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Lloyd's Bracing for Potentially Large Ukraine-Related Claims

Lloyd's is expecting claims from the Ukraine/Russia war to be an earnings event, not a capital event, said Hank Watkins, regional director of the Americas for Lloyd’s. He spoke with Insider Engage at the RIMS conference in San Francisco.

What is what is your perspective on systemic risk?

Systemic risk is one of those opportunities we have as an industry to identify what's coming around the corner. I'd say that everybody now globally is aware that the risks they never thought they'd face as an individual or a business or a public entity — they are all around us. Covid set the stage for that.

Whether it's climate change — which we all talk about more now than anything — a cyber attack, geopolitical stress, challenges that we have in Ukraine, for example, that tragedy ongoing, food, water shortage, we're in California here, they're in the midst of another drought year. That's going to impact everybody here as the wildfire season expands. But systemic risk is something our whole industry has been working towards better understanding on behalf of our clients for years. I'd say now to all the challenges we're facing in the world, it's fast forwarded to the point where everybody's listening.

The clients that are here are very interested having us help them understand what the next, the more broadly, systemic risks are for their companies. So they as risk managers and brokers can present to their boards with much more credibility than perhaps in the past, based on what we're seeing around the world.

How are insurers responding to the systemic risks?

We're all talking about climate change, everyone has an ESG position, or it was articulated a way forward in the transition to green. Whether it's net zero by 2030, 2040, 2050. Most insurance, certainly, most insurance companies have articulated that. But we're still I think wrestling, especially now with the fuel challenges we're facing as a result of Ukraine, how to do this, how quickly to do it, how to do it next, what are the right steps to take without disrupting the current energy industry, as we know it, that so many insurance companies and brokers have worked with over decades.

Speaking of the Ukraine, what are some of the possible ramifications of the Ukraine situation?

Well, I'll take it just from our perspective of Lloyd's for a second, we were well, in advance of this — as we're most insurance companies, I argue globally — looking at what the possible issues might be for them, before February 24 hit, we all are aware that there are going to be sanctions, most likely against the aggressor. And they are, certainly in more than 30 countries, sanctions levied over the past couple of months.

Our biggest role at the corporation of Lloyd’s who I work for is to make sure the 90 plus syndicates on our platform are adhering to the sanctions requested from all the different governments.

Less than 1% of Lloyd's business is actually in Russia. So that's not necessarily the challenge we're looking at currently, it's more around making sure the sanctions that are aimed at punishing the aggressor, in this case, are adhered to.

Another big role we play is to try and aggregate the exposure we have in a marketplace, like Lloyd’s, of course has a very large potential aviation exposure, trade credit, political violence and terrorism, war, marine cargo, cyber — we've not yet fortunately seen that impact, but we're all thinking about it.

When is that going to happen? I can't give you a number that the Lloyd’s market is looking at, it's certainly going to be a big number. But from our perspective, it's not a capital event. It might be an earnings event. But that's why we're in business. It's going to take years to work itself out. Hopefully this aggression will stop well before then but we're all prepared for the long haul here. Especially on the impacts on our industry.

We've noticed that there's a number of new companies here at Rims — a number of insurtechs have come. What are your thoughts on that?

That's really interesting, because several years ago the insurtechs came on the scene with a lot of investor capital. And their mantra was to disrupt this tired old industry that I've been part of for 40 years.

So the first couple of years we worked our way through that relationship. And now for the most part, they are with us as partners. And I've seen more insurtech companies, either here registered at Rims or just walking around the place because we're sort of in the heart of where this all began. They're very interested in how they can help us and you found now a lot of traditional insurance companies have partnered with insurtechs they're actually buying them. The whole intent being not necessarily for the distribution component of it, but more around the loss prevention, if you will.

Whether you're providing sensors to manufacturers on every piece of their equipment to help understand when that piece of equipment needs maintenance, when it might break down, that prevents clearly a machinery breakdown loss, or it could be in the workers’ compensation site, ways to help companies mitigate or prevent workers comp claims. That's huge. And I'm very excited to see so many of them out here. I don’t recognize half the names, but that's okay. That's on me to figure out. But we're really bullish on what that industry brings to us in the years ahead. And I bet next year, we'll see a lot more of them here, actually in Atlanta. So looking forward to that as well.

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