2002: insurers deal with a new crisis, old issues. (Industry Strategies).Corporate misdeeds hit the directors and officers line and affected insurers' investments, but problems such as mold, rising health-care costs and a troubled medical-malpractice line continue to plague the industry. The corporate debacles, such as Enron and WorldCom, and their effects on the insurance industry were the new challenges for 2002. But as for the remainder of the top 10 stories -- the saying the more things change, the more they stay the same, holds true. Health insurers struggled to balance raising premiums with rising health-care costs, the workers' compensation workers' compensation, payment by employers for some part of the cost of injuries, or in some cases of occupational diseases, received by employees in the course of their work. market was in turmoil and homeowners insurers continued to battle the mold issue. Medical-malpractice insurance turned into a crisis, controversy surrounded credit-based insurance scoring and State Farm remained the bellwether Bellwether A leading indicator of trends. Notes: A bellwether stock is a stock that is used to gauge the performance of the market in general. General Motors was an example of a bellwether stock, hence the saying "What's good for GM is good for America. of the industry. RELATED ARTICLE: Equity markets hit industry hard Sinking stock prices and the defaults of some major corporate bonds adversely affected the earnings of insurers in 2002, and recovery may not be any time soon. Life insurers felt the pain in their variable life insurance and variable annuity Variable Annuity An insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio. businesses, in which fee income is linked to assets under management Assets Under Management (AUM) is a term used by financial services companies in the mutual fund and money management or investment management business to gauge how much money they are managing. . Property/casualty insurers saw investment earnings fall, forcing them to underwrite more carefully and to significantly raise premiums. As if lower fee income for variable annuity writers was not bad enough, they and their reinsurers now face exposure unheard of Not heard of; of which there are no tidings. Unknown to fame; obscure. - Glanvill. See also: Unheard Unheard in the ebullient 1990s:The guaranteed minimum death benefit in many variable annuity contracts exceeds the contract value. While the standard death benefit is the higher of the amount invested or the contract value, many insurers in recent years have expanded the death benefit to cover highest anniversary value or even annualized gains Annualized gain If stock X appreciates 1.5% in one month, the annualized gain for that stock over a twelve month period is 121.5% = 18%. Compounded over the 12 month period, the gain is (1.015)^12 -1 = 19.6%. as high as 6%. A consequence of this higher exposure surfaced in the third quarter, when Cigna Corp posted a $720 million charge to increase reserves for reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. contracts on variable annuities Variable annuities Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio. . Cigna is one of the largest writers of variable annuity reinsurance. Some leading variable annuity direct writers were doubtlessly happy about having reinsured significant amounts of their guaranteed minimum death benefit exposure. Among them are Hartford Financial (90%), Manulife Financial Manulife Financial (NYSE: MFC, TSX: MFC, SEHK: 945, PSE: MFC), also known as The Manufacturers Life Insurance Company, is a major Canadian insurance company and financial services provider. (85%), Nationwide Financial (58%) and Phoenix Cos. (85%), according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. equity analyst Andrew S. Kilgerman at Bear Stearns The Bear Stearns Companies, Inc. (NYSE: BSC) is the parent company of Bear, Stearns & Co. Inc., one of the largest global investment banks and securities trading and brokerage firms in the world. & Co. But Kilgerman said that other direct writers have little or no guaranteed minimum death benefit reinsurance. Lincoln National Corp. and Prudential Financial do not reinsure re·in·sure tr.v. re·in·sured, re·in·sur·ing, re·in·sures To insure again, especially by transferring all or part of the risk in a contract to a new contract with another insurance company. the risk, and MetLife Inc. insures only an estimated 8%, Kilgerman reported. The worst may not be over for variable annuity writers, and "life companies' recent results suggest that profitability for the variable annuity business could be permanently impaired," said J. Paul Newsome, a certified financial analyst, and analyst Robin B.Albanese, both at Lehman Brothers Lehman Brothers Holdings Inc. (NYSE: LEH), founded in 1850, is a diversified, global financial services firm. It is a participant in investment banking, equity and fixed income sales, research and trading, investment management, private equity, and private banking. Equity Research. They wrote in a recent report that even a company as well-positioned as Hartford Financial is no longer able to buy guaranteed minimum death benefit reinsurance at acceptable prices for new business, which effectively will reduce the company's margins And while Hartford Financial and others will be changing their products and potentially charging customers more in the future for guaranteed minimum death benefit-type