Residents of the Northeast coast “ignore the hurricane threat at their peril,” a leading insurer is warning.
At the same time, Wendy Baker, president of Lloyd’s America, says she is confident that the global insurance market is equipped to respond to natural disasters.
“The spectre of a hurricane hitting a major Northeast population centre is hardly the stuff of Hollywood fantasy,” Baker said in a speech at the WorldBoston forum, marking the first official day of hurricane season. “Forecasters agree there is more than 80 percent chance of a major hurricane hitting the Gulf or East Coast this year.”
But unlike other insurers calling for a taxpayer-funded bailout pool for natural catastrophes, Baker said Lloyd’s believes the vast majority of natural perils are insurable, provided private industry factors in the threat of global warming and the growing cost of weather-related catastrophes.
“We don’t need taxpayer natural catastrophe funds,” Baker says. “Insurers can handle natural disasters – as long as they constantly refine their risk models and are free to price risk adequately.”
“Proposed national and state catastrophe plans risk damaging the nimbleness of capital markets and force taxpayers to underwrite repeated high-risk behavior,” Baker said.
“Alternative solutions may be called for where the economic impact is potentially more than the private market is willing or able to bear, for example for terrorism or flood. But, unlike terrorism, we should be able to model the impact of natural disasters with some degree of accuracy, so that exposure can be managed and risk spread.”
Baker said Lloyd’s has developed realistic disaster scenarios which include new, tougher hurricane events that stress test the market for industry losses up to $100 billion.
Despite paying out $5.8 billion in 2005 U.S. hurricane claims, the Lloyd’s market loss last year was limited to $177 million thanks largely to performance management.
“Lloyd’s is in very good shape going into this hurricane season. And capital markets are showing a robust confidence in us and the wider industry, with billions of dollars coming into the business,” Baker said.
But Baker called on U.S. insurance regulators to scrap what she called “antiquated and ill-conceived protectionist rules” that she said handicap Lloyd’s and other insurers outside the U.S.
“Simply put,” Baker said, the rules “drive up insurance costs by requiring ‘alien’ or foreign reinsurers to post collateral equal to 100 percent of their gross liabilities — regardless of the reinsurer’s financial strength. Lloyd’s, despite a top-notch credit rating, has more than $10 billion today tied up in collateral accounts. That’s $10 billion which cannot be put where it belongs – in the hands of policyholders. These rules must be changed.”
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