Letter to the editor from Michael Butt

Letter to the editor from Michael Butt

Dear Sir,

“A Changing Political Climate” – Reactions, March 5 2013

I very much appreciated your leader on March 5, reflecting upon the importance of Climate Risk for the Insurance Industry. It is indeed time that we participated more actively in the political and social debates on the importance of adaption and mitigation to Climate Risks. The added value we, as an industry, can bring to intelligent debate and response on this subject is considerable and comes from practical exposure and experience. The Geneva Association is actively involved in seeking to promote this process on a global and national basis and, indeed, will shortly be publishing a paper on Warming of the Ocean and Implications of the (Re)insurance Industry.

However, I would like to question one important point at the end of your article, which states “it (the insurance industry) cannot and should not try to incorporate a longer-term view into pricing now”. I believe it is the fundamental job of the industry to seek to price risk correctly and to pass those messages onto society. Artificial subsidies inevitably create market distortions as we have seen on many occasions and most recently in Florida. If predictive modelling of catastrophe risks shows a likely increase in intensity, severity and frequency so pricing should be adjusted over time accordingly. Not to do so would create greater instability of capacity and extremes of pricing, both undesirable consequences. Also the competitive forces of the market place will always regulate excess or oligarchistic pricing abuse.

The basis of our industry is to smooth the cost of losses over time. This requires the price to reflect the risk, if we are to satisfy our social function and give an adequate risk-adjusted return to our shareholders.

Thank you.
Yours sincerely,
Michael Butt
Chairman, Axis Capital Holdings Limited
Co-chairman, Climate Risk & Insurance Committee, Geneva Association

Editor's Note: You can read the article Butt is responding to here 

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