Realistic disaster scenarios show robust risk spread
10 October 2008
Lloyd’s Head of Exposure Management has told a meeting of underwriters and brokers why the market’s Realistic Disaster Scenarios (RDS) continue to provide a valuable focus for its syndicates about the levels of their catastrophe exposures.
Paul Nunn was addressing the Insurance Institute of London’s aviation meeting at the Old Library at Lloyd’s and said the scenarios have proved their worth since they were introduced in 1995.
His address was centred on the topic of a “Realistic Aviation Disaster”. Nunn said the market still required its syndicates to examine their exposure to a scenario where two passenger aircraft collide over a major US city.
Nunn explained he had been asked on several occasions why the market did not include an RDS involving terrorism or war risks in the annual scenarios the syndicates had to address.
“It’s difficult for the aviation market because we’ve already experienced what people might consider the ‘Perfect Storm’ with the events of September 11 2001,” he said.
He revealed that following the plot to destroy ten passenger aircraft in the mid Atlantic in August 2006, Lloyd’s issued three specialist aviation terrorism RDS that looked at multiple mid-air losses and simultaneous losses at several international hub airports.
Nunn said these scenarios demonstrated the robust nature of the market’s risk management strategies.
He said the changes to the numbers and size of the market’s syndicates, and their broad underwriting portfolios, saw the market capable of withstanding an exceptional single aviation loss.
“Twenty years ago there were 375 syndicates at Lloyd’s with an average capacity of £30m,” he said. “Today we have 75 syndicates that have an average capacity of £210m.”
Nunn added that the nature of the market and the risks it underwrites means there is scope for a far broader range of RDS than syndicates are currently asked to model. However, Lloyd’s had to be mindful of the amount of work it was asking from syndicates. He said the data gathering process is flexible, but the focus remains on those scenarios that give the best data about overall market exposure to major global catastrophes.
He added: “The most important message from today is that the RDS framework is a useful tool to enable Lloyd’s to gain an insight into the syndicates’ risk exposures, and provides the ability to benchmark syndicates. However, the day-to-day responsibility for understanding catastrophe risk lies with the syndicates themselves and they have a responsibility to understand where their exposures could take them.”
Last updated on 03 Nov 2008
