Lloyd’s Urges Rethinking on Cat Losses

In a speech at the “Forces of Nature” conference in London Julian James, Lloyd’s Director of Worldwide Markets, said that the time has come for the insurance industry to rethink how it handles catastrophic risks.

In a summary, posted on the Lloyd’s Website (www.lloyds.com) James noted that over the past few years the frequency and severity of catastrophic events had increased. However he pointed out that reinsurance prices for such risks have not changed in 11 years, and policyholders are paying less now than in 1994.

This has resulted in “a fundamental disconnect in our industry”, James observed. He pointed out that three of the 10 worst hurricanes in US history happened in 2005 – the worst year for catastrophic losses the industry has ever seen, costing US$83 billion. “The industry needs to work harder to identify risk management parameters and work with realistic disaster scenarios.”

Last year, through its Realistic Disaster Scenarios (RDS), Lloyd’s asked market firms to analyze their ability to handle a scenario involving a windstorm in the Gulf of Mexico resulting in losses of US$60 billion. “A number of people said ‘that would never happen; you are being too conservative’ and always thinking the worst,” James explained. “But Katrina happened and we were close to it.”

This year Lloyd’s said it will “introduce two new scenarios with losses of up to US$100 billion. James queried, however: “Now we are thinking – are we being conservative enough? The severity and frequency of these events are going up and we need to work harder to understand catastrophic risks. We are in a new territory here.”

As a consequence of so many natural disasters being linked to global warming and climate change, James stressed that it is up to the insurance industry to get actively involved in debate. Although he didn’t say as much, one could add that the failure to do so could be – well – catastrophic.