London market survives stress test of unprecedented potential losses

London market beats stress test

The London market survived a theoretical stress test involving insured losses more than twice the size of 2005’s Hurricane Katrina.

Robust reinsurance and recapitalization arrangements, deep underwriting expertise and a “surefooted” regulatory response were credited with helping the London insurance market cope with a sequence of catastrophic loss events totalling $200bn. That would be the largest catastrophic loss ever seen – twice the size of losses caused by Katrina, and at least four times the World Trade Center insured losses.

Led by Hiscox and carred out by consultants McKinsey & Co, the exercise tested two fictional loss events in quick succession – a highly destructive hurricane and a cyber loss of unprecedented extent. In the script, these were followed by one of the largest ever stock market declines and a major reinsurer default with consequent delays in reinsurance payments.

Participants said that they would have access to enough practical and financial resources to cope with the losses, and would be able to serve clients and pay claims fairly at the same time as ensuring continuity of cover to further enhance London’s pre-eminent global position. 

Robert Childs, Chairman of Hiscox Group said: “We have not had a market-turning event since 9/11 and it is important we understand how one might play out in today’s trading environment.”

Karl Hennessy, President, Aon Broking, who led one of the project’s two working groups, added: “This dry run is a demonstration of the London market’s unique value proposition; namely the ability to bring together specialist underwriters, brokers, claims and other professionals to serve our clients at the time of their greatest need and beyond.”