Lloyd's chairman says insurers must focus on profitable business.

As chairman of the influential Lloyd's market, Lord Peter Levene had made it a point to repeatedly warn the industry in countless speeches throughout the past year that, despite a good year in 2003, there are dangers ahead.

Lloyd's itself has revamped its management structure over the past two years, with an aim to enforce greater underwriting discipline on the syndicates that write for it.

The Lloyd's chairman's latest public foray was the Risk and Insurance Management Society Inc.'s annual conference, where he outlined the risks lacing Lloyd's and the industry, and the danger of what he calls the American "compensation culture."

Q: Catastrophic claims were down in 2003, but you have said that the world is still a dangerous place and that you're being cautious. What are the risks Lloyd's is facing in the next couple of years?

A: In terms of industry risk, you never know what's going to happen. Unlike other businesses, our business is about risk. Our businesses gather ways to try to avoid it, because you obviously want to avoid it, and 2003 was a good year. Mainly, you hope for the best and insure the right business that's going to be the most viable and the most profitable. Frankly, who's to know what is going to be more risky this year than was last year? We don't really have control over it.

But there are other risks in a wider sense. The biggest risk is that the market reverts to its old ways and just goes on writing in any way. If the market starts making moves in that direction, then we'd really be worried. We've made two or three businesses exit the market. But I think that people are taking it seriously.

Q: Lloyd's has a reputation for being a strict underwriter. What are the biggest mistakes insurers make when underwriting?

A: Being greedy; trying to take on things that they don't have any business taking on. Lloyd's also has a reputation of being a place where you can insure what you can't get insured elsewhere. A very large financial-services company needed directors and officers insurance and carriers refused to do it. They had a great difficulty getting coverage. They came to us and they had a very significant loss book of what were carrying before. I said to them, "Look, let's write it." But we think the price that was quoted by Lloyd's was the first time it's ever been quoted using a sensible and economic principle.

Q: In the past, you have referred to a "compensation culture." What do you mean by that?

A: What I'm talking about is the situation of the tort system. It's a strange system. I was watching TV last night about a man who had brain damage. The doctor in the hospital needed a neurologist. It took five hours to find a neurologist because so many had left the field because the medical-malpractice cover was getting so expensive as a result of claims going tip and tip. Years ago, when somebody was sick and in the hospital and they didn't recover, people had an enormous amount of sympathy and would say, "You win some, you lose some. "The first thing they say now is, "I'm going to sue them."

The compensation culture in the United States is now equivalent to a 5% tax on wages--it's that large. The other thing I saw yesterday was a telephone directory in my hotel, and on the back page there was a huge ad for ambulance chasers. It is, as I describe it, a cancer in the system.

Q: What's the biggest trend you see developing over the next few years?

A: I think people mustn't lose sight in terms of natural disasters. We talk about terrorism, D&O insurance, medical malpractice, but natural disasters are the one thing nobody can control.