Lord Levene Gives Thought Provoking Speech to Rendezvous Delegates

September 10, 2003

Maybe it’s inevitable, or just a sign of the times, but some of the most original thinking on the problems facing the insurance industry in general and reinsurers in particular is coming from people with experience outside the industry. Main case in point – Lord Peter Levene, who, until he became Lloyd’s Chairman last December, had never worked in insurance. His speech to delegates at the Reinsurance Rendezvous in Monte Carlo is literally a tour de force of the industry’s problems, and an example of how “thinking outside the box” might help solve them.

Levene started off with the by now familiar call to “return to the basics and focus on underwriting for profit,” but he then went on to attack the cyclical nature of the insurance business, and the pernicious affect it has had on primary insurers, reinsurers, brokers and their clients. “It is critical that we stop behaving like slaves to the cycle,” he stated. “If we act now, and act decisively, we can abolish the worst effects of the insurance cycle within a generation, and secure a much more stable environment for the future.”

He singled out “four of the most significant trends which are impacting corporate balance sheets in different ways,” and the effects they are having on the insurance industry, identifying them as follows:
— Collapse of corporate balance sheets
— Decline in asset values
— Increasing liabilities
— Globalisation of the balance sheet

Each one impacts the industry. Collapsing balance sheets lead to companies searching for more stability, but as Levene pointed out “ten of the world’s top fifteen reinsurers [have been] downgraded, most by several notches.” As the industry raises rates, but can’t provide the same guarantees, stronger companies will explore the alternative market. Although Levene put it more articulately, this could result in more companies, who manage their risks well, eventually becoming self-insured, leaving the industry to deal only with riskier business.

He also pointed out that the world was now a riskier place, including greater risks of natural catastrophes and “a creeping culture of litigation which is beginning to have an impact on Europe,” as well as the $200 plus billion it costs Americans. He also said that the industry had been too reliant on investment in the stock market to protect it from poor underwriting procedures.

Levene’s vision sees a world where business and carriers work together on a global basis to reduce the volatility of coverage and pricing, and provide the stability economies require. While that may sound rather quixotic to some, he’s prepared to push for real changes, mainly in the way global companies and insurers are regulated, to help it come about.

His view is in stark contrast to the questions some analysts have recently raised concerning the continued viability of the global reinsurance business model in light of recent large losses. (See IJ Website Sept. 9) His call to make global markets more interdependent, not less, is a bold one, but perhaps it’s one of the few potential solutions to the present and future problems the industry faces that stands a chance of working.

The full text of Lord Levene’s remarks can be obtained on the Lloyd’s Web site: www.lloydsoflondon.com.

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