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Following a series of natural catastrophe disasters, you warned of the need for rates to rise particularly if this year's U.S. hurricane season proved severe. Has there been as much hardening of rates as you would wish for?

There is still too much capacity overall, although the market is hardening in cat-exposed areas such as Japan, New Zealand and also U.S. property cat. But unfortunately the more general trend is one of rates moving sideways, despite the determination of one particular broker (indirectly referring to Aon Benfield's chairman Grahame Chilton) to talk the market down by speaking of reductions of 5 percent to 10 percent.

Our own risk modelling has accurately forecasted recent events. For Hurricane Irene, we modelled for a loss of up to $120 million, and for the Tokyo earthquake, a loss of around $60 million. It's always the unexpected events that cause rates to move, but those that have occurred over recent months have been within our predictions.

Events never match the models and we are not modelling reality, so they need to be continually revised. What happens in real life is usually very different from the models' scenarios, but they are nonetheless useful in gauging what our potential exposures are. There has certainly been a lot of discussion around contingent business interruption and concerns that the numbers for Japanese earthquake/tsunami losses may move higher as a result.

However, I disagree with those that suggest that the industry hasn't kept abreast of supply chain developments. Three years ago, I talked with a German manufacturer, who identified around 1,000 single source suppliers for his company. I invited him over to Lloyd's to outline these dependencies. Businesses need to look at where potential single points of failure exist and whether they want to insure these specific suppliers.

Of course, alternative suppliers don't always exist and Grahame Chilton correctly cited the example of brake pad shortages for Formula One.

Businesses increasingly opt for the just-in-time inventory approach, although if the supply chains extend from Japan to Europe there is a time lag between dispatch and delivery, which may allow time for supplies to be sourced from elsewhere. However, there have been fewer reports recently of component shortages caused by the Japanese quake and tsunami.

Six years ago, the industry was able to attract many new capital providers in the wake of Hurricane Katrina. Do you foresee a scenario where we have further heavy losses and capacity is cut, but the world economic slowdown means there are no new sources this time around?

The influx of capital into the market in late 2005 came about as a direct result of the losses caused by Katrina, Rita and Wilma. Despite some heavy losses in various parts of the world, over 2010-2011 there have been similar natural catastrophes to trigger a similar surge of capital; indeed there is already too much in the system.

Your first half results for 2010 were severely dented by the Chilean earthquake and Deepwater Horizon. Those for 2011 will be released shortly and presumably an estimated claims bill of £2.4bn for the New Zealand, Australia and Japan disasters will make the figures fairly grim reading?

Obviously I can't reveal our first-half results ahead of schedule, but if you've seen the figures from Amlin, Beazley and Catlin then you can calculate for yourself where we might be. In the first quarter of the year alone catastrophes cost us $4 billion, which exceeded the figure for the whole of 2010.

You have spoken on several occasions of your concerns over the cost and complexity of the Solvency II regime -- are you still concerned that it will be damaging both to Lloyd's and the industry in general?

One report suggested that Solvency II might have slipped down our priority list following the recent natural catastrophes. That's certainly not the case -- we're still talking about it as much as ever and spending £300 million on preparation. We continue to work towards an implementation date of Jan. 1, 2013 -- we were told that it would be the equivalent of a marathon (26.2 miles) and we've already passed the 20-mile stage. We will be talking with the regulator on how to satisfy the requirements.

It's disappointing that at this late stage there should now be talk of a possible delay to the timetable as we are going for approval of our internal model from the Financial Services Authority. Frankly, the reason appears to be that some national regulators are not ready for implementation in 15 months' time, but we nonetheless still plan to run our own internal models next spring.

Risk & Insurance readers will be interested in your visit to China earlier this year, particularly in view of the predictions that China's insurance market may overtake the U.S. as early as 2020. Do you agree that this is a likely scenario?

It's a market that is growing rapidly and Lloyd's has established its own direct reinsurance operation. We could, frankly, write as much business as we liked in China -- the big question is whether we would necessarily make any money from doing so. Instead we're writing around $100m of Chinese business rather than aiming for $1 billion.

We regard China as a long-term investment, so we're building for the future rather than for today. We're in the fortunate position of being able to invest counter-cyclically, so we can write more business as and when we determine the conditions to be right.

Of course, despite Lloyd's long tradition it has only been established in China for a few years and we still need to spend considerable time in building up our relationships there.

Lloyd's has issued some fairly alarming predictions on the potential effect of solar flares over the next couple of years. Is this risk still high on your radar for 2012?

Yes, we have given quite a lot of publicity to this topic. We like to do thought pieces on topics that others may not be thinking about and to ask those in the market whether they have given them any consideration. In addition to the potential effects of solar flares on satellite networks, we've also examined issues such as cyber risk and digital security ? which probably are of even greater importance.

John Nelson officially takes over the role of chairman next month from Lord Levene. Can we expect any changes in approach or will it be a case of building on the work of his predecessor?

John shouldn't be regarded as "another Lord Levene," who is irreplaceable. So I will sit down with John and discuss what needs to be done. But of course, Lloyd's is a 322 year-old institution and has seen numerous CEOs and chairmen over the years. Our work should therefore focus on working with regulators and the government, achieving the right business environment and supporting our managing agents. John will continue that drive.

With institutions such as ours, you only get radical change when it has been forced on you by radical events. That was demonstrated by the recovery program of the early 1990s, which was driven by a series of massive claims for marine disasters, asbestosis and pollution. And I'm sure we will be hit by unexpected events in the future and will need to respond accordingly.

October 15, 2011

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