The commercial insurance market would be unable to withstand the economic effect of a major terrorist attack and more public/private partnerships on terrorism risk are needed, Lord Levene, chairman of Lloyd’s, has warned.
While countries such as the UK, South Africa and Spain have longstanding terrorism insurance pools and others, including Australia, established them following the September 11 attacks, Lord Levene warned that more bespoke coverage is needed.
“The potential economic impact of an extreme attack could be more than the commercial insurance markets are able to bear,” he said. “Most mature economies have therefore concluded that public-private partnership is the best way to manage the modern terrorism risk. But of course, terrorism pools can generally only offer standardised coverage. An increasing number of businesses now demand bespoke stand-alone terrorism cover which some insurers are able to provide to complement this. Lloyd’s has been a leader in this area for several decades and our syndicates continue to develop new products across the spectrum of terrorism and political risks.”
He added that Lloyd’s requires businesses in its market to model the impact of a two-tonne bomb blast in central Manhattan and the impact of a political crisis in the Middle East.
While the insurance industry both in the UK and Australia has been proactive on addressing the business risks associated with climate change and extreme weather events, there is an increasing need for deeper understanding of the issue, Lord Levene added.
“Weather and climate risk is another major area where the perception of risks has grown exponentially in recent years but there is still a lack of understanding,” he said. “Here again, we argue that what is needed is partnership, between insurance, government and business. Our Lloyd’s 360 debate last summer brought together 200 experts from science, government, business and insurance found that nine in 10 agree that companies that take climate change seriously have a genuine competitive advantage over their peers, but only one in four feel strongly that the benefits to a company of climate-friendly behaviours outweigh the costs. Clearly, there is much work to be done in translating awareness to reality, and we can all play a part in this.”
In order to properly build intelligence and understanding of the risks and opportunities of climate change, a bigger investment in research is required, he added. “We all need to invest more in research to understand climate change better and a deeper comprehension of the financial impact of weather-related catastrophes,” Lord Levene said. “Lloyd’s has responded by setting up a dedicated emerging risks team to oversee the insurance market’s preparations for and management of climate change risk. Right now, we are also funding PhD posts specialising in climate change here in the UK and working with the International Institute of Strategic Studies to explore what part business can play in mitigating the homegrown terrorism threat.”
He added that in an increasingly interconnected world, countries and business are more exposed to international evens than ever before.
“At Lloyd’s, we believe a US$100 billion [$112 billion] natural mega-catastrophe is getting closer and could hit anywhere on the Atlantic coast,” he said. “You may wonder why I am talking about America at an event about the UK’s resilience but in the globalised world, what happens there impacts the rest of us. Indeed, Lloyd’s insurers underwrote premiums totalling a record US$12 billion [$13 billion] of insurance and reinsurance in the US last year, making it our biggest market. We have no doubt that there needs to be much wider, open discussion generally about land use policies in disaster-prone areas and why improved standards and consistency of building codes governing the structures of new construction need to be delivered.”