Speaking to the New York Risk Insurance Management Society on Friday, Lloyd’s Chairman, Lord Peter Levene, stressed the role insurance plays in business, calling it “the oil in the engine of the economy, allowing entrepreneurs to take risks, helping businesses to grow.”
Lloyd’s has a strong presence in New York. “Much our $3 billion of reinsurance premium [citation] is generated, broked [sic], or otherwise directed through this City and its environs,” Levene stated. “It is also one of the biggest sources of direct business for us in the States. In fact in New York alone, we underwrote over $160 million of surplus lines business in 2002, equivalent to 12% of the market. [citation] New York is also a focus for our direct business on the Eastern Seaboard generally, which generates over $1 billion in income for Lloyd’s annually.” [citation]
Speaking of the Sept. 11 attacks, he reminded the delegates that “We incurred the largest loss of any insurer for the attacks on the WTC. Doom-mongers predicted that we would never be able to meet our claims. But we proved them wrong. In fact, in his recent visit to Lloyd’s along with the UK Chancellor of the Exchequer Gordon Brown, the US Treasury Secretary John Snow praised Lloyd’s for how it ‘stepped up to the plate’ and honoured its obligations following the tragedy. We have now paid $4.2 billion dollars in direct and reinsurance claims.” (citation]
He also stressed the global nature of the role that insurers “played following 9/11,” noting that of the, “10 insurers facing the highest gross losses from the 9/11 attacks, one is Bermudan, two Japanese, two American and five European, of which one is Lloyd’s.” [citation]
Levene then discussed three of the biggest challenges he sees facing the insurance market – Terrorist threats, the rising number of natural disasters and the increasingly pernicious burden on insurers and the economy of the U.S. tort system.
“9/11 showed that fanatical terrorists are willing to go to any extent, and any place, to wreak death and destruction,” he stated. He pointed out that business interruption “accounts for 20-25% – or $10 billion – of the overall 9/11 loss.” [citation] He’s also worried about the increasing threat to electronic communications, as the world relies more and more on computers.”A recent global survey of 1,400 organisations found that only 7 per cent had cyberinsurance,” he pointed out.
He also expounded on one of his major overall concerns – the need to level “out the peaks and the troughs of the market.” He defended premium increases as being necessary, “because we need to be able to look policy holders in the eye and tell them that there will be sufficient funds to cover claims should disaster strike. And we can only cover claims if there are sufficient funds to do so.”
The occurrence rate of natural disasters, including storms, has been rising steadily. Levene noted that “US insurance losses from natural disasters have increased 15-fold since 1960.” He doesn’t see the situation improving. He told the delegates that according to UN figures by 2050 losses will “be 900 per cent higher than they are today,” with “mega-catastrophes, which used to occur every 100 years,” now recurring at an average of 25 year intervals.
His third topic, the U.S. tort system is, by his own admission, “a speech in itself.” Levene warned that the U.S. “has to reform its tort system, as it is eroding the spirit of enterprise, innovation and risk-taking that lies at the heart of the American culture.” American enthusiasm, the country’s “Can-do” spirit was rapidly becoming more like “Can-sue”. This “I’ll see you in court” approach, Levene stated, “is a leech on the US economy. The tort system cost $721 per U.S. citizen in 2001. That’s $205 billion in all.” [citation]
In his closing remarks, Levene visited another familiar theme – the trust fund requirements for “alien reinsurers,” such as Lloyd’s. “As a result, we have to hold collateral to cover our liabilities here in the US, either by way of expensive letters of credit or cash in non-working trust funds,” he pointed out. “They amount to our entire gross reinsurer liabilities, a full 100 per cent, plus a substantial margin.
“As of today, Lloyd’s has about 9 billion dollars tied up in such funds. (citation] Those 9 billion dollars sit there, much of it unnecessarily covering our liabilities, when they could be used much better elsewhere. And this is despite the fact that, we are already highly regulated in the UK.” He asked rhetorically if the situation wasn’t the equivalent of “competing with one hand tied behind our back?”
“We pride ourselves on our expertise, our innovation, our creativity. We relish the challenge of finding new ways to insure against new risks. Above all, we value the trust that the people and businesses of New York, and the United States as a whole, have placed in us. Long may that continue,” Levene concluded.
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