Lloyd's Chairman Stresses Abolition of Insurance Cycles

Lloyd's Chairman Stresses Abolition of Insurance Cycles

NU Online News Service, Sept. 11, 1:55 p.m. EDT? Lloyd's Chairman Lord Levene, speaking this week in Monte Carlo, urged the insurance industry to avoid premium and capacity cycles in favor of constant, responsible underwriting.

In a talk Tuesday at the Monte Carlo Rendez-Vous for the reinsurance industry, he said it was "critical that we stop behaving like slaves to the cycle."

"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," Lord Levene said.

The most important step to break the cycles, in Lord Levene's view, is to "return to the basics and focus on underwriting for profit." The insurance industry should not rely on investment returns to compensate for shoddy performance in its core skill of underwriting, he stressed.

Lord Levene also noted that insurer and reinsurer failures, such as HIH in Australia, are making insurance buyers nervous. "The Independent in the U.K., Reliance in the U.S. and Gerling in Germany are all major failures on any scale," he said. He questioned why an insurance buyer would want to transfer risk to a company that, in some instances, is financially weaker than the buyer.

"In the post-Enron environment, no balance sheet is too big to fail," Lord Levene noted. "There has been a seismic shift in reinsurance credit ratings since 2001, with 10 of the world's top 15 reinsurers downgraded, most by several notches."

Stressing the importance of relationships among the parties to insurance transactions, Lord Levene pointed out that "willingness to pay can be just as important as ability to pay."

"The benefits of a strong, long-term relationship are invaluable and cannot be accounted for in a company's rating," he said.