Steady Habits Make for a Stable Market

Regulator Says Nutmeg State Will Take AIG and Catastrophe Problems in Stride

Connecticut Insurance Commissioner Thomas Sullivan considers himself something of an insider when it comes to the insurance industry – after all, he spent 20 years at The Hartford. And maybe it’s because he spent enough of his career to see insurance cycles play out that he is so comfortable with the state of Connecticut’s own insurance marketplace. In this exclusive interview, conducted by Insurance Journal‘s Ken St. Onge in September, Sullivan touches on a range of issues – from AIG, to the workers’ compensation market to his department’s relationship with agents. His view? The “land of steady habits” is also a land of stable insurance markets.

Coastal insurance has been big issue in Connecticut. What’s the status of coastal insurance, catastrophe insurance and preparedness in general in the state?
Sullivan: I always worry about preparedness because we survey on that issue at a national level at the NAIC (National Association of Insurance Commissioners) and more often than not, we find consumers aren’t prepared for disasters. They don’t have home inventories, they don’t have backup plans, they don’t have the kinds of things that I would like to see. So, we can never have enough preparedness in terms of disaster planning. But as far as my coastal marketplace is concerned, it’s operating today in a very efficient, highly competitive marketplace which is good for consumers. They have a multitude of choices. I have over a hundred underwriters of personal lines homeowner coverage in the state of Connecticut, which I think is testament to the fact that we’ve created a regulatory environment in the state of Connecticut that allows for competition.

We haven’t strictly regulated our companies from the standpoint of the rates and forms they file. We look at everything that comes in, don’t get me wrong, and we make sure there’s actuarial justification about it, but we do so with a pillow-covered hammer, if you will, and we make sure that the market performs and responds to the market needs.

You recently launched the Coastal Marketing Assistance program in Connecticut. How’s that going?
Sullivan: It’s intended to be – and I’m pleased to report – it’s operating as a market of last resort. It’s intended for that tough to place coastal risk and they’ve seen, quite frankly, very little traffic, which, again, is a testament to the way the private market has responded to Connecticut as a marketplace.

What’s your stance on catastrophe plans?
Sullivan: There are some good elements in some of those company proposals. I am not a supporter of either state or federal intervention into the business of insurance. I do see a limited role for the federal government in a backstop facility. I don’t believe in state-sponsored catastrophe funds per se because I don’t think natural catastrophe events can distinguish where the border of Connecticut or New York or the border of Connecticut or Long Island is. That’s just not the way disasters occur. So, I think it’s impractical and imprudent to look at it at a state level. I do think that at a national level, there is a role for the Fed to play, much like what occurs in the structure known as TRIA. But I haven’t really settled on what the thresholds and triggers would be. Certainly, it’d have to be something of a high, multi-billion dollar, very significant event.

What is the state of the property/casualty market in general in Connecticut?
Sullivan: If I believe the reports I see in trade journals like yours, the market is very soft. Now, the events of last (few months) might change that. Premiums have been decreasing at a rate of 10 to 15 percent for quite a long period of time now. So, we’ve been in a sustained soft cycle in the market and we all know that these markets are cyclical. Eventually, they’ll turn around and they will harden and pricing will firm. I don’t know if the events of last (few months) will have anything to do with that or not. Some suggest it will. We’ll have to see.

From a national point of view, how will the federal loan to AIG affect the insurance industry generally?
Sullivan: Well, I think it’s a good policy decision by the Fed because it would have led to a great deal of stress and turmoil in the marketplace and I don’t think that was something that anybody wanted.

As respect to the industry itself, that is a two year bridge-loan facility so it gives, effectively, AIG an opportunity to catch their breath and consider what assets they will need to sell to raise the necessary capital to pay back the Fed, which I don’t think is a bad thing.

The good news here is, throughout it all the underlying insurance assets of AIG are performing. Said another way, under state supervision, AIG continues to be a strong and solid company – their insurance affiliates – so that’s good for consumers.

How will the AIG loan affect the debate over federal regulation of the insurance industry?
Sullivan: We welcome it because this is a great day for state-based regulation. The supervision of the underlying insurance assets is in the purview and dominion of we, the state regulators, and again, they remain as strong and solid as they ever have been. AIG’s Holding company was supervised by the Office of Thrift Supervision, which is a federal regulator. So, we’re very proud of our record. We state-based regulators are standing on high ground through all this and we welcome the opportunity to engage some of our critics.

And let me be clear, we seek to improve our regulatory scheme. We think there’s always opportunities to get better, but we don’t think one of the solutions is a federal regulator.

Will the bailout affect agents in Connecticut?
Sullivan: No. I reached out to the agent community last (September) just to take their temperature and see what their feelings were and I would say that they’re being cautious, and perhaps rightfully so. But, again, if, as I stated, the underlying insurance assets of AIG are sound and solid then they should have faith and confidence in them as well.

How would you characterize relations between your department and insurance agents in the state?
Sullivan: I have a great relationship with them. The Big I and the PIA, all the major agency advocacy groups, we have great working relations. I rely on them as stakeholders in my office, to give me the kind of perspective that grounds me in what’s happening in the marketplace, and understanding what their issues are because I think some of their issues are very much right in the wheel house of what consumers issues are.

What’s happening with the worker’s comp market in Connecticut?
Sullivan: Much like many of my other markets, the worker’s comp market has behaved very efficiently lately. I study the NCCI data that comes into my office and I look at that very rigorously. The good news is that frequency trends continue to move downward but those declines in frequency are being offset by severity trends, which are ticking upwards. We had a modest rate increase that was filed with my office last year. I don’t expect any big changes this year.

I am concerned from a policy perspective that some of the changes in our worker’s compensation statute that were made with the reforms of ’92, ’93, are going to be brought up again in the upcoming legislative session. So, I’d prefer not to disrupt what is otherwise a pretty well performing and efficient market and I would urge the legislative body to really think carefully about any policy changes.

There’s been bills kicking around the General Assembly for a couple of sessions in a row now, and I would expect some of those same bills to come up again this year but they’re not being offered by my office.

Are there any changes that you’d like your department to undertake in the next year? Any goals?
Sullivan: Well, what we do at the Department of Insurance is critical to the consuming public’s purchase and commerce of insurance and in that charge, we have to make sure we protect consumers. What we do from a financial regulatory perspective is sometimes overlooked but I would submit to you, especially in light of (recent) events, it’s now more important than ever.

But in terms of goals, we need to be more stakeholder-centric. I think the Connecticut Insurance Department has a great reputation – that’s because of the fine regulators I get to work with day in and day out. But I want their acuity and their focus to be more externally focused – understand who your stakeholders are. And they could be a variety of different folks from all walks of life, you know, be it the medical society or the trial bar. We have a multitude of stakeholders who come to our office. We need to understand what everybody’s interests are because that will make us better regulators at the end of the day.

In the last couple year there’s been an awful lot of money recovered by your department on behalf of policy holders. How has that process been working?
Sullivan: We get upwards of 6,000 to 7,000 formal complaints in my office. We take 25,000 to 30,000 telephone inquiries in my office. So, I’m very proud of the fine work that my consumer affairs division does day in and day out. And we pride ourselves on being an advocate for the 3.5 million residents of the state of Connecticut. Our job is to help them figure out the maze of insurance.

We don’t give buying advice or anything like that but we will intervene on a concern about proper premiums or whether a claim is being paid, you know, effectively, those are the kinds of things that we get involved with and advocate for the state residents, and we’re very proud of that work.

Topics Agencies Legislation Workers' Compensation Connecticut Market AIG