features, "the industry apparently is unable to go cold turkey and get rid of these costly features," they wrote. After being hit in 2002 with net losses related to under-performing portfolios and exposure to alleged accounting fraud of companies such as WorldCom Inc., insurers also began scrutinizing the backgrounds of the boards and management of companies that are potential investments. Insurers are spending more time underwriting a company's management and investigating how it expands, whether internally or through acquisitions. Insurers also reacted in 2002 by divesting equity exposure and opting for sleep insurance in the form of high-quality mortgage-backed securities Mortgage-backed securities (MSBs) Securities backed by a pool of mortgage loans. and long-term corporate bonds. Net investment income for the property/casualty industry in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. fell only 4.1% to $18 billion for the first half of 2002 as compared with the first half of 2001, according to an A.M. Best Co. special report. The decline in underwriting losses "significantly outpaced the moderation in investment income," wrote Karen Horvath, vice president in the property/casualty division. Robust price increases fueled the results, with net premiums written up 10.9%. Horvath expects that the growing exposure the industry faces in professional liability lines, mold and terrorism will serve to protect the hard market, at least over the near term. --Ron Panko D&O: Terms Tighten; Premiums Rise Corporate governance Corporate Governance The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy, and rule of law. issues surfaced as a consequence of some high-profile corporate bankruptcies tied to alleged accounting irregularities. At issue is the damage the litany of corporate accounting irregularities has done to investor confidence and potentially to commercial insurers who wrote directors and officers and surety coverage for the companies involved. D&O insurance protects a company's board of directors against claims of mismanagement mis·man·age tr.v. mis·man·aged, mis·man·ag·ing, mis·man·ag·es To manage badly or carelessly. mis·man  age·ment n. from employees and
shareholders.The Enron bankruptcy; the second-largest in the United States since 1980, was tied to accounting irregularities and refocused corporate America on D&O coverage. "Enron showed how severe a D&O loss could be. On its own, it would have been pause for change in the D&O world," said John Keogh John Keogh (1740 - 1817) was a leading Irish campaigner who struggled to get Irish Roman Catholics the right to vote and the repeal of the Penal Laws. He was of an obscure family and made his considerable fortune in land speculation, brewing, and silk trading. , president and chief operating officer Chief Operating Officer (COO) The officer of a firm responsible for day-to-day management, usually the president or an executive vice-president. of National Union Insurance Co., a member of American International Group
American International Group, Inc. (AIG) (NYSE: AIG; TYO: 8685 ) is a major American insurance corporation based in New York City. . Various sources put Enron's D&O coverage at $350 million. Past underwriting, rising claims costs and corporate scandals caused the D&O market in 2002 to see price hikes of up to 50%. Reacting to the corporate troubles, insurers also asked policyholders to take more skin in the game in the form of higher deductibles and requesting reduced limits and eliminating multiyear contracts. On the underwriting side, high-profile accounting scandals Accounting scandals, or corporate accounting scandals are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. wore a well-trod path to the courtroom. In November, bankrupt telecommunications company See telecom company. WorldCom Inc. and a subsidiary of AIG AIG addressee indicator group (US DoD) AIG American International Group, Inc AiG Answers in Genesis (religious group in defense of Scripture) AIG Artificial Intelligence Group AIG Australian Industry Group reached a tentative agreement over a D&O insurance dispute. National Union Fire Insurance Company of Pittsburgh, which had issued three D&O liability policies to WorldCom covering 2002, had moved to have the policies declared null and void, after WorldCom filed for bankruptcy. D&O coverage disputes are also in litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. involving accounting firm Arthur Andersen For the U.S. Supreme Court case commonly known as Arthur Andersen, see . Arthur Andersen LLP, based in Chicago, was once one of the "Big Five" accounting firms (the other four are PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG), performing LLP LLP - Lower Layer Protocol , which went insolvent in the aftermath of the bankruptcy of its client, energy trader Enron Corp. Insurers are also seeking to deny Enron D&O coverage. Todd Bault, an equity analyst with Sanford C. Bernstein & Co., said the difficulties faced by both D&O and surety underwriters in 2002 are signs of fundamental weaknesses from the pre-2000 soft market coming home to roost Home to Roost is a British television sitcom produced by Yorkshire Television. Written by Eric Chappell, it starred John Thaw as Henry Willows and Reece Dinsdale as his 18-year-old son Matthew. . "In the past soft market, there were both softening of prices and softening of terms," he said. "You had more cover granted. You sometimes had longer cover