Lloyd's of London

Lloyd’s takes out £650m cover for its extreme loss fund

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Lloyd’s of London, the world’s leading insurance market has secured a £650 million ($909 million) cover from an investment bank and reinsurers to protect its Central Fund against against possible high-risk events that could cause losses, according to a report.

The Central Fund at Lloyd’s is a roughly £3 billion backstop set up nearly 100 years ago and is used when a claim against any of the firm’s branches outgrows its capital buffer, protecting the market in times of stress.

“In the event that something really, really big happens, this makes it much more safe for our policyholders that we will basically pay out the claims they are entitled to receive some money for,” Burkhard Keese, Lloyd’s of London’s chief financial officer told the Financial Times on Thursday (June 17).

Keese explained that £450 million of the five-year cover is provided via a cell structure and funded by investment bank JP Morgan. The remaining £200 million comes from a group of eight major global reinsurance firms (Arch Capital, Berkshire Hathaway, Everest Re, Hannover Re, Munich Re, RenaissanceRe, SCOR and Swiss Re).

He also explained that because the new Central Cover protection has a lower cost of capital
it will provide some leverage and allow the Lloyd’s market to underwriting more business, perhaps as much as 30% to 40% more in overall premiums.

Lloyd’s has been hit hard by the Covid-19, with underwriters expecting an overall hit of more than £6bn, particularly from event cancellation and business interruption policies.

Aon, one of the world’s biggest insurance brokers, is responsible for structuring and placing this reinsurance cover for the Lloyd’s Central Fund.

The last claim against the Central Fund was in 2007 and aggregate claims against it have never breached the level required to trigger this new cover, Lloyd’s said.

This is the first time the Central Fund has had a reinsurance arrangement since 1999. Lloyd’s has been hit hard by the Covid-19 with underwriters expecting an overall hit of more than £6bn

Lloyd’s, a global hub for insurers, began as a coffee house in the 1600s where ship captains, vessel owners, traders and others interested in shipping gathered to buy or sell what is now called ocean cargo insurance. It  is the oldest continuously active insurance marketplace in the world providing specialist insurance services to businesses in over 200 countries and territories. Lloyd’s is regulated by the government, and sets the standard for insurance companies.