In 1994, I was tasked with calculating the solvency of the Lloyds Insurance Market. It’s a requirement of the act[1]Lloyd’s Acts that covers the Market, and usually it was just a formality. In that year it mattered. There was a very real concern that the Market was insolvent.
The Lloyds Insurance Market is complex, made up of brokers, agents, underwriters, syndicates, the Lloyds administration, and the Names.
The Names are those extremely wealthy individuals, mostly British, who underwrite the risk using their wealth as collateral. In most years it’s a great deal for the Names. Their money is earning money wherever it’s invested, and then again in the Market. Normally premiums cover claims by some margin, and the Names get even richer.
In 1994 there had been massive accumulated losses, mostly in natural catastrophes and asbestos claims, and they made up the single biggest aggregation of loss ever experienced by a single entity[2]Today, Lloyd’s risk systems are acutely fine-tuned and precise. Added to which, since the Realistic Disaster Scenario (RDS) framework was introduced in 1995, syndicates have had to demonstrate an … Continue reading.
The underwriters has underestimated the risk by some margin, had skimped on reinsurance, and as a result, the market was at risk of collapse.
In the normal course of business, the Names had an option to take out personal stop loss (PSL), which is a policy to insure against losses. PSL was insured within the Market, and a policy holder was not allowed to be on a syndicate that covered his/her PSL policy.
But a Name could be on a syndicate that insured another Name who underwrote their policy. And that in a nutshell is where the complexity lay in the calculation, unwinding the Market’s incestuous relationships.
In Switzerland, I discovered that my home was covered by a policy where, hidden in the small print, is a clause saying that the insurance company’s liability is limited when the claims in a single event exceed CHF 1 billion, or in multiple events where the claims exceed CHF 2 billion.
In other words, if the underwriters make a mistake in the risk assessment, the policyholders become responsible for the losses in excess of those stated amounts.
Earthquakes are also excluded.
The policyholders have no idea what the extent of the insurers risks are, so have no idea how exposed they are, and yet there they are underwriting the insurer, through the small print in the policy. That’s immoral, and should be illegal.
Let’s imagine a scenario where there is an avalanche that wipes out a village, as happened in Italy[3]Deadly avalanche hits hotel in earthquake-stricken Italy. Not only have people lost their homes, their possessions, and possibly loved ones, the insurance that they thought they had does not properly cover the their homes. They become homeless.
Closer to home, there is the village of Brienz which is set to be destroyed by a rock avalanche soon[4]Swiss village of Brienz told to flee imminent monster rockslide. Imagine when they discover that their insurance does not fully cover the destruction of their homes.
When I asked for the clause to be removed, the insurance company said take it or leave it.
It would be interesting to know whether the banks who think their mortgages are covered by insurance policies are aware of this small print?
References
| ↑1 | Lloyd’s Acts |
|---|---|
| ↑2 | Today, Lloyd’s risk systems are acutely fine-tuned and precise. Added to which, since the Realistic Disaster Scenario (RDS) framework was introduced in 1995, syndicates have had to demonstrate an accurate handle on risk accumulations for major offshore complexes. Piper Alpha |
| ↑3 | Deadly avalanche hits hotel in earthquake-stricken Italy |
| ↑4 | Swiss village of Brienz told to flee imminent monster rockslide |