Newspaper article The Evening Standard (London, England)

Storms That Shook Insurance World to Its Foundations

Newspaper article The Evening Standard (London, England)

Storms That Shook Insurance World to Its Foundations

Article excerpt



*FOR the first time ever today, the Lloyd's of London insurance-market published halftime profit figures. And wonderfully misleading they are.

They show, as one would expect, that for the period up to the end of June it was a good time to be in insurance. There had been talk of premium rates coming down from post-2001 peaks - and they have, but not that far, and in most classes they are still high by any recent yardstick.

Profits at this early stage also look good. But if an investor were to conclude from this that Lloyd's and the rest of the insurance world was in for another bumper year, he should be gently reminded of Katrina, the hurricane that devastated New Orleans a few weeks ago, and her little sister Rita, which did massive damage to Gulf of Mexico oil installations.

It is Lloyd's chief executive Nick Prettejohn's misfortune that he publishes the figures - in deference to Lloyd's issue of bonds last year - when they have been rendered largely irrelevant. Katrina is the biggest single loss the insurance industry has ever known, but happened after the reporting period.

There is no clue in the figures as to what Katrina has done to the industry.

For that you need to turn to a paper delivered this week to a select audience at the Insurance Institute of London by Ron Pressman, boss of GE Solutions, the insurance arm of US giant General Electric. He admits candidly that Katrina has made fools of the entire industry. It has "given us a new benchmark for the types of losses that are possible", as he euphemistically puts it.

His firm is rethinking its exposures worldwide as a result because it fears it stands to lose quite unimagined sums of money. And why? Because the computer models on which the industry bases its pricing and its estimates of losses have turned out to be wrong. In fairness to the industry, computer modelling in insurance is a relatively new science, and the four hurricanes of last year and those of this year are the first time the models have been confronted by reality.

That said, it is a pity they failed the test. It is also a pity insurance professionals have been naive in forgetting that a model is only as good as the assumptions on which it is based, so when the assumptions are wrong the whole thing is disastrous.

Says Pressman: "Important loss factors in Katrina and Rita - such as the storm surge - were not significantly factored in to most risk models." I think the storm surge is what flooded the city. The models also have problems with demand surge (don't ask) and the environmental cleanup and mould, so all told they have missed rather a lot. True hurricanes don't normally cause mould but this one will or, as Pressman coyly puts it: "What we have learned in the last six weeks is that the range of loss possibilities has dramatically increased. …

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