Hiscox preps for insurance 'war game'

California has fallen into the sea, oil rigs have collapsed and the markets are tanking. No, not the latest disaster blockbuster but a hypothetical scenario for an industry-wide “war game” for the insurance sector later this year.

The insurance giant Hiscox yesterday unveiled further plans for a system-wide stress test to “dry run” a response to a huge natural disaster or terrorist outrage. The insurer is working with Lloyd’s of London and the Prudential Regulation Authority to arrange a scenario to test the defences of the London market. 

The initiative is being led by Hiscox’s chairman Robert Childs and chief executive Bronek Masojada. “People are out of practice,” Mr Masojada said. “We want to test the stress when the sun shines to see if it will work when it rains.”

A stress test, which is regularly run on the banking industry, could happen later this year if a plan is agreed.

Lloyd’s of London regularly runs tests on insurers in its own market to see if they can cope with certain stress scenarios, but Hiscox is pushing for a wider-ranging test across the whole London market to give decision makers hands-on experience if disaster strikes. 

“It is something that has concerned me for some time and the last time we had a really big disaster was 2001,” Mr Childs said.

“If you had a junior underwriter who just started work in 2001, he’d be getting on for 37 or 38 years old, and these are the people are very important in the market now, running businesses and making decisions, but they have no real experience about what happens in a disaster.”

Since the World Trade Centre attacks in 2001 the regulatory landscape has changed and many of the systems and processes have moved on, leaving the environment untested against a global disaster. “The actual nature of the disaster is immaterial,” Mr Childs said. “I’m concerned about solvency and speed of response.”

Hiscox has met with Lloyd’s to thrash out a plan for the tests. The PRA launched its own stress test last year  but the Hiscox plan is set to be wider ranging. 

Hiscox reported a drop in pre-tax profits for the year ending December to £216.1m from £231.1m last year despite a 10.7 per cent rise in gross written premiums to £1.94bn. 

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