Having witnessed the tsunami disaster first hand, the chairman of Lloyd's made a call for early warning systems, which, he said, were vital to prepare for global risks, both natural and corporate.
Lord Levene of Portsoken, who recently was named to a second term as the insurer's chairman, spoke to senior industry officials in Boston on the need for better risk management and increased efforts to mend the industry's reputation. “It is not only the insurance industry and corporate boards that need to address risk management,” he said. “The world needs to prepare for the most unthinkable disasters. Risk management should be addressed by everyone.”
Levene, who was vacationing in Malaysia with his family when the tsunami struck, noted that the event came at the end of a record year for natural catastrophes, with insured losses of more than $50 billion. Major disasters in 2004 included a record typhoon season in Japan and the four hurricanes that damaged one in five dwellings in Florida. This was a sharp reminder that the risk from natural catastrophes is increasing and that insurers need to rethink how they evaluate financial risks, Levene warned.
“The surge in catastrophic events also reminds us of the importance of pricing risk correctly,” he said. “The critical role of insurance is to pay claims, to assist the process of rebuilding, but the industry can only do that if its balance sheet is strong.”
Last year only reinforced the trend toward higher losses. “Rising population densities and growing concentrations of people and businesses in catastrophe-prone areas are the drivers,” Levene said. “It suggests that the way in which we prepare for disasters may not be quite right. Even where the risk itself is slight, the consequences may well be great enough to warrant better preventative measures.”
New York Attorney General Eliot Spitzer's investigations into payment practices and the World Trade Center insurance dispute were the other two defining events of 2004, highlighting the need for the insurance industry to tackle its reputation and practices in the coming year, Levene said.
“I wish I could report that the defining events were triumphs, which enhanced the standing and reputation of our industry in the eyes of consumers and business leaders, but that is not the case,” he said. “Each defining event presents the insurance industry with a major challenge to get our house in order and improve our reputation.”
Effective risk management, combined with greater transparency and contract certainty, are necessary to restore the industry's tarnished reputation, he believes, citing a National Underwriter survey revealing that only 23 percent of risk managers received their final policies error free and in a timely fashion.
“In the Silverstein case, it was found that only one insurer had issued a final policy on the World Trade Center prior to the September 11th attacks,” he said. “To any outsider, it must seem highly unusual that this single agreement should not be in place. The insurance industry owes it to its customers, as well as to itself, to ensure that cover is fully agreed and clearly documented right from the start.”
The Spitzer investigation, which has prompted scrutiny of the industry from other state attorneys general, in addition to corporate leadership changes, criminal charges against senior executives, and redefined business practices at the largest brokers, emphasizes the need for greater transparency. “We need to take careful stock of our inter-relationships and workings,” Levene said. “We need to be clear and unambiguous on who is doing what exactly, for whom, and at precisely what cost.”
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