A consortium of leading London insurance organisations, led by Hiscox, have tested the market impact of a highly destructive hurricane, an unprecedented cyber attack, a large stock market decline, and major re-insurer default, occurring in quick succession.
They concluded in their white paper that the capital would have sufficient practical and financial resources to cope with such an event, despite it potentially incurring costs at least four times larger than the World Trade Centre-insured loss.
Hiscox chairman, Robert Childs, 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.
“Exercises such as these are often imposed by a regulator, but our industry-led approach is what makes the London market so special.
“As a market, we have tested our robustness and resilience and stand ready to support our clients, trade forward, and ensure financial and economic stability during turbulent times.”
This latest stress test for the London market involved 28 organisations, including underwriters, brokers and Lloyd’s, with the assistance of the Financial Conduct Authority, the Prudential Regulation Authority (PRA) and HM Treasury.
The group believes these organisations would be able to serve clients and pay claims fairly during the hypothetical disaster event, with no significant liquidity challenges highlighted in the exercise.
Aon broking president, Karl Hennessy, said: “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.
“In an increasingly competitive global market, such exercises are essential for London to continue to maintain and evolve its position as the pre-eminent centre of insurance expertise, serving clients from across the globe.”
Despite the London markets’ robustness, conclusions from the test rely on the strength of firms’ reinsurance and recapitalisation arrangements, according to the group, as well as their ability to implement them during a turbulent financial environment.
The consortium also acknowledges that the simplified nature of the exercise means that liquidity could be stressed to a greater or lesser extent in a real-world event.
“Inevitably, an exercise such as this requires firms to make a number of assumptions. If these assumptions had proved to be wrong, the ability of the market as a whole to respond as assumed could have been different,” PRA general insurance director, Chris Moulder, said.
“One of the key lessons of the exercise, therefore, should be for firms to consider how the actions taken across the market as a whole might affect their individual ability to act in the way they might have originally planned.”
The white paper recommends strengthening stakeholder interactions, Lloyd’s position, and collaboration with the PRA, to further enhance the London market’s strength.