Lloyd’s Chairman Lord Levene has called for rates to rise to sustain the insurance industry in light of the recent number of natural catastrophes.

Speaking at the National Insurance Brokers Association/Underwriting Agencies Council Expo in Brisbane last week, Lord Levene says the move would be unpopular, but the insurance industry has faced an unprecedented number of claims this year.

“At Lloyd’s alone, we face more claims in the first quarter of 2011 than we paid in the whole of 2010,” he said. “And this is coming during a soft market, where the price of insurance has been low for years.

“If businesses want sustainable insurers who can pay these claims, the sorry fact is that the prices must reflect risk.”

Lord Levene admits this will be unpleasant news for victims of a major catastrophe and it will be seen as being “deeply unfair that they must now pay more for their insurance”.

“I know that the Government here is grappling with this issue and we want to be part of this debate,” he said.

Speaking earlier at an Australian and New Zealand Institute of Insurance and Finance (ANZIIF) seminar on the Gold Coast, Lord Levene said another issue Australia faces is ensuring everybody has access to insurance.

“Some people have homes and businesses in highly vulnerable locations,” he said. “Some of these people may not be able to afford commercial rates for insurance. What should society do?”

Lord Levene admits providing cover for these people presents a conundrum for both insurers and policymakers.

“I would argue the most crucial step is to seek to minimise the risk,” he said.

“We can build better flood defences, we can encourage households and businesses to work with local authorities to share flood-mapping data and we can use things like water-resistant building materials.”

He cited Japan’s latest earthquake and tsunami as an example of how steps to minimise risk had saved lives. In the Great Kanto Earthquake in 1923, falling buildings killed more than 100,000 people, but this year’s event saw a death toll of about 20,000.

“The lower death toll is due to defences like tsunami alerts, but also, in great measure to building codes, something which has been led by the insurance industry,” he said.

Lord Levene admits these moves won’t stop events happening, but the insurance industry can minimise the risk.

“At some point in the future, we will face new catastrophes,” he said. “We can reduce their impact, but they will happen.”

He says communities have three choices to reduce the risks: they can close down an area declaring it uninhabitable, which is happening in Christchurch; market forces can be allowed to operate unhindered; or some form of subsidy can be paid to people at risk.

“There is the possibility of a mixture of these approaches, which is the debate happening in Australia,” he said. “I would argue strongly the private insurance sector needs to be part of the mix.”

Lord Levene says while insurers have to make a profit, they also have a social role to play.

“There is a strong correlation that what is good for an insurer is also good for society at large,” he said. “If businesses take care to manage their risks, to be conscientious citizens, that is good for us. 

“If they don’t, we suffer.”