granted for D&O. For surety, there was a broadening of the things that were covered. "Now, with claims coming in, you are seeing not only prices going up, but a tightening of terms and conditions," he added. Changes in corporate governance practices led to scrutiny for insurers in how they account for their own businesses-especially the big, complex companies such as AIG and Citigroup. Following a public call from Berkshire Hathaway Berkshire Hathaway (NYSE: BRKA, NYSE: BRKB) is a conglomerate holding company headquartered in Omaha, Nebraska, U.S., that oversees and manages a number of subsidiary companies. Chairman Warren Buffett Warren Buffett Known as "the Oracle of Omaha," Buffett is Chairman of Berkshire Hathaway and arguably the greatest investor of all time. His wealth fluctuates with the performance of the market, but for the last few years he has been reported to be worth over $30 billion, making for corporations to treat stock options as expenses, several insurers, including Chubb and Citigroup, said they would. "Investors have made it clear that they want options accounted for in this manner," said Citigroup Chairman Sanford Weill. Bault expects the accounting practices unique to insurers to remain about the same. "The big issues for the insurance industry, which revolve primarily around reserves, haven't changed," he said. "The current environment may have brought a bit more focus back to them. Reserve accounting is difficult. It's hard to measure, and can always be improved, but there is a limit in how much more accurate it can be." --David Pilla Medical-liability rates increase In 2002, physicians were faced with not only higher medical-malpractice insurance rates, but also a limited number of companies offering the coverage. The industry was still adjusting to St. Paul St. Paul as a missionary he fearlessly confronts the “perils of waters, of robbers, in the city, in the wilderness.” [N.T.: II Cor. 11:26] See : Bravery Cos. -- the largest carrier of medical-liability insurance in the United States --cutting the line at the end of 2001, while other companies scaled back their market share or left some states entirely. As medical-liability costs rose by double digits Double Digits was a pricing game on the American television game show, The Price Is Right. Played from April 20, 1973 through May 18, 1973's show, it was played for a car and used small prizes. -- triple digits in some states -- trauma centers and hospitals closed, the most salient case being the temporary shutdown of the Las Vegas Las Vegas (läs vā`gəs), city (1990 pop. 258,295), seat of Clark co., S Nev.; inc. 1911. It is the largest city in Nevada and the center of one of the fastest-growing urban areas in the United States. University Medical CenterTrauma Center in July. Physicians have retired, moved to another state, or changed the way they practice medicine as costs for certain high-risk specialties exceed a physician's ability to pay and still be able to operate a practice. The American Medical Association American Medical Association (AMA), professional physicians' organization (founded 1847). Its goals are to protect the interests of American physicians, advance public health, and support the growth of medical science. designates 12 states that have a crisis in medical care, said Dr. Donald Palmisano, president-elect of the association. These states are Florida, Georgia, Mississippi, Nevada, New Jersey, New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of , Ohio, Oregon, Pennsylvania, Texas, Washington and West Virginia West Virginia, E central state of the United States. It is bordered by Pennsylvania and Maryland (N), Virginia (E and S), and Kentucky and, across the Ohio R., Ohio (W). Facts and Figures Area, 24,181 sq mi (62,629 sq km). Pop. . "The system is melting down right now," Palmisano said. "People need to remember that as this problem continues, and physicians retire or leave practice, we can't just go to Home Depot The Home Depot (NYSE: HD) is an American retailer of home improvement and construction products and services. Headquartered in Vinings, just outside Atlanta in unincorporated Cobb County, Georgia, Home Depot employs more than 355,000 people and operates 2,164 big-box and ask for six OBGs off the shelf. It takes a lot of years to make a good obstetrician obstetrician /ob·ste·tri·cian/ (ob?ste-trish´in) one who practices obstetrics. ob·ste·tri·cian n. A physician who specializes in obstetrics. or a good neurosurgeon neurosurgeon a physician who specializes in neurosurgery. neurosurgeon A surgeon specialized in managing diseases of the brain, spine and peripheral nerves Meat & potatoes diseases Brain tumors, spinal cord disease Salary $245K + 15% bonus. ." Industry groups, the AMA (Automatic Message Accounting) The recording and reporting of telephone calls within a telephone system. It includes the calling and called parties and start and stop times of the call. and legislators have been pushing for reform of the medical-liability laws both in state legislatures and on a federal level. Most of these proposals are based on California's Medical Injury Compensation Reform Act The Medical Injury Compensation Reform Act (MICRA) of 1975 was a California law designed lower medical malpractice premiums for Californians. Parts Micra Consists of the following parts: MICRA places a cap on noneconomic damages -- commonly referred to as "pain and suffering" -- at $250,000, limits the time during