‘A pandemic is too big for the industry to insure’

Lloyd’s of London is almost completely empty. The trading floor has been integral to the way the insurance market has operated for 334 years, yet the stools where brokers traditionally sit next to underwriters to negotiate and the bars in nearby Leadenhall Market have been unoccupied since the pandemic struck.

From the iconic building’s famous “inside out” glass lifts, Lloyd’s suited chairman Bruce Carnegie-Brown has noticed for weeks that the skyscrapers surrounding him are equally quiet.

“Most people are really just waking up to the fact this is going to go into 2021, so some of the things we’ve been able to overcome through gritted-teeth while managing a crisis are now present on a daily basis,” says the 60-year-old, speaking from a top-floor office so new and unused that the furniture still has its tags in.

You can hardly blame him for not noticing the labels. Banking and insurance, the two sectors Carnegie-Brown has senior roles in (he is vice chairman of Banco Santander), now face an unprecedented set of challenges going into winter and both started this pandemic painted as the villains of the crisis by Covid-hit firms on the brink.

Insurers were accused of abandoning customers, who were told their policies were worthless, while banks were criticised for their initial handling of vital coronavirus loans. Carnegie-Brown does not expect his year to get easier.

“When you’re handing out money it’s easy but we haven’t got to the point where you have to start asking for it back.

“There are really some quite difficult days to come for the banking industry,” he says.

“In order [for banks] to get their guarantee paid by the Government they’ve got to prove the customer hasn’t repaid them, which almost certainly means the customer is going out of business.

“A lot of these loans will [also] end up being fraudulent, that’s part of the risk of getting these loans out in a hurry. If you have 15 minute application forms and then you get £15,000 in your bank account the opportunity for fraud is huge.”

Things are looking pretty grim for the insurance sector too. Lloyd’s, which only allowed women on to its floor in 1973 and spent much of 2019 trying to move on from an explosive sexual harassment scandal, warned earlier this year that the sector was set to suffer historic $203bn (£166bn) losses as a result of Covid-19.

But Carnegie-Brown admits that “most of that was predicated on us being through the Covid curve by the end of June”. A new wave of claims are expected in the next stage of this crisis while a High Court case into whether coronavirus means insurers should pay 370,000 businesses under their policies is ongoing.

“Some claims come very quickly – our biggest losses are in things like event cancellations, when Wimbledon is cancelled or the Tokyo Olympics is postponed, you crystallise the loss very quickly and it’s easy to calculate. Others have a longer tail to them.

“There will be claims that come through on medical malpractice, if patients claim they weren’t properly treated, or directors and officers insurance, when a company goes bust and shareholders might sue management for mismanaging the company through the Covid period,” he says.

The City veteran defends the banking and insurance industries when asked about the widespread criticism directed at both this year, arguing that the sectors have tried their best given the unexpected issues thrown at them.

After some initial obstacles at the start of the pandemic, banks have been getting money out to cash-strapped businesses much quicker. In insurance, overwhelmed bosses are now calling for the Government to step in.

“The economics of insurance is collecting a premium from lots of people and paying the large claims of a few. The problem with a pandemic is it’s everywhere, all the time, so the model doesn’t really work,” he says. “The risk is too big for the industry itself to insure, so you could put in place a partnership with the Government which effectively underwrites the risk.”

This is not a new idea. Since the bombing of the Baltic Exchange in the City of London by the IRA in 1993 the Government has backed a model known as Pool Re to insure businesses against terror attacks, which involves insurers paying levies into a pool and the Government acting as an insurer of last resort.

“Why limit this just to a pandemic? We should be thinking of something for all systemic risks,” he continues. “Before the pandemic happened I would have thought cyber risk is a much bigger systemic risk to the country, so if we put something in place for the pandemic and the next big risk is cyber, we’ll be in the wrong place.

“So we’ve suggested something that might work across a variety of systemic risks.”

Carnegie-Brown says Lloyd’s produced a report after the Sars epidemic in 2008 which when re-read today is “almost exactly word for word what has happened in this pandemic” – raising questions about why the industry was not more prepared.

“People have a limited amount of money to spend on protection so they default on the things that are more immediately in focus, they don’t buy more remote protection for more remote risks,” he says.

Lloyd’s is also battling issues closer to home. It has just sent out a survey on culture to the market after finding last year that almost one in 10 respondents had witnessed sexual harassment at work.

This year it was also forced to acknowledge its “shameful” and “appalling” ties to the 18th and 19th century slave trade after its role was highlighted in a major academic database.

NatWest (formerly RBS), Barclays Bank, HSBC and Lloyds Banking Group were among those also found to have benefited directly or indirectly from slavery payments.

When slavery was abolished by the British Government in 1833 the Government decided to compensate Britons who had lost property – in this case men, women and children. There are 18 former companies associated with RBS with links to claimants or beneficiaries, including Smith, Payne and Smith – a bank that later became part of Natwest.

“[We’re] trying to educate ourselves more on these issues,” says Carnegie-Brown. “Some of the challenges are quite uncomfortable. White privilege has not been a conscious issue for white people until now.”

Carnegie-Brown is trying to better understand Lloyd’s involvement in slavery, and researchers at UCL have been commissioned to go through the insurance market’s archives.

It is also asking black and ethnic minority employees about their experiences of working in the market and is setting up a database after finding that only two thirds of syndicates working at Lloyd’s record data on ethnic diversity.

Another issue at the front of Carnegie-Brown’s mind is climate change, a problem former Bank of England governor Mark Carney warned insurers about in a speech from Lloyd’s futuristic building five years ago.

“We provide insurance to a number of projects that some NGOs would prefer we didn’t, so that’s an issue for us from a public policy perspective,” he admits. “If you don’t take action now we’ll arrive at a bad place in 10, 15 years.”

As he steps out of his empty office, Carnegie-Brown considers whether the City can survive all of this. He seems hopeful that this is not the end of office life, even as he himself reviews whether to make permanent changes for staff following the success of remote working.

“As a physical space I think the City has a lot of challenges. Repurposing what it is about is quite important. You’d be hard-pushed to bet against a place that’s been going for 2,000 years and has adapted through huge changes whether it’s the Great Fire, the Blitz, all these existential things that a city like London has faced and not think it will be able to respond positively.”