“Too many of us believe that the insurance market is dictated to by the insurance cycle.” Those were the words of Julian James, director of Worldwide Markets at Lloyd’s of London. James spoke before a group of insurers and reinsurers at the 57th Annual Meeting of the National Association of Independent Insurers (NAII).
James challenged insurers to change the way they think about the market – and to no longer allow themselves be dictated by the market cycle.
“We are working in an industry that is still in the financial intensive care ward…. In a world where new risks seem to be created or plucked out of thin air every day, businesses must be able to reduce risks. The world is different now, and we now need to behave differently,” said James.
“We’re right now operating in unchartered territory and perhaps dangerous waters. All of this, I believe, has a great impact on our current thinking about the so-called insurance cycle.”
James explained that since 1980, over $439 billion has been lost in the underwriting of the U.S. property and casualty industry. “Our industry has managed to underperform consistently in relation to every single other industry.”
In regards to the industry’s response to Sept. 11, he offered more criticism. “It is a very sad fact, that by whatever measure you wish to use, collectively, as managers of shareholders’ capital, we have done a pretty poor job. The insurance industry, in my view, has performed abysmally.”
James further noted that the number of securely rated companies (with a rating of B+ or higher) decreased consecutively for the second year, demonstrating the uncertainty of many companies’ financial stability. A.M. Best also issued more downgrades than upgrades for the second consecutive year.
“The cost of claims, in virtually every area, is spiraling exponentially,” he added.
Despite these factors, since Sept. 11, over $40 billion dollars in new capacity was invested into the industry. James attributed these investments to the turning of the insurance cycle, revealing the rise and fall of premium prices – a turn which has headed upward, rising steeply.
“Hoping that a couple of more years of the hard market will be our salvation is about effective as a man lost in the desert, trusting a mirage,” said James. “We need a new response. And that response needs to be to challenge the very notion of the insurance cycle itself. We do that by sticking to one very important principle – make a sustainable underwriting profit year upon year.”
Lloyd’s has made several new reforms over the past couple of months in efforts to modernize. The first step was to replace the existing regulatory and market boards and committees with the creation of a single franchise to restore profitability. The three year accounting review has been replaced by the GAAP standard of annual accounting, allowing investors to track financials more easily.
“Lloyd’s is setting out to challenge the cycle,” said James. “We want to drive the bus rather than sitting in the backseat being driven down the freeway out of control at 100 miles an hour.”
Watch for upcoming issues of Insurance Journal for more on Lloyd’s of London, along with exclusive interviews with Julian James and Wendy Baker, president and director of Lloyd’s America Inc.
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