Lloyd’s CEO Richard Ward has issued a warning to the insurance market that the next big natural catastrophe will be a capital rather than earnings event, unless there are “significant” rate rises.

“Rates should rise,” Mr Ward said. “Prices are dangerously low at present. Clients may think they are getting a bargain, but the fact is that they are buying security.

“The insurers who write unprofitable business are inevitably the first to collapse when disaster strikes.”  

He says that the current market more closely resembles the 2001 soft market – when Lloyd’s recorded a combined ratio of 140% – than the hard market in 2005 when Katrina and several other major hurricanes devastated the industry.

Mr Ward says that the first-quarter losses have exceeded total losses for 2010.

The US hurricane season, which starts next month, is traditionally a “weathervane” for Lloyd’s full-year profits.

“For the past two years we have been lucky,” he said. “Despite some highly active seasons – last year 12 hurricanes formed – none made landfall in the US. At some point our luck will run out.”