Although the insurance outlook for the year ahead is much more upbeat than it was this time last year–when the industry was awaiting massive loss estimates from Hurricane Katrina–this is no time for the insurance industry to relax, warned Julian James, director of worldwide markets for Lloyd's.
"From our standpoint and most people's standpoint, the financials will be better because we're not sitting here with the prospect of paying $5.5-to-$6 billion for hurricane claims," Mr. James told National Underwriter in an interview here.
"But it doesn't change the fundamental risk profile of the world, and that is that the risk is still there, whether it's a risk of earthquake or hurricane," he added.
He said that reinsurers need to remain steady in their pricing. Making it to the end of the year without having paid claims on a major catastrophe "is to a certain extent irrelevant, because the risk is still the same, so therefore the premium should still be the same," he noted.
"Some people say, 'you made a bit more money this year because there haven't been any catastrophe claims, therefore the premium should go down,'" he added.
However, he said it's important that insurers "don't ignore the underlying trends in terms of what's happening to risk and the adequate pricing for it. Just because you have a one-in-200-year event doesn't mean you should slash prices."
Mr. James observed that while early predictions made here at the annual Rendez-Vous de Septembre reinsurance meeting are interesting, "there are very few transactions that have been done, and therefore I think it's too early–because we're the best part of three months away from the actual renewal date, and because there is uncertainty still about the U.S. windstorm season and what effect that's going to have."
He added that other uncertainties include the U.S. economy. "That will change the way capital flows through the world, so it's too early to make any firm predictions," he said. "But I would hope that people remind themselves of the basics and that there is a need to focus on making a gross underwriting profit."
He noted that while the general consensus is that underwriting discipline and a return to basics are important after a major catastrophe, "now's the time to remind yourself of that. You've got to stick to your core competencies and the business that you know."
Mr. James added that the United States is "always a tough market because it's a diverse market and because it attracts a risk profile that is quite complex." Whether because of litigation issues, or major catastrophe exposures and a concentration of values, "it's always a tough environment."
"The people who get themselves into trouble writing U.S. risks are the people who don't spend the time doing their own due diligence in the market. It's always a tough environment but a very important market," he said.
While rates for some risks–such as property, particularly in coastal areas–may have hardened in the United States, other lines, such as professional liability, "have been coming down consistently for a number of years. Those rates are not bottoming out."
However, he added, "if you take U.S. cat risks, that's going through a different cycle and market phase, so it's difficult to generalize. It's ebb and flow."
He emphasized that Lloyd's is committed to improving certain aspects of trading under its platform "to make sure that we have the best possible capital structure, the best security rating; that our business processes are efficient and doing the things we need to do to make sure people want to underwrite at Lloyd's."
The market's investments for the future include building "a reinsurance platform for the market in China, which we hope to be operational very soon," according to Mr. James. "China is a market that's going through radical change. Most commentators believe that the premium is growing 18-to-20 percent a year there–in all types of insurance."
He added that China may be "the second-largest economy in the world very soon, so you've got to get involved with that and understand it and participate."
He observed that "in the same way you can't call yourself a global insurer without participating in the U.S., in 25 years time, you won't be able to call yourself a global power unless you have an understanding and a presence in the Chinese market."
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