Lloyd's chairman Peter Levene told New York business leaders today that if trade barriers such as collateral requirements are lifted, foreign reinsurers could provide more support in the event of another U.S. mega-disaster like Hurricane Katrina.
According to a copy of Lord Levene's remarks released by Lloyd's, he told members of the Downtown Association and Insurance Brokers Association of New York that it is imperative for the U.S. to reform its "credit for reinsurance" rules that force foreign reinsurers to post collateral equal to 100 percent of their gross liabilities to U.S. companies.
Foreign reinsurers for years have been unsuccessfully urging regulators to make a change in the requirement. The National Association of Insurance Commissioners is due to consider the issue again at its meeting next month.
"The illogical demand for collateral based on ZIP code, not financial health, has helped drive up the costs of reinsurance and restricted critical capacity," Lord Levene said. "The events of 9/11 and more recently Katrina only underscore the unacceptable burden and unintended consequences of these requirements."
He added that neither "effective nor efficient, the current rules distort the operation of the U.S. insurance market, leaving U.S. customers as the biggest losers."
In the 21st century, he said, many European reinsurers find it difficult "to interpret the current rules as anything other than sheer protectionism. We expect to see a definitive change in 2006."
The reforms would help the global insurance industry cope with future disasters and encourage much-needed capacity for consumers, Lord Levene said.
He also acknowledged that natural disasters were becoming more severe and widespread, adding that most are insurable.
"Lloyd's believes the vast majority of natural perils are currently insurable," Lord Levene said, adding that Lloyd's position was based on its history of helping the U.S. rebuild after catastrophes–dating back to the San Francisco earthquake in 1906.
In his prepared speech he spoke of Lloyd's underwriter Cuthbert Heath, who, after the quake cabled his San Francisco agents, said: "Pay all claims."
"In doing so," he said, "he played his own part in transforming the down-at-heel gold rush town into the 'Paris of the Pacific."'
Lord Levene said the global insurance market is well equipped to respond to natural disasters, as long as it is free to price risk adequately and constantly refines its risk models.
"Our experience is that insurance markets operate most effectively and most efficiently when left to free market forces," he said. "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."
As a result of the extreme natural disasters of 2005, he said the insurance industry faces some fundamental questions about its performance in 2005 and key responsibilities for 2006.
"Have things really changed?" he asked. "In some important ways, yes they have. Some of the largest brokers have made significant operating changes and abandoned contingent commissions. The leadership of some of the largest insurance carriers has been turned around. And by the end of last year, almost half of risk managers had made a major change to their insurance relationships, and they are now taking a more active role in decision making" he added.
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