Conference Sure of Firm Market, Uncertain About Future of Regulation

Except for the future of insurance regulation, there was surprising unanimity on leading issues facing the property and casualty insurance industry among both panelists and guests at the Fifteenth Annual Executive Conference for the Property/Casualty Industry. Sponsored in part by Standard & Poor’s, the event in New York on Nov. 20 and 21 drew an audience of property/casualty insurance executives to hear presentations by industry executives, analysts, trade associations and regulators. The principle points of discussion included the current state of the market and the short-term outlook, the future of insurance regulation, asbestos litigation and civil justice reform.

A consensus emerged among panelists at the conference that the property/casualty industry will not see a soft market any time in 2004, despite early signs that the cycle has reached or passed its peak. They cited an array of conditions they believe will keep the market firm, if not hard, for at least another year. Panelists expressed the opinion that the problem of reinsurance recoverables, lagging investment income, reserve increases and uncertainty over the outcome of asbestos litigation will combine with less significant factors to hold prices firm.

The strongest indicator that a softening of the market is on the horizon is the infusion of new capital into the industry, principally through newly-organized insurers and reinsurers in Bermuda. An increase in capital, the panelists acknowledged, ought to exert downward pressure on prices, especially since the new arrivals are not burdened with reserve deficiencies on business written during the prolonged soft market of the 1990s. They reasoned, on the other hand, that the new capital is not sufficient to exert a controlling influence on the overall market. William R. Berkley, chairman and CEO of W.R. Berkley Corporation, pointed out that during 2003 four U.S. insurers wrote off more capital than the entire Bermuda market has available.

Problem recoverables
Panelists offered reinsurance recoverables as one of the factors that will encourage underwriting discipline for at least another 12 months. S&P’s Managing Director Steven Dreyer estimated that reinsurance recoverables will reach $200 billion by year-end 2003, approximately two-thirds of the surplus of U.S. property/casualty insurers. The problem this creates does not, however, appear insurmountable. Heidi Hutter, CEO of Black Diamond Group, pointed out that reinsurers have already collateralized 40 percent of recoverables and have $300 billion of surplus to back the remaining $120 billion of recoverables. Berkley argued that willingness to pay, as well as ability to pay, is an important issue. In support of this position he pointed to growing use of arbitration to resolve disputes that in the past the parties would have settled between themselves.

Whether or not reinsurance recoverables are secure, panelists asserted that ceding companies will have to get use to having fewer “AAA” rated reinsurers available. Dreyer reported that since Sept. 11, 2001, rating agencies have downgraded 14 of the top 20 reinsurers, and eight have seen their ratings slip more than once. One reason for this may be that the market does not reward higher financial strength ratings with higher rates. All reinsurers on a risk typically receive the same rate regardless of how the rating agencies view them.

Whither insurance regulation
There was less of a consensus on the future of insurance regulation. Agreement among the panelists that there is a genuine regulatory crisis did nothing to dissuade divergent views on how the situation will work itself out. In many ways, panelists’ views reflected their political beliefs.

Craig Barrington, general counsel of the American Insurance Association (AIA), depicted some type of federal intervention in the regulation of insurance as imminent and inevitable. In a survey of state laws, he reported, AIA found more than 350 price control laws that apply to the property/casualty industry, and more than 250 form review laws. Insurers, he asserted, cannot be efficient while carrying regulatory overhead of that magnitude. Barrington described efforts to reform state regulation of insurance as inadequate, accusing state regulators of a fixation on price control and hostility to product innovation that are out of place in a world of high technology and globalization. By passing the Gramm-Leach-Bliley Financial Services Modernization Act and the Terrorism Reinsurance Act (TRIA), he continued, Congress has shown that it can and will act to address important insurance issues. TRIA, he went on, vests the power to regulate insurance in the Department of the Treasury, an agency he said behaves in a professional and businesslike manner, supportive rather than hostile to the insurance mechanism.

New York Superintendent of Insurance Gregory Serio said that he does not think it will happen the way Barrington predicts. He laid the blame for much of the bureaucratic delays in state regulation on the industry, accusing property/casualty insurers of not keeping up with regulators.

He pointed out that life and health insurers make as much as 70 percent of their filings on a speed to market basis, completing all the required filings on the department’s Web site. The department receives no more than 8 percent of property/casualty filings via that route. He said that the insurance department wants to get out of the business of approving forms, and cited as an obstacle a reluctance among property/casualty insurers to take responsibility for certifying that filings are in compliance with New York law. “Is the industry,” he asked, “ready to modernize along with the regulators?” The clear implication of his presentation is that they are not.

No solution to asbestos in sight
Asbestos litigation, panelists and the audience agreed, will continue to be a factor for the foreseeable future. AIG’s Greenberg described the asbestos trust fund currently working its way through Congress as a bad idea. It will not work, he asserted, because it cannot satisfy all interests. Insurers feel that it demands too much of them, defendants argue that insurers are not paying their fair share, and unions are looking for more from both insurers and defendants. He proposed instead a solution that incorporates compensation based on defined medical criteria, consolidation of claims in federal courts and a cap on legal fees. Insurers, defendants and unions, he argued, will support a solution that embodies these principles, leaving trial lawyers as the only constituency that will oppose it.

Tort reform, a closely related issue, also drew attention at the conference. AIA’s Barrington said he believes that if insurers, the business community and sympathetic legal scholars get involved, tort reform at the state level is possible. The key to changing the system, he urged, is getting good judges at the top of the state court system, particularly in states where supreme court justices are elected. The trial bar, he asserted, owns these justices because they have historically been the most concerned about getting their people on the court. “We change it by putting our money where our views are,” he said. “We change it by getting involved, getting involved politically.”

Greenberg described a need to attack the problem at both the state and federal levels, and had both high praise and hopes for civil justice reform legislation working its way through Congress. He also urged using insurers’ power to withhold investment in municipal bonds of states with the most egregious tort systems, and drawing other segments of the business community into the battle. “It’s not an insurance problem as much as it is an economic problem,” he argued. “The country is suffering from our tort system. It has a profound effect on economic growth. It accounts for about 2 percent of our GDP, and going up to 3 percent in another few years. It’s an enormous burden on our country, so it’s everybody’s problem.”

Joseph F. Mangan is the author of four textbooks on commercial lines underwriting. He brings more than 25 years of experience in P/C underwriting to his current position as consultant, author and editor.

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