Climate and Insurance.org | takefive with Lord Peter Levene

He had spent 20 years in the defence industry before being asked to take on the Permanent Secretary post of Chief of Defence Procurement in the Ministry of Defence, a post which he held for six years. Subsequently, he held a number of government posts and was adviser to the Prime Minister John Major on efficiency and effectiveness from 1992 to 1997. He also served as chairman of the Docklands Light Railway and subsequently as chairman and chief executive officer of Canary Wharf Limited.

Lord Peter Levene served as vice chairman of Deutsche Bank, having previously been chairman of Bankers Trust International and Senior Adviser at Morgan Stanley.

In addition to the Chairmanship of Lloyd’s, he is presently chairman of General Dynamics UK Limited and a member of the board of TOTAL SA, China Construction Bank and Haymarket Group.

Lord Peter Levene is an alderman of the City of London and served as Lord Mayor for the year 1998/99. He received a knighthood in 1989 and became a life Peer in 1997 and he sits in the House of Lords as a Crossbencher. In May 2006, the Chartered Insurance Institute awarded him with an Honorary Fellowship (Hon. FCII).

Takefive:
Lord Levene, in your recent speech to the World Affairs Council in Washington, D.C., you appeared to suggest that the U.S. is in denial about catastrophe trends. Can you elaborate on what you meant by that statement?

Lord Levene:
I would certainly argue that we have not yet faced up to the truth about catastrophe trends in the U.S. Between the 1960s and 1990s the number of natural catastrophes doubled. Insured losses increased nearly seven-fold, most of them weather related. 2005 was the worst year ever, with total global insurance claims of $83 billion, more than 80 percent from the U.S. hurricanes. But has all this been factored in to public policy? With a changing demographic profile in risk-exposed areas and coastal exposures soaring, for example, the facts suggest not. Left unchecked, trends like this will continue. Society must have some difficult debates, make some tough decisions and be prepared to change its behavior to show it is taking catastrophe loss seriously.

Takefive:
You said Lloyd’s believes the likelihood that the U.S. will experience a $100 billion U.S. mega-catastrophe is increasing, and mentioned that Lloyd’s is actively planning for this scenario. Can you explain what Lloyd’s is doing?

Lord Levene:
Lloyd’s uses a range of scenarios, based on our own work and that of other modelers, to test the strength of our market and to ensure its ability to respond to major loss events. We require all of the businesses in our market to apply these scenarios to their own business plans. All the evidence we have seen lately suggests that a U.S. hurricane causing more than $100 billion in insured losses is now a credible threat which the industry needs to prepare for. This is twice as big as Katrina, the largest loss the insurance industry has faced so far. However, the likelihood of a “mega-catastrophe” is growing all the time as coastal property values increase, and the outlook is for greater storm loss thanks to both natural cycles and long-term climate change.

Takefive:
In your speech, you called for wide and open discussion within the U.S. on the issue of catastrophe trends and suggested that there needs to be a much greater willingness to consider radical land use policies for affected areas. Can you give some examples of the type of land use policies that Lloyd’s would like to see put in place?

Lord Levene:
We don’t want to promote a specific policy. What we are saying is that there needs to be much greater willingness on everyone’s part to consider the important public policy issues. Land use policy for catastrophe-prone areas is one obvious are where we just haven’t seen the will and commitment for meaningful discussion before now. It’s precisely this kind of attitude which we want to see change. There needs to be wide and open discussion with no predetermined agenda going forward, in our view.

Takefive:
You have said the insurance industry needs to raise public awareness of catastrophe risk in order to generate public support for stronger building codes and adaptation measures. What should the U.S. insurance industry be doing – beyond working closely with organizations like the Institute for Business and Home Safety – to educate the public about issues related to catastrophe risk?

Lord Levene:
We need to raise public awareness of risk in a transparent way. For example, research shows that if all properties in south Florida met the stronger building code requirements which apply in some counties, property damages from Hurricane Andrew today would be only half the 1992 levels. The insurance industry has much to contribute in this field, but we haven’t always been very good at coordinating ourselves to do it. At Lloyd’s, our main focus is on commercial insurance. We know from our research that many businesses do not have adequate planning and preparation in place to deal with disaster, and that standards of risk management vary widely. I believe that we need to work together better as an insurance industry to address these issues. And there is no doubt that we need to do a better job of partnering with government departments – and critically we need to create the right channels with the business community – in order to deliver change.

Takefive:
Finally, in your speech, you argued that profitability should not be seen as a “dirty word” in the context of catastrophe losses. In your opinion, how can the industry better frame this argument?

Lord Levene:
I think it’s pretty simple. We need to be able to look policyholders in the eye and tell them that there will be sufficient funds to cover claims should disaster strike, and that their insurer is still going to be around to pay. But we can only do that if there are sufficient funds to do so, and that means pricing insurance according to the underlying risk. There is simply no alternative. In recent years, insurance industry results have been a white-knuckle ride for investors. Insurers must also have a reasonable chance of making an appropriate level of profit each year in order to survive in the long term. To argue otherwise suggests an unrealistic understanding of the nature and economics of risk and insurance.