INTERVIEW: Test Insurance System Response To 9/11-Type Event – Hiscox

The following article ran on Alliance News Professional on Monday, July 27. It is an example of exclusive interviews with UK company CEOs by Alliance News journalists.

 

LONDON (Alliance News) – Hiscox Chief Executive Bronek Masojada on Monday called for a “war game” involving all London market players and their regulators to practise how they would respond to a big loss to the insurance industry reminiscent of the 9/11 terrorist attacks.

The events in the US fourteen years ago when airliners were deliberately crashed had a big effect on the insurance industry and profound implications for aviation business.

Supervisors permitted insurers to continue trading in the wake of 9/11, an approach which Hiscox Chairman Robert Childs thinks enabled the industry to “keep the wheels of global business turning”. The fear is that a new set of rules and regulators, combined with “suspicion and skepticism” towards financial services, may prevent the industry from providing the same support to the global economy in similar circumstances.

In a statement issued as part of Hiscox’s interim results announcement Monday, Childs called for a “detailed practical ‘dry run’ of how a serious catastrophe may play out” and said the stress test currently planned by the UK Prudential Regulation Authority, under which insurers would be subjected to a range of catastrophic scenarios, does not go far enough.

Meanwhile, Masojada emphasised that it is important to enable London to respond swiftly to a big loss event or face losing business to rival insurance hubs such as Bermuda and Singapore.

“London needs to react within a week, not within three months or six months, because if you react fast, that’s how you maintain your primacy as the centre of the world’s insurance for high risk activities. That’s what London is known for, that’s what has created London’s reputation,” Masojada told Alliance News in a telephone interview.

When catastrophe struck on September 11, 2001, Lloyd’s of London, the specialist insurance market, was the primary regulator of the likes of Hiscox. Now, a different regulatory regime is in place, with the PRA, which is part of the Bank of England, responsible for the supervision of insurers since April 2013.

“If you go back to 9/11, the best example is the airline industry insurance. After 9/11, with four airplanes being deliberately crashed, worldwide aviation insurance was cancelled. Without insurance, the airlines can’t fly because everyone was terrified that this was now going to become a really frequently repeated risk,” Masojada said.

“The London market got together and came up with a deal…and because of that, the airlines were able to buy that insurance and start flying again. If you think about the economic impact of an absence of insurance, it’s huge,” the Hiscox CEO said.

“What Robert is saying is that it’s been a long time since that happened. We have a new regulatory regime, we have a whole new generation of people, we need to have a war game to practise – not the effect of a big loss on Hiscox – but the impact on the whole industry system,” Masojada added.

Hiscox said that it is supportive of the PRA’s stress test plans and that its suggestions are for a future health check.

“We’re suggesting that not this year, not in 2015, because everyone is focused on Solvency II, but in 2016, the Treasury, the PRA should conduct a war game involving themselves, so that it’s not just how would Hiscox respond to a big loss, but how would the PRA respond to it?” Masojada told Alliance News.

The PRA, which is aware of Hiscox’s position on the matter, will be considering its options as a matter of course for the next round of stress testing. The regulator declined to comment to Alliance News. Lloyd’s of London could not be reached for comment.

There are also concerns that Solvency II, the new European-wide insurance rules due to come in to force from January 1 2016, are untested.

“Nobody knows how Solvency II will react under a true stressed situation. People are out of practice. That’s why you have a war game. That’s where you’ll identify the stress points, and figure out what needs to be done to make this work rapidly,” Masojada said.

By Samuel Agini; samagini@alliancenews.com; @samuelagini

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