Hurricanes to wreak havoc on London insurance market

Lloyd's of London, the world's biggest insurance market, which suffered a 47 per cent collapse in profits in the first half, is braced for massive payouts after Hurricanes Gustav and Ike lashed the United States.

Total losses are put at $8-$12bn (£4.4-£6.5bn) for Ike and $4-6bn for Gustav. Lloyd's syndicates are collating damage reports and expect to know the cost of their exposure by mid October.

"While it is too early to assess the final economic cost of these storms, undoubtedly it will add pressure to underwriting earnings," said chief executive Richard Ward. Pre tax profits for the first six months fell from £1.8bn to £949m as Lloyd's suffered from the twin whammy of lower investment income and the rising cost of claims.

Lloyd's key performance benchmark that measures costs and claims as a percentage of premiums earned by its 75 syndicates rose sharply from 82.9 per cent to 89 per cent, reflecting the dearer cost of raw materials such as steel and other metals.

The accelerating cost of claims left underwriting profits 36 per cent down, at £699m. Mr Ward said claims rosein property, casualty and energy areas, fuelled partly by "the political instability in various regions around the globe".

He is concerned at how rates have fallen reflecting over-capacity in the industry, and suggests that "profitability in many lines is questionable with current pricing levels leaving little margin to cover major catastrophe losses."

The absence since 2006 of major hurricane damage led to many insurers reducing their premiums during 2008. The upheaval in global markets hit Lloyd's investment income, from which insurers generate most of their income, leaving the total down at £346m from £846m. Significantly, just 5 per cent of its funds are invested in equities, with most in safe government securities.

Lloyd's, the world's oldest insurance market, continues to make headway in dragging itself into the modern age, with over 90 per cent of claims and premiums now processed electronically. Until recently, Lloyd's was still transporting four tons of paper a day from London to a back office centre in Kent.