over the past few months, from heatwaves and wildfires to storms and flooding, causing devastation for thousands of people.
But while prices for cover in the US have risen sharply 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 driven by the cost of reinsurance — the cover that insurers buy to protect themselves. According to Lloyd’s chief executive John Neal, prices for US reinsurance have risen by between 20 per cent and 40 per cent over the past year or so, while prices in Japan have also increased sharply. In Europe, prices have risen by just 10-12 per cent.
“I think you’re going to see a much stronger movement in price 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 that the extreme weather was changing the way insurers thought about climate risks. “When we look at weather-related losses, the reality is it’s changing and we’ve got to be much smarter in the way in which we assume and measure risk.”
He added: “The pattern of weather, which is a function of climate change, is changing. I don’t think you can simply rely on past data and say ‘that’s what happened in the past so that’s what will happen in the future.’ I think there’s a lot more on us 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’s a realisation that we are living in more challenging and riskier times,” said Neal. “You’ve got society — either individuals, corporates or governments — more inclined to think about how they manage the financial implications of risk by transferring the liability.”
The combined ratio — a measure of claims and costs as a proportion of premiums — improved from 91.4 per cent to 85.2 per cent. “We’ve not been close to that [level] for a couple of decades,” said Neal.
Lloyd’s also benefited from better returns on its £100bn investment book, generating a yield of 3 per cent as interest rates rose, up from less than 1 per cent a few years ago. Neal predicted that the yield would rise to nearer 4 per cent.