Ward: Next big cat could hit capital

Speaking at an industry conference shortly after Lloyd’s announced claims in the region of £2.4bn as a result of the natural catastrophes in the first quarter, Dr Ward praised the insurance community for its ability to cover these losses.

“Recent events, perhaps even more than the financial crisis 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," he said.

The weathervane for Lloyd's

However, Dr Ward reminded his audience that these claims have occurred in just one quarter of the year and that they already exceed total losses for the whole of 2010, saying: “The next big catastrophe could well be a capital event.”

The weathervane for Lloyd’s profits is traditionally the Atlantic Storm season, which starts next month.  “For the last two years we have been lucky.” said Dr Ward. “Despite some highly active seasons – last year 12 hurricanes formed - none made landfall in the US. At some point our luck will run out.”

Dr Ward also said that last time Lloyd’s faced claims of this magnitude – in 2005, when hurricanes Katrina, Rita and Wilma ripped up swathes of South Eastern states – the market was hard. In many ways, 2011 bears a closer resemblance to 2001, when the tragic events of 9/11 occurred during a soft market and Lloyd’s recorded a combined ratio of 140%.

Risk, rates and responsibility

Dr Ward also called strongly for rates to firm arguing that it was the responsibility of both underwriters and brokers to ensure pricing reflected the risk. “Rates should rise," he said. "Prices are dangerously low at present. Clients may think they are getting a bargain. But the fact is that they are buying security. The insurers who write unprofitable business are inevitably the first to collapse when disaster strikes.” 

Dr Ward also believes that the recent catastrophes highlight how globalisation has changed the scope of a single event saying the Japanese earthquake and the Eyjafjallajokull volcano eruption may end up being viewed as the first systemic natural catastrophes. 

“What the earthquake and tsunami in Japan – and to an extent, the eruption of the Icelandic volcano last year – show us, is that risk travels further and faster. Insurers should be looking at how they build business continuity policies into the modelling of natural disasters. And risk managers may want to bring back the concept of a Plan B – for example spare stock in the warehouse, or alternative suppliers.”

However, he strongly rebuked the idea that insurance creates systemic risk, saying: “When I hear insurance described as a source of systemic risk, it defies my understanding because it is blindingly obvious that we absorb risk, we do not spread it. Our record - as an industry which has protection, not speculation at its heart - should stand by itself.”

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