which a claim for malpractice can be filed, provides for binding arbitration and limits lawyer fees on any medical-liability case. Many states have been moving to pass legislation dealing with medical-liability costs. "The biggest states that enacted something meaningful on medical-liability reform this year were Mississippi, Nevada and Pennsylvania, and what we're seeing is legislative actions based off of California's MICRA law". said Sarah White Sarah White is an acclaimed singer-songwriter based in Charlottesville, Virginia, whose music can be roughly characterized as folk or alt-country. She was born in Warrenton, Virginia, and relocated as a child to Monroe County, West Virginia. , commercial lines policy manager for the Alliance of American Insurers. Ohio attempted to pass a medical-liability reform bill based on MICRA, after the state's Supreme Court declared limiting noneconomic damages unconstitutional. The bill, SB 281, includes a $750,000 cap on noneconomic damages for catastrophic injuries and $500,000 for all others. When the Texas Legislature The Texas Legislature is the state legislature of the U.S. state of Texas. The legislature meets at the Texas State Capitol in Austin. In Texas, the Legislature is considered the most powerful branch of state government because of its aggressive use of the power of the purse to convenes in 2003, it will also consider a MICRA-based bill. On a federal level, the House passed medical-liability reform bill HR 4600 in late September, but the Senate version of that bill has not been passed, Palmisano said. Advocates who say tort reform is not the problem, but rather increasing insurance rates and poor doctors, should note that studies have shown only 18% of malpractice cases go to trial in states with mandatory review, and of those, 80% are closed with no payment to the plaintiff, Palmisano said. If doctors operated for appendicitis Appendicitis Definition Appendicitis is an inflammation of the appendix, which is the worm-shaped pouch attached to the cecum, the beginning of the large intestine. The appendix has no known function in the body, but it can become diseased. , and 80% of the time the test came back for a normal appendix, the doctor's license would be pulled, he said. "When people talk about peer review, we need some peer review on the legal system. It's out of control," Palmisano said. John Hillman Hillman was a famous British automobile marque, manufactured by the Rootes Group. It was based in Ryton-on-Dunsmore, near Coventry, England, from 1907 to 1976. Before 1907 the company had built bicycles. Terrorism cover challenges remain At the same time insurers have been saying they wanted a federal backstop to cover future terrorism losses, they've been saying they didn't know how to price terrorism risks. More than a year after Sept. 11, in which insurers paid billions in insured losses from the disaster, President George Bush signed a federal terror bill in late November.The backstop program states insurers are responsible for terrorism losses equal to a percentage of their company's annual written commercial premium, plus 10% of losses exceeding that figure. The federal government would pay the other 90%, up to $100 billion. Now that the backstop is here, what's changed in terms of the industry's knowledge about pricing? "Nothing has changed, and it's as difficult as ever to price," said Ron Ferguson  This article is about a minister of religion with a passion for football: for an article about the father of Sarah, Duchess of York , retired chairman and chief executive
officer of Gen Re, who now acts as a consultant for that company, and
other Berkshire Hathaway companies.Yet, expectations are that writers of commercial property/casualty, workers' compensation, business interruption, excess and surety insurance -- lines required to participate in the program -- will be reasonable in their pricing. Based on early conversations with insurance companies, those who would write coverages for "non-trophy" buildings "will act responsibly, but will charge additional premium,' said Bruce Guthart, chairman and CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. of Kaye Insurance Associates, a New York-based commercial insurance broker. "It's still a free market environment," Guthart said. "Carriers, at the pricing levels they're charging now, absent terrorism, are at a point now where they're believing they're going to make an underwriting profit Underwriting profit is a term used in the insurance industry. It consists of the earned premium remaining after losses have been paid and administrative expenses have been deducted. It does not include any investment income earned on held premiums. for the first time in decades, and they're not prepared to lose that business." The federal backstop requires participating insurers to state the price of terrorism coverage in disclosure notices, and eventually on the policy itself. The program also eliminates terrorism exclusions, unless the policyholders state they do not want terrorism coverage. Not all insurers included in the program are particularly thrilled about the disclosure and reporting requirements of the federal backstop program, said Monte Ward, vice president of federal affairs for the National Association of Mutual Insurance Companies. Some commercial writers didn't exclude terrorism; they just went ahead and wrote the risk, Ward said. Whether they charged more or not depended on what they