U.S. intervention hinders disaster recovery, says reinsurance giant

The largest reinsurer of U.S. risk saidthe federal government’s intervention in the insurance market could hinder recovery efforts following natural disasters.

In a report released on Tuesday, Lloyd’s of London argued that “[g]overnment intervention in insurance markets should be kept to a minimum,” but trends in the United States appear to the contrary.

“We don’t believe that the U.S. has the balance between industry and government intervention right, you have government intervention in federal and state level, it demonstrates this is not a sustainable way to proceed,” said Sean McGovern, Lloyds general counsel and the director of North America.

“The private insurance market has a crucial role to play in helping communities and economies recover from disaster,” Sean McGovern continued. “We need to go back to first principles and redraw the boundaries between government intervention and the private market. The cost to the U.S. taxpayer is huge and is not sustainable.”

The report, titled “Managing the Escalating Risks of Natural Catastrophes in the United States,” urges greater cooperation between government, insurers, and planners in the United States to ensure that a greater emphasis is placed on managing and mitigating risk.

According to the report, a healthy private insurance market will help to price risk appropriately and in turn lead to greater preparedness.

“Insurance is not sustainable if it is offered at rates below what is required by sound, risk-based actuarial practices,” explained McGovern “When insurance is not risk-based, the wrong price signals are sent and there is little or no incentive to mitigate risk.”

McGovern argued that the insurance industry and the U.S. government must help those affected by disasters to gain a better understanding of the potential costs of these events so they will take the necessary steps to mitigate the impact of future disasters.

With proper planning the costs of natural disasters could be significantly reduced, said the report.

The Lloyd’s report comes in the wake of one of the most destructive series of natural disasters in U.S. history. According to the Insurance Information Institute, economic losses from natural catastrophes in the first half of 2011 amounted to $27 billion and this year is on track to be the costliest year on record for the insurance industry.

“The extent of the challenge facing us is best highlighted by the unprecedented series of natural disasters that have occurred this year,” said McGovern. “Never before has it been more timely or necessary for us to work together to manage the escalating risk of natural catastrophes in the U.S.”