Lloyd’s Neal: insurance industry in pole position to combat systemic risks

The global insurance market is ideally placed to lead and co-ordinate effective management and response to evolving systemic risks, according to Lloyd’s CEO John Neal.

Neal (above) was speaking as part of a systemic risk masterclass series, hosted by the Chartered Insurance Institute, in partnership with Lloyd’s and the Lloyd’s Market Association.

Noting that the world faces a plethora of potential systemic risks – including animal viruses, electrical failure and widespread cyber-attack – Neal said that the advent of COVID-19 “has demonstrated that society must not remain complacent”.

He suggested that the non-life insurance market, with some $2 trillion in assets, can play a leading role in predicting and modelling systemic risks, though noted that public sector support is also important as he alluded to the society’s recently mooted Black Swan Re.

Black Swan Re is a reinsurance framework for government and industry partnership that Lloyd’s says could better protect customers from the impacts of systemic catastrophic events – from another pandemic, or global supply chain disruption, to the interruption of critical infrastructure or utilities.

The framework would be designed to provide reinsurance for commercial non-damage business interruption cover for black swan events through industry pooled capital, backed by a government guarantee to pay out if ever the pool had insufficient funds.

Indeed, Neal said that Lloyd’s has already engaged with 25 governments around the world to discuss the possibility of covering systemic risks.

“We need to work together with governments to make sure we are never as under-prepared for a future pandemic,” he commented.

Also speaking as part of the event was Paula Jarzabkowski, professor of strategic management at Cass Business School, who suggested that by its nature, systemic risk is not insurable, “but that doesn’t mean elements of systemic risk cannot be insured”.

She pointed out that the insurance industry has an enormous indirect effect here, especially when it comes to its modelling expertise.

Jarzabkowski added that the “fundamental survival” of the insurance industry is dependent on its resilience to risk, calling for a greater dialogue around risk mitigation and suggesting that insurers “can and should” share models and data.