Climate change will amplify catastrophe costs already fuelled by increased insured values and development in high-hazard locations, with impacts “extremely complex”, Lloyd’s Chief of Markets Patrick Tiernan says. 

“An overly simplistic approach will only cause more problems than it solves,” he says in a third quarter market message. “If you don’t invest in understanding climate change now, then by the time we see the true impact on claims, it’s going to be too late.” 

Mr Tiernan says it’s difficult to say how severe convective storms, hail and tornadoes may react to a change in climate, while the science is clearer for risks relating to surface water and wildfire. 

Lloyd’s is considering expanding its LCM 5 framework, which defines the five key peak perils to the market. Currently these are US wind and earthquake, Japan wind and earthquake and northern European wind.

But Mr Tiernan says other perils “not too far off” the lowest of the LCM5 include US flood, US severe convective storm, US wildfire and New Zealand earthquake. 

Lloyd’s focus areas for improvement include casualty, particularly US general liability, specialty classes impacted by geopolitical risk and directors’ and officers’ (D&O). 

“As for D&O, we believe there is a litany of irrational underwriting behaviours driving the relatively shambolic state of that market,” he says in the message. 

Mr Tiernan says he had raised concerns in June about what appeared to be “irresponsible giving away of rate” and in worst instances there had been risk adjusted decreases of around 20%. 

In addition, Mr Tiernan says line sizes are starting to increase as more capacity enters the market, increased limit factors on lower layers are squeezing rate on the excess layers and widening coverages are being given that increase frequency and severity of loss potential. 

“While much of the focus in the class has been in the US, we are now seeing these same trends spreading across Australia and Europe as carriers re-enter local markets,” he said.