A record year of natural disaster losses and Eliot Spitzer’s investigations into payment practices highlighted the urgent need for the insurance industry to tackle its reputation and practices during 2005, Lord Levene, Chairman of Lloyd’s, warned insurers today in Cambridge, Mass.
Lord Levene said the Spitzer investigation, the Asian tsunami disaster and the Silverstein court case regarding the disputed policy wordings in the World Trade Center contracts added up to three “defining events” in 2004 from which the industry must learn.
Speaking to senior Boston insurance professionals, Lord Levene said that, having witnessed the Tsunami disaster first hand, it was clearer to him than ever that “early warning systems” were vital to prepare for global risks — both natural and corporate.
“It is not only the insurance industry and corporate boards that need to address risk management. The world needs to prepare for the most unthinkable disasters,” he said. “Risk management should be addressed by everyone.”
“I wish I could report that the defining events were triumphs, which enhanced the standing and reputation of our industry in the eyes of consumers and business leaders — but that is not the case. Each defining event presents the insurance industry with a major challenge to get our house in order and improve our reputation,” he said.
Effective risk management, combined with greater transparency and contract certainty, are urgently needed to restore the insurance industry’s tarnished reputation, he said. In addition, the industry needs to maintain strong balance sheets to fulfill its vital role in helping to re-build after major disasters.
In the Silverstein case for example, it was found that only one insurer had issued a final policy on the World Trade Center prior to the September 11th attacks. “To any outsider, it must seem highly unusual that this single agreement should not be in place,” he explained. “The insurance industry owes it to its customers as well as to itself to ensure that cover is fully agreed and clearly documented right from the start.”
Similarly, Lord Levene said New York Attorney General Eliot Spitzer’s ongoing investigation of the insurance industry — resulting in corporate leadership changes, criminal charges against senior executives and business overhauls at the largest brokers — emphasized the need for greater transparency.
“We need to take careful stock of our inter-relationships and workings,” he told insurers. “We need to be clear and unambiguous on who is doing what exactly, for whom, and at precisely what cost.”
Reflecting on the Asian tsunami, which he witnessed while in Malaysia with his family, he said it came at a record year for natural catastrophes with insured losses over $50 billion, including a record typhoon season in Japan and the four major hurricanes that hit Florida in a month. This was a sharp reminder that the risk from natural catastrophes is increasing and insurers need to rethink how they evaluate financial risks.
“The surge in catastrophic events also reminds us of the importance of pricing risk correctly. The critical role of insurance is to pay claims, to assist the process of rebuilding. But the industry can only do that if its balance sheet is strong,” he said. “The insurance industry’s long overdue profits in recent years have been delivered in the context of a very hard market and the overriding pressure on prices is now a downwards one.
“2004 only reinforces the trend towards higher losses. Rising population densities and growing concentrations of people and businesses in catastrophe-prone areas are the drivers. It suggests the way in which we prepare for disasters may not be quite right … even where the risk itself is slight, the consequences may well be great enough to warrant better preventative measures.”
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