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Lord Levene, Lloyd’s of London chairman, speaks to Gillian Tett, capital markets editor, at Davos on January 24 2007
Gillian Tett Obviously one of the big themes of this Davos event is going to be climate change, lots of speculation about who’s going to bear the cost of dealing with this, but of course the insurance industry is already tackling the cost, can you tell us about that?
Lord Levene Sure, well, we’ve had this problem for a long time, and when things go wrong whether it be through natural disasters or man-made disasters, terrorist attacks, the insurance industry ends up picking up the tab. So if it affects anybody financially, more than anybody else, it has to be us. And we’ve been living with the problem for a long time, if you go back to ’04, we had four hurricanes in four weeks, when we thought we were going to have a pretty easy year, they cost a lot of money, but that was nothing compared with ’05, everybody remembers Katrina and Rita and Wilma, that cost the whole industry $60bn, it cost Lloyd’s $6bn, the biggest payout we’ve ever had to make. ’06 just ended, the forecasters told us it would be pretty bad, maybe not quite as bad as ’05, but pretty bad, no hurricanes, all right, it gives us a chance to recoup some money to pay out for the next lot, but for us it’s real money every day, it’s our every day business.
GT: So what scale of disaster are you now preparing for, or conducting simulations for?
LL: Well, what we do, we run what we call realistic disaster scenarios, which we run in order to look at any kind of disaster that may happen whether it’s man-made or it’s a natural disaster, to make sure that the market is ready for it, we stress test our own market, the Lloyd’s market, to make sure that they can do it, and at the end of ’04, we increased the windstorm category there up to $60bn, a lot of people thought that was very high, and what happened? That’s what we got to in ’05, in ’06 we increased it again to $100bn, now as I said we were fortunate in ’06 that there weren’t any hurricanes, but we’re certainly not thinking of reducing it.
GT: Do you think that there is a risk that you’re going to get some kind of backlash from policyholders?
LL: I think there is a lot of talk of policyholders, you know, we’re all policyholders as well, so, we’re paying very high premia, the insurance industry made a very good profit in ’06, they’re gouging us, it’s not the case, you know, in order to pay out just for Lloyd’s our $6bn, a lot of money in ’05, we had to have accumulated the cash. The US property and casualty industry over the last 20 years on its underwriting lost something like $400bn.
LL: So, yes, you get people saying that, but we’ve got to be responsible about it, we can’t just respond because somebody is not very happy with the premium they’re paying, which I understand and sympathise with, but the maths is pretty simple.
GT: Do you have any comments on the news that the Florida state is creating a sort of back-stop loss-provision system that emerged last night?
LL: Well, that only came out last night, it’s a bit early to say, but I would say it’s a pretty unusual step to take, but I’d like to look through the small print before saying anything very profound about it.
GT: Would you expect to see other States or other political entities trying to protect consumers, because of course it is becoming a big political issue in the US now?
LL: Sure, well, I’d be surprised, and I’ll tell you why, it’s a big issue for the American government every year, whether they actually extend their trio, which is the terrorism re-insurance protection, as they say, this is not something the state should be doing, it’s something which the industry should be doing. Now on terrorism we believe it is something that the state should be helping with, which is what they do. If we said to the Federal Government, look you should provide re-insurance cover and subsidise everybody in the country, there’s no way that they would accept it. I mean, I’m sure in Florida they’ve got their own rationale for it, and as I say we don’t know enough about it yet, but it seems a bit surprising.
GT: Right, and in terms of climate change, President Bush obviously touched on that last night, in the State of the Union speech, were you encouraged by that and do you think that global leaders are actually doing enough to tackle?
LL: Well, it depends who you talk to, I mean, there are many global leaders who’ve said for a long time that it is a major issue and they want to get to grips with it, and try and persuade everybody else to get to grips with it. In the United States, the President stood aside from that, I think from what he said last night there is a recognition that there is a problem there, what they’re going to do about it, how they’re going to deal with it, we shall see, but I think if the largest economy in the world now is starting to say: look we’ve got to do something about this, we’ve got to cut back on emissions, we’ve got to cut back on fuel usage, we’ve got to make sure our reserves are all right, then they’re starting, I think, to realise that there is a real problem there.
GT: Right, and just lastly for you at Davos, you’re obviously a long Davos veteran, what do you expect to be the sort of main talking points, and the main things that we’re going to achieve this week? What do you hope to achieve?
LL: I think climate change is a very big issue, you know, you can say I’m looking at it very narrowly because it’s the issue for the insurance industry, but I think everybody here is talking about it, every magazine you pick up there’s something about climate change, I think that really is going to be the issue this year.
GT: Right, and do you hope to see anything tangible coming out of these meetings?
LL: Well, the world is a big place, this is one meeting, you’ve got some very influential people here, and I think the extent to which people pick it up, you’re not going to walk out of here on Sunday and say: hey, everything’s changed, but I think that the mood is changing, and that will be important, you’ve got leaders of very large companies saying that they’re going to make some changes now, and I think that will be a big factor.