were writing. Any increases were part of the overall hardening market and not necessarily attributed to terrorism. "Now they have to pinpoint what is terrorism in their price, and that's a problem. Now they have to point it out in each policy and they're having a hard time figuring out what the price is going to be," Ward said. If companies are going to make errors in the pricing, they may tend to be downward, rather than upward, said Joel Wood, senior vice president of government affairs for the Council of Insurance Agents and Brokers. The backstop is a temporary bid to restore the marketplace, "not a government solution," Wood said, adding, "I don't see companies using this as an excuse to go off and draw a large premium." State insurance departments will have the authority to determine if pricing is "excessive," but they also have a huge challenge in figuring out what "excessive" is, said Terri Vaughan, Iowa insurance commissioner and immediate past president of the National Association of Insurance Commissioners The National Association of Insurance Commissioners (NAIC) is an Internal Revenue Code Section 501(c)(3) non-profit organization which seeks to organize the regulatory and supervisory efforts of the various state insurance commissioners from around the United States. . Dennis Kelly Dennis Kelly (born 1970 in New Barnet, London) is a London-based writer. He received a BA in Drama and Theatre Arts, Goldsmiths College, London (first). His plays include Debris (Theatre 503, 2003, BAC 2004); Osama the Hero Mold Still Issue for Insurers Insurers began to react proactively to mold claims in 2002. The industry's response to billions in losses in homeowners insurance and publicity included a major initiative to address water claims quickly, filing for policy revisions and turning to subrogation The substitution of one person in the place of another with reference to a lawful claim, demand, or right, so that he or she who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or Securities. to recover claim costs. Attorneys, including Joseph A. Gerber, a senior partner with Cozen coz·en v. coz·ened, coz·en·ing, coz·ens v.tr. 1. To mislead by means of a petty trick or fraud; deceive. 2. To persuade or induce to do something by cajoling or wheedling. 3. O'Connor, hammered the message to insurers about the importance of inspecting water claims quickly, using qualified experts to avoid lawsuits. "Look at the million-dollar verdicts-the actual property damage component wasn't the large part. The millions came from bad faith on the part of insurers," he said. Reacting to the mold-claim nightmare in Texas and California, regulators from several states such as Florida, Maryland and Connecticut investigated or issued guidelines limiting first- and third-party insurance coverage for mold-related claims. In Washington, Allstate and State Farm filed forms requesting policy clarifications for mold coverage. For example, Allstate limits mold coverage to $5,000 above the cost of repair for the event causing the mold problem, with no option for additional coverage. Commercial insurers of hotels, day-care centers and apartment buildings also dealt with mold claims. Greg Thompson Gregory Francis Thompson, PC, MP (born March 28, 1947 in St. Stephen, New Brunswick) is a Canadian politician. Thompson, a businessman and financial planner was first elected into the Canadian House of Commons in the Canadian federal election, 1988 as a member of the , the president of Thomco, a Kennesaw, Ga.-Based managing general agency, said property water claims are driving his company's property loss ratio higher than it has ever been. Melinda Ballard, who received a $32 million jury award from Farmers Insurance concerning the handling of a water-damage claim, said although some commercial insurers are pulling back from business because of the potential liability of mold, the problem should be viewed as a business opportunity. "I believe insurers should react differently than they did in the homeowners market. Turn lemons into lemonade," Ballard said. Mold-related lawsuits also expanded from homes to cars. In a lawsuit filed in North Carolina North Carolina, state in the SE United States. It is bordered by the Atlantic Ocean (E), South Carolina and Georgia (S), Tennessee (W), and Virginia (N). Facts and Figures Area, 52,586 sq mi (136,198 sq km). Pop. , the owners of a 1999 Cadillac Escalade The Cadillac Escalade is a full-size luxury sport utility vehicle sold by the General Motors luxury brand, Cadillac. It was the division's first major entry into the popular SUV market. sport utility vehicle sued its manufacturer, General Motors, alleging water leaks caused by faulty weather stripping resulted in mold growth that made the owner suffer depression and a host of medical problems. Texas remained "ground zero" for mold claims and homeowners coverage. The Texas Department of Insurance, responding to double-digit homeowners insurance rate increases and insurers puffing back coverage, approved six new residential property forms in July, giving consumers more flexibility in coverage decisions while easing the problem with severity and frequency of claims for insurers. In February 2002, Texas Gov. Rick Perry James Richard Perry (b. March 4, 1950) is a Republican politician and the Governor of Texas. He assumed office in December 2000 when then-Governor George W. Bush resigned to prepare for his inauguration as President of the United