Lloyd’s urges end to U.S. insurance ‘protectionism’

The U.S. should remove existing trade barriers to permit foreign reinsurers to lend more support in the event of another mega-disaster such as Hurricane Katrina, Lloyd’s chairman Lord Levene told New York insurance leaders.

Emphasizing the increasingly globalized nature of the insurance industry, Levene said it was imperative for the U.S. to reform its “credit for reinsurance” rules that force foreign reinsurers to post collateral equal to 100 percent of their gross liabilities to U.S. companies.

“The illogical demand for collateral based on zip code, not financial health, has helped drive up the costs of reinsurance and restricted critical capacity,” Levene said. “The events of 9/11 and more recently Katrina only underscore the unacceptable burden and unintended consequences of these requirements.”

He said the current rules are “neither effective nor efficient” and hurt U.S. customers. He maintained that changing the rules would help the global insurance industry cope with future disasters, and encourage new insurance capacity.

“In the 21st century, many European reinsurers find it difficult to interpret the current rules as anything other than sheer protectionism. We expect to see a definitive change in 2006,” Levene added.

Speaking to the Downtown Association and Insurance Brokers Association of New York, Levene acknowledged that natural disasters were becoming more severe and widespread. “Lloyd’s believes that the vast majority of natural perils are currently insurable,” he said. “We are confident that the global insurance market is well equipped to respond as long as it is free to price risk adequately, and constantly refines its risk models.”

He said the industry should be able to model the impact of natural disasters with enough accuracy to manage risk, while noting it can’t do this with terrorism. “Insurers are, after all, in the risk business. It is up to us to demonstrate commitment and leadership,” he added.