Lloyd’s of London says it can manage a $200bn event: Here are four scenarios insurers used to test themselves
Like the rest of the world, Lloyd's of London was caught unawares by the attack on the World Trade Centre in September 2001.
The world has been hit by natural catastrophes since the tragic 9/11 terror attacks, but what would happened in a doomsday scenario where a number of apocalyptic events all occurred at once?
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Well, Lloyd's decided it was time to find out and has gone through an extensive stress test process to see how the market would react to an onslaught of nasty things happening. It decided to run two catastrophes and two catastrophic reactions.
Here's what the Lloyd's market hit themselves with…
1 – Halloween blackout
The scenario: On 31 October 2016, 15 US states and Washington DC suffered a blackout lasting several days, shutting off power to 93m people. More than 50 generators malfunctioned during the blackout, a large number of which were overwhelmed and many more turned off as a precaution.
What happened next: As the blackout rolled into a second and then a third day, mobile phones stopped working as backup power to mobile phone towers failed. With communications greatly affected there was a growing mood of uncertainty.
And then:
- On 2 November, power was restored to roughly half the affected areas, with the priority given to getting critical infrastructure back up and running.
- Major urban areas, including New York, would remain without power for almost two weeks longer
- On 14 November, while those places where it had been largely restored continued to suffer rolling blackouts. Intermittent outages were expected to continue indefinitely.
- Local farmers’ markets sprang up, but there were alarming stories of food shortages and a spike in visits to hospital emergency rooms.
- There were also multiple instances of industrial and environment damage, as machinery failed mid-cycle.
- Reports emerged of chemical plants leaking toxic chemicals into the Hudson River.
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2 – The bottom falls out of the market
The scenario: On 31 October, the first day of the blackout, the New York Stock Exchange ceased trading for two full days for only the second time since 9/11.
- Global stock exchanges reported drastic falls in values.
- The NYSE witnessed a similar fall of over 10 per cent – it reopened on 2 November.
- Global stock valuations dropped 16.2 per cent over the week
- Property / casualty (re)insurers’ share prices slumped by 28.3 per cent.
The outcome following 1 and 2: The event was projected to cost approximately $45bn (£36) in total insured losses – of which Lloyd's participants accounted for 6.8 per cent or $3.1bn.
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3 – Hurricane Guy Fawkes
The scenario: As the events of the Halloween Blackout were playing out on the US’s Eastern Seaboard, a storm was brewing off the African coast that would become one of the costliest hurricanes ever to hit the United States.
Things got worse: The hurricane made landfall in the Caribbean islands of Barbuda and Saint Martin as a Category 4 storm.
- Passing south of the island of Anguilla to strike the Bahamas as a Category 5 storm.
- On 6 November it became the first Category 5 storm to hit Miami.
- Following landfall there, Hurricane Guy Fawkes entered the Gulf of Mexico as a Category 4 storm, then made landfall in Louisiana, 120 miles east of Houston, Texas, passing south of central Houston to enter Mexico as a Category 1 storm.
- The storm finally dissipated on 14 November.
(Source: London Markets report)
The outcome: The hurricane caused widespread destruction, in the form of wind, storm surge and flood damage across Florida, Louisiana, the Bahamas, Lesser Antilles and Mexico.
- More than 100,000 homes were destroyed
- 1.8m buildings and many offshore energy platforms were damaged.
Hurricane Guy Fawkes was responsible for a total industry loss of $125-175bn. Lloyd's insurers tested were responsible for $6.8bn or 4.5 per cent of total insured losses.
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4 – The cash dries up
The scenario: Reports started to emerge of an unrelated accounting or model validation scandal in the reinsurance industry.
During the hours ‘Hurricane Guy Fawkes’ was ripping through Florida, Louisiana and Texas, a major reinsurer chief exec was ousted by its board amidst reports of potential default and delays in reinsurance payments and rating agency reviews.
The failure of a major reinsurer made it likely that 10 per cent of all reinsurance recoveries related to Hurricane Guy Fawkes would not be paid and that a further 10 per cent of reinsurance claims related to the hurricane would suffer a five-week delay before payment.
At the same time, the impact of the cyber-attack of Halloween Blackout resulted in a recalibration of future reinsurance capacity, with a maximum of 10 per cent of Halloween Blackout’s gross loss available as cyber reinsurance cover for the next 12 months.