States. Gov. said in a joint statement with state Attorney General John Cornyn John Cornyn III (born February 2 1952) is the junior United States Senator from Texas. He is a Republican and was elected to his first term in November 2002, defeating Democrat Ron Kirk, the former mayor of Dallas, Texas, and Libertarian Scott Jameson of Plano, Texas. that the state's largest writer of homeowners, Farmers, "had engaged in unfair, discriminatory practices to charge consumers excessive and unjustified rates." John Hageman, state executive officer for Farmers, said the third-largest property/casualty insurer in the United States was "being used as a political football by people running for public office." In Early December, Farmers reached an agreement with regulators to remain in the state's homeowners market and agreed to a $100 million settlement. Lynna Goch State Farm Retrenches State Farm, the nation's largest auto and homeowners writer, took dramatic steps to return to profitability in 2002, which also affected the entire personal lines industry. After posting $5 billion in net losses for year-end 2001--a loss bigger than most of its competitors' entire books of business--State Farm changed its modus operandi [Latin, Method of working.] A term used by law enforcement authorities to describe the particular manner in which a crime is committed. The term modus operandi is most commonly used in criminal cases. It is sometimes referred to by its initials, M.O. from undercutting competition to gain market share to placing moratoriums on new business, while seeking rate increases in both its auto and homeowners lines. State Farm also reported a net loss of $1.5 billion for the first three quarters of 2002, said Dick Luedke, a company spokesman. In June 2002, State Farm, which insures one in five homeowners in the United States, announced plans to stop writing new homeowners business in 17 states and restricted sales in another six states. By August, State Farm had instructed its agents in as many as 35 states to be more selective in writing new business. State Farm also has plans to exit the auto insurance market in New Jersey, and had planned to stop writing new auto insurance in Louisiana until it won approval for a 14% auto premium hike for standard coverage and a 19% increase for high-risk drivers. By October, State Farm had resumed writing some new homeowners insurance in at least three states--Missouri, Kansas and Florida--after raising rates. Luedke said increased claims severity, inadequate rates and the downturn in the equity markets led the insurer to "more closely manage our growth, not stop our growth." He said the company raised auto insurance rates by an average of 10.5% and homeowners coverage by 19% for 2002. "For the overall personal lines industry, it's a positive that State Farm has taken these steps, as it should further overall rate firming in the sector and provide opportunities for unit growth for other companies," said Richard Attanasio, senior financial analyst with A.M. Best Co. "However, while it is a positive, there are risks, as those who absorb the businesses will have to be disciplined underwriters to manage any potential growth." Some companies have seen a tremendous jump in new business opportunities since State Farm announced its changes. For instance, in New Jersey, the third largest auto writer in the state in 2001--New Jersey Manufacturers Insurance Co.--saw the number of new applications double in two years, growing from an average of 8,126 a month in 2000 to an average of 16,000 per month in 2002, said Eric Stenson, a company spokesman. Allstate, the nation's second-largest auto and homeowners writer, saw its premiums written grow by 7.8% for the first three quarters of 2002, compared to the same period in 2001. That included a 6.8% increase in standard auto and a 21.2% increase in homeowners. While all insurers have been stung by the tumbling stock market dragging down investment income, State Farm has felt it more than most. "Since State Farm invests more in equities than their competitors, over the last 12 to 18 months equity markets have taken a significant toll on its capital," Attanasio said. While the total personal lines industry, excluding State Farm, had an investment leverage--or common stocks as a percentage of surplus--of 37.3% at year-end 2001, State Farm had an investment leverage of 91.5%, Attanasio said. "We know at this point that our 2002 results will still not be where we'd like them to be. We still need more improvement, and we're confident that we will see more improvement," Luedke said. Meg Green State Farm 2002 Fast Facts * Reported a net loss of $1.5 billion for first three quarters * Insures 1 in 5 homeowners in the United States * Raised auto insurance rates an average of 10.5% * Raised homeowners insurance rates an average of 19% Scoring Debate Leads to Legislation The controversy surrounding credit-based insurance scoring has shifted from whether or not such scores correlate to higher risk of insurance losses to how to use the scores without being accused of discrimination. Credit information measures patterns of responsibility in consumers and how the consumer accepts risk. Credit-based insurance scores have proved to be beneficial to consumers, with many more policyholders obtaining discounts on the basis of their credit score than have received adverse action, said Lynn Knauf, personal lines policy manager for the Alliance of American