Insight and Intelligence on the London & International Insurance Markets

25 February 2018

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You hesitate, you die

Mark Geoghegan 31 January 2017

Even insurance journalists have to undergo disaster planning.

Thankfully in practice all we have to do is make sure we all know each other's alternative email addresses and personal phone numbers and we'll probably be okay.

Our systems are web-enabled so we are confident that we could continue to publish even if our offices were totally destroyed.

It would be a major inconvenience but we'd survive.

Indeed, we made it through one such event several years ago when an enterprising workman drilled through a cable on Lime Street and cut off our office electricity supply for over a week.

Following the catastrophe our first editorial meeting took place in a local pub. Ironically the bar's free wi-fi was better than the connection in our office!

I'm sure longstanding readers didn't notice any interruption to their Insider service.

But for a highly regulated and capital-intensive industry like insurance it is far more complicated.

Today the London market published the results of a disaster scenario that involved all the key actors including regulators, rating agencies, Lloyd's and individual companies and managing agencies.

The difference between this and the various realistic disaster scenarios that any Lloyd's business is used to filing as part of its annual business planning was that this was a real event run in real time, with real people and the real regulator.

So it wasn't just a stress test, but a practical fire drill.

This is a laudable exercise. Whilst no drill can replicate the real gut-wrenching emotions experienced when a true market-changing event hits, to my knowledge no other market has attempted anything on this scale.

Many junior staff have never been through a big event. It is more than 15 years since 9/11 and so much has changed since then. Solvency II was just a whisper in a Brussels back room in 2001 - now it is what governs the market.

Ahead of the exercise the fear of many was that the new strictures might snuff out classical entrepreneurial behaviours at which London has historically excelled.

The worry would be that as the Prudential Regulation Authority (PRA) has no remit to promote the insurance sector, but rather an overriding duty to protect policyholders, it might temporarily put the industry on pause while it worked out whether models were correctly calibrated in the light of the new loss experience and indeed whether it was solvent.

The fear was that such a scenario might kill the sector's ability to trade forward, thereby unwittingly causing the industry's demise - for while one market pauses and takes stock, others are busy seizing the opportunities thrown up by the event.

The London market, and Lloyd's in particular, has shown time and again that being ready and willing to offer terms and trade immediately after a major shock is one of its core strengths and advantages.

Happily the PRA looks like it might take a bigger view. Rather than kill the goose, it hinted that maintaining a viable ongoing industry that can serve customers and trade forward would be a desirable outcome for policyholders.

It also hinted that under stress scenarios it might facilitate business by streamlining model re-approvals via quick judgement calls, adding prudential capital loadings to existing models rather than insisting on waiting for the results of lengthy recalibration processes before acting.

Practice makes perfect, and nerve is required. For our industry, the overriding lesson from 9/11 was that if you hesitate, you die. Those that paused lost.

We can't guarantee collective success but we can deserve it.

The fact that London is in serious training can only make a favourable outcome more likely, and deserved, when the next big event occurs.

This article was published as part of issue January 2017/5

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