Review of 2005

So that was 2005: a combination of natural disasters and man-made challenges sent to test the world and particularly that of insurance.

The year began with the aftermath of the tsunami in South East Asia - a tremendous human tragedy rather than a huge insurance hit. But then in late summer the southern United States entered the hurricane season, which was an altogether different matter.

The insurance industry is, of course, in the business of assessing and taking risks, using the tools available. But Katrina and her companions demonstrated to the industry the limitations of catastrophe modelling.

There are many inherent problems with it. For example, given the increasing number of hurricanes in recent years, how much historical data should the catastrophe modellers use?

The industry must recognise that insurance risk on a catastrophic scale cannot be sensibly modelled. Motor claims and life expectancy, yes. But not catastrophes.

There's talk that increasing rates will mean that 2006 is going to be profitable for the property and casualty (P&C) underwriters. But then the environmental forecasters are predicting that next year's hurricane season will be at least as bad as this year's?

To further muddy those warm waters, looking at the amounts paid out by the P&C underwriters in the past 12 months and at the new money that's poured into the industry, we find that it is as strong at the end of the year as it was at the beginning. How do we explain that?

Hurricane claims have hit Lloyd's hard, as their recent announcement predicting a loss for 2005 made clear. But will the increasing rates actually be sufficient to take them back into profit? This is one of the issues that the new man or woman at the top will have to face.

The impending departure of current chief executive Nick Prettejohn (for the Pru) was the other big Lloyd's story. Prettejohn has built a good reputation, and his successor will be responsible for maintaining the status of Lloyd's as a leading player in world insurance.

On whose shoulders will that responsibility now land? Lots of names have been mentioned. But I've spoken to many of them, and they've said: "No way". Appointing the right person will be a critical decision for the London market.2005 was, of course, the year statutory regulation of insurance intermediaries finally arrived in the UK, and to be honest, most brokers were not as well prepared on 14 January as they thought they were. The mailbags of "Dear CEO" letters from the FSA have since proved this to be the case.

Based on our own practical experience, the big issue for brokers arising out of regulation has been the accounting treatment of client money and the application of statutory and non-statutory trusts. It has been difficult for London market brokers, because the way they take brokerage has changed.

I don't blame most brokers for keeping their heads down when it comes to the intricacies of accounting standards. But this issue has also been testing our profession's mettle and has led to a rethink, at a fairly late stage it must be admitted, on the correct way to account for client money and insurance debtors and creditors in brokers' accounts.

The accountancy profession as a whole has not yet come up with a satisfactory answer, and this will make it difficult for the many brokers with a December year end. Just how are they going to present what in the past have been the biggest numbers on the balance sheet? Some extra effort might be needed in the coming weeks to dig out information for the audit, which will not make accountants popular.

Continuing on the subject of regulation, as the year comes to a close, we are still no nearer to the level playing field across Europe that the EU Insurance Mediation Directive promised. The UK is one of a limited number of member states to have already implemented this Directive; several of our key European friends are sadly lagging behind.

As a result, the UK insurance industry has felt somewhat disadvantaged throughout 2005 - and that feeling is probably justified. After all, I haven't seen any more overseas business heading to our shores as a result of regulation. The counter argument says that our world-beating regulation gives a lot more comfort to the insured - but this sounds like PR spin to me.

Another pre-occupation for the London subscription market continued to be the matter of contract certainty, with efforts being stepped up to make some progress ahead of the FSA's deadline of December 2006.

The industry as a whole is fully behind the concept; no-one wants to see another World Trade Center fiasco where the insurance policy had incepted, but the full policy terms and conditions had not been worked out and agreed. As a result, the lawyers are earning a fortune from trying to resolve the confusion in the courts.

The view in the market is that contract certainty will be achieved substantially, but doing so on the FSA's timescale is not going to be easy.

Turning again to regulatory matters, the transparency of fees and commissions (post Spitzer) will continue to make the agenda. It's unfair to say the FSA has changed its mind on this issue. But having first indicated it didn't think there was a problem in the UK with undisclosed fees and commissions, it now seems to be showing a little more interest.

Many challenges and opportunities will continue to present themselves next year. For example, a lot of the new capital coming into the industry - which shored up the balance sheets of the P&C underwriters - has gone to Bermuda. Does this threaten the London market? And should the FSA be concerned that this money is heading to a jurisdiction considered to have a less rigorous regulatory regime?

Another ongoing issue is that of pricing the insurance risk: will the industry get it right? Before the hurricanes struck, lots of rates were softening.. The industry needs underwriting discipline - making sure we do not write risks at uneconomic rates. IT

' Robin Oakes is senior partner - London region, Mazars