Insurers. Many states have held public discussions regarding the use of insurance scores, as consumer advocates claim these scores discriminate against minority groups, using information on age, sex, income, ethnic background or employment. None of this information, however, is used to determine a score, Knauf said. Scores are gleaned from credit reports, which don't reference age, race or any information considered as inappropriate factors in an underwriting review, she said. Eight significant laws were passed in 2002 out of about 30 or so bills presented across the country, Knauf said. For example, Utah lawmakers approved a measure that prohibits insurers from using credit scoring Credit scoring A statistical technique that combines several financial characteristics to form a single score to represent a customer's creditworthiness. as a criterion for canceling policies or denying their renewal. Washington's new law limits insurers to a 20% difference between the premiums charged to people with clean credit histories and those charged to people with poor insurance scores. And Idaho legislators passed a bill prohibiting carriers from charging a higher premium or declining to insure a person based primarily on credit history. Under regulations enacted last summer in South Carolina South Carolina, state of the SE United States. It is bordered by North Carolina (N), the Atlantic Ocean (SE), and Georgia (SW). Facts and Figures Area, 31,055 sq mi (80,432 sq km). Pop. (2000) 4,012,012, a 15. , insurers can't refuse to issue, cancel or nonrenew a policy based A decision made by any software application that is based on the policy (rules and regulations) of the organization. See policy and COPS. solely on credit information without consideration of other underwriting factors. Insurers will be required to file actuarial ac·tu·ar·y n. pl. ac·tu·ar·ies A statistician who computes insurance risks and premiums. [Latin justification for using credit information and must disclose the use of credit information to consumers. The National Association of Insurance Commissioners is working on a model regulation for credit-based insurance scoring that contains several options. The most restrictive version of the regulations bans the use of credit information or credit-based insurance scores in any fashion du during the initial review of an auto or homeowners insurance policy application. No states have considered this broad a ban on credit information. Maryland regulations, however, do prohibit using credit information in underwriting homeowners insurance. The regulations limit using credit scores to the initial review of an automobile policy application, prohibiting their use on any follow-up review or renewal. The more common version of state regulations prohibits an insurance company from taking adverse action solely on the basis of the insurance score, according to the NAIC NAIC See National Association of Investors Corporation (NAIC). . The same limitation extends to renewals, permitting scores to be used only if they improve a policyholder's premium rate, the NAIC said. Most state regulations prohibit adverse action if there is no score or insufficient information to develop one. Laws such as the Fair Credit Reporting Act The Fair Credit Reporting Act (FCRA) is legislation embodied in title VI of the Consumer Credit Protection Act (15 U.S.C.A. § 1681 et seq. [1968]), which was enacted by Congress in 1970 to ensure that reporting activities relating to various consumer transactions are conducted in a or cancellation laws already limit an insurance company's ability to take adverse action based on credit information, Knauf said. John Hillman Workers' Comp Market in Turmoil The workers' compensation insurance market continued to struggle in 2002, following one of the worst years in the market's history when it posted a combined ratio of 121, according to NCCI NCCI National Council on Compensation Insurance (Boca Raton, FL) NCCI National Correct Coding Initiative NCCI National Company for Cooperative Insurance NCCI Namibian Chamber of Commerce and Industry Holdings Inc.--an organization that tracks this part of the insurance market. Compounding the poor results is the lack of terrorism reinsurance coverage, which most reinsurers have excluded since Sept. 11, 2001. Now employers with 100 or more employees in an urban high-rise building high-rise building Multistory building taller than the maximum height people are willing to walk up, thus requiring vertical mechanical transportation. The introduction of safe passenger elevators made practical the erection of buildings more than four or five stories tall. are considered a high risk--a category that used to be reserved for workers with dangerous jobs. That's put many of the more than 1,770 companies that write less than $100 million in annual commercial lines premium in danger of insolvency if they insure a 100-employee operation that's destroyed in a terrorist attack, said Nancy Schroeder, assistant vice president of the National Association of Independent Insurers. "A 100-person risk is something many small companies would have competed for and would have loved to write," Schroeder said. "But now, in Illinois, for example, that could mean $100 million in death claims. The Sept. 11 events really added to the distress in a market that had already begun to harden." While workers' comp premiums rose 13.5% in 2001, the insurance industry sought additional rate increases