The next big natural catastrophe will not just hit earnings of insurance companies, it will also affect the industry’s capital reserves, said Lloyd’s chief executive Richard Ward urging insurers to hike their rates significantly.
Ward also praised the insurance industry for its ability to absorb claims worth £2.4 billion in the first quarter arising from natural disasters while addressing a conference.
“Recent events, perhaps even more than the financial crises have demonstrated in stark detail why businesses need insurers who can pay large sums without any threat to their solvency or ability to trade forward. Lloyd’s has delivered that”, Ward said.
However, the losses suffered in the first quarter has already exceeded total losses suffered in 2010 and the “next big catastrophe could well be a capital event (for the insurance companies)”, he warned.
Traditionally the Atlantic Storm season, due to start next month decides Lloyd’s profitability.
“For the last two years we have been lucky. Despite some highly active seasons – last year 12 hurricanes formed – none made landfall in the US. At some point our luck will run out”, ward said.
Arguing a rate hike, he said brokers and underwriters should ensure that price reflects the underlying risk adequately.
“Rates should rise, prices are dangerously low at present”, Ward said adding: “Clients may think they are getting a bargain”.
Faulty pricing may trigger a collapse, he warned saying: “But the fact is that they are buying security. The insurers who write unprofitable business are inevitably the first to collapse when disaster strikes”.