Robin Oakes says predicting catastrophes is a minefield - no one can get it absolutely right

A compelling number of threats facing the insurance industry were listed by Robin Oakes, senior partner at Mazars.

He began by warning of the problems of climate change and the issue of forecasting. "One thing that the forecasters do seem to have got right for this year, is that it would be a major year for hurricanes.

"There have been three times as many hurricanes in recent years as there were 150 years ago. And we are making things worse. We build on flood plains, we build in coastal areas, we insist on driving our cars and increasing carbon emissions and bringing about some of the issues that are influencing the insurance industry this year, and will do so into next year and the years to follow."

He said that in this environment only the lawyers won. "They are the people who win when we start arguments, and is that really a good way forward? It's one of the challenges for the future that the industry needs to look at."

Oakes also warned of the validity of catastrophe modelling. "Do modellers get it right? The probability of an event happening depends on which historic data you take. If you took 150 years or 100 years or 50 years, as far as the incidence of hurricanes is concerned, you would get different answers.

"And how do you account for some of the bizarre events which have happened during various hurricanes? Take, for example, Hurricane Andrew, when a tribe of monkeys escaped from Miami Zoo. Did the modellers sort of anticipate that humans and monkeys would be fighting each other to get the limited available food resources?

"And they [the models] tend to be IT driven. They tend to be based on simulations and predictions and speculation. Speculation is actually guesswork - we don't know how it's going to work out. They are very data driven and analytic.

"The industry needs to recognise that the modellers are not going to get it right.

"We need to look with a slightly jaundiced eye on some of the companies that do modelling. I am cynical, forgive me for that, that's why I'm an auditor and have been for many years.

"You need that slight edge, but I wonder whether some of the modelling organisations are courting publicity and brand awareness and seeking to increase their client base, rather than really having a grip on these things."

Oakes did admit, however: "Actuaries are no more accurate than anyone else, they can't be. Because all they are doing is projecting from historic events, they are looking at the samples and so on and they are making assessments.

We give them credibility sometimes which is unjustified and which they wouldn't really claim. We need to be careful about that sort of thing."

He then focused on terrorism and modelling. "This is really where modelling becomes unstuck - how can you predict the unpredictable? How can you imagine some of the horrific events that have taken place over the past few years? Who could have imagined the sort of catastrophe like 9/11could happen, and 7/7 in London and the Madrid bombings?"

He added that the work of ratings agencies should also be questioned. "They have gained in importance over the years. But does their influence outweigh their value?

"If you take Katrina as an example, Standard & Poor's immediately put 10 reinsurance and insurance companies on credit watch, AM Best put 17 reinsurance and insurance companies under review, and Fitch said: 'Stable outlook for reinsurance going forward.' Who's right?

"They have a code of conduct which states that they will be looking at transparency and symmetry of information, they will be independent and they will be free from conflict of interest. Well I just ask who pays them. Are they really free from conflict of interest?"

Oakes asked whether the insurance industry was at fault. "Why is it that brokers have used rating levels as a trigger for certain types of insurance? Is it that the brokers' security committees aren't up to it these days? There are these sort of issues that should be considered."

And as for regulation, he commented:

"We look upon it more as a threat than as an opportunity. Better quality regulation is good for the industry and that's something we need to bear in mind."

He also questioned how important intermediaries are. "One area that they could help to address is the apprenticeship issue. They need to maintain the successful relationship that they have with underwriters.

"But consolidation can be dangerous. We need competition, certainly within the London market, to maintain our edge and our leadership. We need that entrepreneurial flair which so often comes through intermediaries."

Moving on to risk-based capital he said: "One thing that we must not do, is ignore it, we cannot ignore it. The UK is about to embrace Solvency 2 which will bring the UK in line with the EU, or the EU in line with the UK. We are just two years away from Solvency 2 hitting.

"We need to make sure that we have managed our exposure, using the products that are available."