[Bible Prophecy News] Lloyd's of London warns of 'perfect storm' threat to insurance market

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Pastor Dale Morgan

May 18, 2010, 2:13:48 AM5/18/10
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Perilous Times

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 Lloyd's warns

    * 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 this year.

Richard Ward will tell a gathering of insurance chiefs that the industry is facing the toughest year he can remember, the Guardian has learned.

"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 insurance industry.

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 clients.

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."

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