Lloyd's of London warns of 'perfect storm' threat to insurance market
Gulf oil spill has made it a tough year for the insurance market, which
is only one major disaster away from slipping into the red, head of
* The Guardian, Tuesday 18 May 2010
Deepwater Horizon Oil Rig burning
The Deepwater Horizon oil rig burning in the Gulf of Mexico. The spill
is likely to cost up to $3.5bn, which with the Chilean earthquake will
make for another tough year for insurers. Photograph: AP
The head of the Lloyd's of London insurance market warns today that one
more major disaster could plunge the insurance industry into the red
Richard Ward will tell a gathering of insurance chiefs that the
industry is facing the toughest year he can remember, the Guardian has
"It isn't overstating the situation to say that the insurance industry
is facing a potential perfect storm this year," Ward says in his
keynote speech at the Insurance Day London Summit.
Speaking as the industry braces itself for the US hurricane season,
Ward says: "That is a significant challenge for the industry worldwide
but it is a storm we can see coming and we can prepare for. Insurers
who keep their discipline and don't chase risky short-term profit will
stand the best chance of long-term survival."
The insurance industry is forecasting a loss of up to $3.5bn (£2.4bn)
from the growing oil spill in the Gulf of Mexico. This will be the
biggest loss in the energy market since the explosion of the Piper
Alpha rig in the North Sea in 1988, which led to a spiral of
reinsurance losses and cost Lloyd's £8bn between 1988 and 1992.
Swiss Re has put total insured losses from the oil spill at
$1.5bn-$3.5bn, and its own loss at $200m. Lloyd's will issue its own
estimate later this month.
Lloyd's recorded record profits of nearly £4bn last year, with £1.4bn
of underwriting profit. However, Ward warns: "Just one serious
catastrophe could potentially wipe out the entire underwriting profit
from last year."
Hurricanes Ike and Gustav, which wreaked havoc on the Caribbean and the
southern US in 2008, cost the industry $24bn. It was one of industry's
worst years with 137 natural catastrophes and 174 man-made disasters.
By comparison, the total cost of Hurricane Katrina is estimated at
between $100bn and $225bn.
Already this year catastrophes such as the Chilean earthquake and the
oil spill in the Gulf of Mexico, combined with low investment returns
and weakening rates, will have a "very significant" impact on the
Several insurers, including Amlin, the largest group in Lloyd's, have
warned that the oil rig disaster will raise premiums. Much of the
losses will end up being paid by reinsurance companies, which cover the
losses made by direct insurers – triggering reinsurance price hikes
that will be passed back to the insurers, who may then pass them on to
Ward calls on insurers to follow a "strict diet of underwriting
discipline" to ensure they survive the crisis with their balance sheets
intact. He urges them not to be lured into writing risky business in
the hunt for short-term profit; to underwrite for profit, not volume;
and to focus on where they will be in five years' time, not one.
"During the financial crisis the insurance industry has performed very
well, without the need to fall back on either government or taxpayer
support. We've helped protect the economy during the crisis. Now it's
time to protect ourselves."