Lloyd’s of London sees $3.8 billion disaster hit

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Lloyd's of London Disaster

Lloyd's of London Disaster

LONDON (Reuters) – The Lloyd’s of London (LOL.UL) insurance market will take a $3.8 billion hit from earthquakes and floods in the first quarter, and predicted the high level of catastrophe claims will lift insurance prices this year.

Lloyd’s estimated catastrophe losses for the first three months of 2011 exceeds the $2.6 billion it paid out in the whole of last year, when hefty claims from an earthquake in Chile and the Gulf of Mexico oil spill halved the market’s profit.

The estimate is still well within the worst case scenarios Lloyd’s prepares for and the market will have no difficulty settling claims, it said on Friday.

Lloyd’s projected losses include $1.95 billion from the earthquake that devastated Japan in March. February’s New Zealand quake accounted for a further $1.2 billion and heavy flooding in Australia cost another $650 million.

Lloyd’s of London Chief Executive Richard Ward said the first quarter’s catastrophes, as well as tornadoes that swept through southern U.S. states in April, should lead to a “firming of rates” as insurers seek to recoup big payouts to customers.

Big natural disasters can trigger a rise in insurance prices as a surge in claims dents the industry’s finances, forcing less well-funded players to retrench and freeing those still in the market to charge more.

Insurers have said a proliferation of natural disasters since the start of 2010 had boosted the cost of catastrophe insurance and reinsurance, but that prices in the broader market are drifting lower for the third year in a row, weighed by intense competition.

TURNAROUND

Some in the industry reckon there could soon be an across-the-board rise in insurance prices, especially if the June to November U.S. hurricane season generates further big claims.

“People are very much talking about us being much closer to a wider reinsurance market turn,” said Nick Pope, an analyst at brokerage Jefferies. “Bear in mind that we haven’t even gone into the U.S. hurricane season, when traditionally the highest level of losses happens.”

Bermuda-based insurer Catlin (CGL.L), the third-biggest listed insurer operating in the Lloyd’s market, said on Friday a widespread rise in rates would be “totally appropriate” given recent catastrophe losses.

Lloyd’s, which traces its origins back 323 years to a London coffee house where wealthy merchants sold shipping insurance, said its capital reserves would be unaffected by recent earthquakes and floods.

The market, made up of 85 competing syndicates who provide cover against large-scale, complex risks, also said there would be no need to call on its central fund — a financial safety net used in the event of a syndicate being unable to pay claims.

Lloyd’s projected $1.9 billion hit from the Japanese quake is based on a total insured loss of $30 billion, toward the upper end of estimates of between $20 billion and $34 billion calculated by risk modeling agencies.

The quake, one of the most powerful ever to hit Japan, triggered a tsunami off the country’s north-eastern coast on March 11, killing thousands.

(Editing by David Holmes)

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