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Top 4 industry challenges: Lloyd’s

Posted on Nov 18, 2011

Determining emerging risks, effective modeling, and dealing with regulatory backlash are key concerns, says Lloyd's Canada president.

A cyclical market, modeling risk, emerging risks and tough regulations are the greatest challenges facing Lloyd’s, as well as the industry as a whole, according to Deborah Moor, president of Lloyd’s Canada.

Moor detailed each challenge at a Toronto Insurance Women’s Association (TIWA) dinner meeting on November 15, 2011.

1) Modeling risks

Although the industry has plenty of models to evaluate risk, Moor said models are not perfect and that it is almost impossible to determine the true cost of risk.

She used the example of failing to accurately model 2005′s Hurricane Katrina, which caused over $100 billion in damages.

“[At Lloyd's] we were able to say within a very short period of time after Katrina hit exactly what the losses would be out in the Gulf,” said Moor. “But no one had modeled what the flood losses would be. It was a bigger loss than many insurers had been anticipating and this is the challenge—you can’t sit back and assume the model will tell you everything you need to know.”

2) Emerging risks

New risks are emerging all the time, according to Moor, including failing infrastructure and cyber attacks on businesses.

She stated one of the TIWA members told her about how her house got hit by lightning, which caused the fireplace to explode into the living room, and blew out her appliances.

“Who knew that was a risk?” she asked.

Additionally, Moor discussed magnetic storms and solar radiation in space, stating that it could cause mass failures to power grids, rail, and aircraft navigation systems.

“Who amongst us is really underwriting these [risks] today? Which of the policies do we have that would respond?”

She suggested the industry must better understand all emerging risks, create products to protect consumers, and also explain the importance of these products to customers.

3) Regulatory backlash

“Because of the financial crisis, all financial institutions have been tagged with being irresponsible and poorly managed,” said Moor. “The particular danger is that as insurers we might get lumbered with a lot of extra capital and recording requirements.”

The regulatory environment in Canada is of particular concern to Moor because it is complex and there is little harmonization between provinces.

“Having been away from Canada for awhile and then coming back I find it very frustrating how much duplication and lack of consistency we have to put up with as Canadians,” she said.

4) The soft market

An ongoing industry challenge is the soft market. Moor explained how the market worked in a cyclical manner.

“People make losses, capital exits the industry, and some companies go bust. Then because there’s less capacity prices start rising, people start making money again, and capital starts to come in again. As a result, there’s pressure on prices, losses start mounting, and off we go again.”

Moor stated this was how the industry had always done business and she wasn’t sure “if this industry will ever figure out a different way.”

However, despite each of these challenges, she said Lloyd’s remains optimistic, is well positioned for the future due to its financial strength, and remains committed to Canada.

“Business in 2010 [in Canada] was up 10% from 2009, and this wasn’t during a time when rates were going up,” she said. “This is because the economy in Canada has been relatively good compared to other places in the world.”

Suzanne Sharma on November 16, 2011

http://www.citopbroker.com/news/top-4-industry-challenges-lloyds-2981