Lloyd's Baker Calls CAT Fund Unnecessary

The hurricane season kicked off today with Lloyd's America saying that insurers should be able to handle storm losses without government help, while a U.S. rating firm predicted a mega-catastrophe could wipe out 40 insurers.

Lloyd's America President Wendy Baker said a national catastrophe fund is not necessary so long as insurers do the proper underwriting, while A.M. Best Co. saw a prospect for insurer failures.

Ms. Baker, speaking at the WorldBoston forum in Boston, said a federally backed catastrophe fund is not needed. She added that the vast majority of natural perils are insurable, provided insurers factor in the threat of global warming and the growing cost of weather-related catastrophes.

"We don't need taxpayer natural catastrophe funds," Ms. Baker stated. "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," she said.

In Ms. Baker's view, "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."

Ms. 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.

"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," she said.

Ms. Baker repeated a previously heard Lloyd's complaint that U.S. regulations "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," she said.

Best, based in Oldwick, N.J., issued a report on the impact of a mega-catastrophe hurricane with insured losses of $100 billion or more. It said such a storm could cause between 20 and 40 insurers to become vulnerable to failure.

Best said it used catastrophe modelers AIR Worldwide Corp., Eqecat and Risk Management Solutions Inc. to examine catastrophe events hitting the Northeast in New Jersey and New York, and a Florida storm hitting close to Miami, in making its assessment.

Best said while the industry would survive, 3-to-7 percent of all insurers with exposures would be vulnerable to failure. At the high end, Best said, losses would nearly equal all catastrophe-induced insurance failures of the past 37 years, reaching roughly three times the number seen after Hurricane Andrew in 1992.

William M. Gray, climatologist at Colorado State University, predicts nine Atlantic hurricanes this season, five of them intense, with winds of at least 111 miles per hour or higher. The National Oceanic & Atmospheric Administration (NOAA) predicts 13-to-16 named storms, with eight-to-10 becoming hurricanes and four-to-six becoming major hurricanes.