Lloyd’s Poll Finds Financial Instability is Main 2008 Risk

February 20, 2008

According to a recently conducted survey of 138 underwriters, Lloyd’s found that the instability of global financial markets is the single factor that will have the most impact on the insurance industry during 2008. Lloyd’s annual underwriters survey asked the underwriters questions about working in the Lloyd’s environment, including what emerging risks will most challenge the insurance industry over the coming year.

Their concerns about the financial markets, “echoed what was said at the annual meeting of the World Economic Forum, which was held in Davos, Switzerland, in January,” notes an article on Lloyd’s web site (www.lloyds.com).

Global government and business leaders put the repercussions of the US sub-prime crisis at the top of their agenda for the week-long event, with uncertainty and volatility generally predicted for the coming year.

In addition Lloyd’s found that more than half of those who participated in the survey believe that the compensation culture is out of control. David Jones, Divisional Managing Director – Professional Liability, Markel International, explained how the financial crisis will relate to insurers: “Over the next 12 months we are going to see the sub-prime web unraveling as the layers of collateralized debt obligations collapse from the pools of investors worldwide. ”

He warned: “There is an inevitability that increased property repossession will once again lead to litigation against mortgage brokers, solicitors and surveyors as the lending institutions seek to recover their losses without necessarily questioning their lending criteria.”

As it happens, Liability is the key theme for Lloyd’s 360 risk project in 2008, which has commissioned the Economist Intelligence Unit to undertake a survey of business leaders to get opinions on issues such as the “compensation culture” [i.e. the increasing number of lawsuits] and the global credit crunch.

“Eighty-two percent of underwriters questioned in the Lloyd’s survey believed that more consideration is being given to corporate liability by insurance buyers, although 61 percent still felt that more preparation was needed,” Lloyd’s found.

While he acknowledged that financial instability will be a “key threat in 2008,” Andrew Miller, Director at BPL Global, also identified another major concern. “The two main issues that will continue to drive our business are the ‘credit crunch’ and the problems of terrorism and political violence,” he stated. “Both are really only just beginning to bite and their shared characteristic is that they are set to get worse before they get better.”

Forty-nine percent of survey respondents told Lloyd’s they “feel that the world will be a less stable place in 2008.” However, 55 percent of underwriters said they feel that insurance buyers are giving greater consideration to terrorism and political risk in planning, but 56 percent said they needed to do more.

Lloyd’s also found that a mere 21 percent of its underwriters “believe that insurance buyers are giving greater consideration to climate change in risk management, which is a concern at a time when flooding and unseasonably high temperatures are highlighting the impact of climate change. Thirty-nine percent of underwriters questioned feel that climate change is likely to contribute to above average losses from the 2008 hurricane season after two years of benign loss experience.”

There is, however, some encouragement from the survey. Lloyd’s indicated that “despite all the uncertainty, overall 83 percent of the respondents believe that disaster and continuity planning is higher on the agenda for global business leaders than it was two years ago and over three quarters feel that risk managers are more sophisticated in their understanding of risk than two years ago. There is still much to be done, but it is encouraging that risk management seems to be higher on the agenda than ever as underwriters and business leaders alike face up to a challenging year.”

Source: Lloyd’s

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