Lloyd’s chief says insurance is set for boom

THE COMMERCIAL insurance industry is set to triple in size by 2025 as the business benefits from growth in the developing world, the chairman of Lloyd’s of London said yesterday,

John Nelson told an audience in Monte Carlo that global demand for business insurance will increase from $600bn (£382bn) to $2 trillion a year over the next decade, driven by clients in emerging markets who do not currently buy insurance.

“I remain very optimistic about the future of this industry, because the world needs more insurance and there is the capital that has confidence to invest in us,” he told an event organised by PwC.

But this will require enormous new capital investment, which Nelson believes will largely come from alternative forms of finance such as catastrophe bonds.

Pension funds and institutional investors are increasingly eyeing catastrophe bonds – an alternative to traditional reinsurance – as a way of beating lacklustre returns elsewhere. Investors buy the bonds and either receive a relatively generous annual payout – or see their original lump sum depleted in the case of a disaster.

Nelson has already raised concerns about this “commoditisation of risk”, and says reinsurers and brokers “may start to behave like managers of investment portfolios”.

David Law, global insurance partner at PwC UK, said the industry must be up front about the risks associated with catastrophe bonds: “It is critical that the industry does not expose itself to claims of insufficient transparency over the risk of loss.”