in 2002. The NCCI, which files loss cost ratings in 37 states, requested increases in 28 states as of November, said Pete Burton, senior division executive for state relations. For this same time in 2001, the NCCI had requested nine increases. "It's a changing landscape. You're seeing the cost pressures of medical and litigation costs pushing loss costs up," Burton said. Perhaps the most telling barometer of the troubles in the workers' comp market is the growth of the residual market, where employers must go to buy insurance if they can't find it in the private market, Burton said. For the first three quarters of 2002, the number of applications that the residual market has received is up 31% over the first three quarters of 2001. By premium, the residual market has grown 58% in that time, Burton said. "We are seeing a lot of larger risks looking for Looking for In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with. coverage," Burton said, noting there's been a 76% increase in policies with premiums of $100,000 or more, while policyholders with under $1,000 in premium have increased by only 2%. Workers' comp has been an especially difficult line in California, where the State Compensation Fund of California grew 102% in direct premiums in 2001 to become the largest workers' comp writer in California and in the country. California's workers' comp woes mostly stem, however, from the state's poor timing in adopting an open rating law, Schroeder said. After California began to allow companies to set rates without regulatory approval in 1995, carriers slashed prices to gain market share, but were able to compensate from underwriting losses as long as investment income was strong. But recent downturns in the equity markets and a drop in interest rates, plus the demise of several large carriers, have left the market in crisis. Meg Green Worker's Comp Combined Ratios After Dividends 1997 103.5 1998 111.3 1999 118.6 2000 120.8 2001 120.9 Source: Best's Aggregates and Averages--Property/Casualty, 2002 Note: Table made from bar graph Health-care inflation grows Rapidly rising health-care costs have stressed the U.S. health insurance system. Although insurers have managed to raise rates, most believe cost shifting won't work much longer. As the industry enters 2003, many are asking," What's next?" It's a strange time for health insurers, said John Fitzgibbon John Fitzgibbon may refer to:
KPMG Kaiser Permanente Medical Group KPMG Keiner Prüft Mehr Genau (German) KPMG Kommen Prüfen Meckern Gehen LLP, an accounting and tax firm. While the industry is performing better financially than it has for a long time, health-care costs continue to escalate faster than they have in a long time. It's a "genie genie: see jinni. An online information and bulletin board service that closed its doors at the end of 1999, much to the dismay of its many users, some of whom were still chatting when the plug was pulled. in the bottle" phenomenon, said Fitzgibbon, because rising costs are difficult to reverse. For example, costs rose 13.7% in 2002, according to a study by PricewaterhouseCoopers, and are expected to increase anywhere from 15% to 20% in 2003. Employers are shifting the cost to employees, but employee compensation isn't going up as fast as the current inflation rate. And as the number of consumers and employers who can't afford insurance increases, health insurers are losing customers, said Dr. Don Young, president of the Health Insurance Association of America. Higher rates from providers, state mandates, declining government funding, an aging population, the increasing costs of prescription drugs and higher utilization of benefits are all reasons for the increases. In addition, litigation costs impact premiums. Medical-malpractice litigation has skyrocketed, which puts financial pressure on insurers. It also causes physicians to practice "defensive medicine," which results in more tests and treatments than necessary, Young said. In 2002, providers also filed lawsuits against insurers in at least eight states over payment practices. In several cases, physicians allege that insurers "downcode" or "bundle" codes for services, thereby paying less for a more expensive service or combining services and paying the cheaper bill. So far, these lawsuits haven't been a big factor in rising health-care costs, Young said. But if a major class-action lawsuit were to move forward, it would create a large impact. Litigation has led to a ruling that ordered Blue Gross Blue Shield Blue Shield A US not-for-profit health care insurer that is a reimbursement intermediary for physicians. Cf Blue Cross. of Georgia to share its fee schedule and its methods for calculating payments with doctors, which would have given the insurer less negotiating power over rates. The regulation has been loosened, however, Young said. As of Oct. 1, health plans must provide information about payments to enrollees rather than physicians. The information doesn't have to include actual rates, only general details about how the physician is being paid, such as through a capitation CAPITATION. A poll tax; an imposition which is yearly laid on each person according to his estate and ability. 2. The Constitution of the United States provides that "no capitation, or other direct tax, shall be laid, unless in proportion to the census, or , fee-for-service or another arrangement. Meanwhile, Texas is currently developing rules that relate to fee disclosure. The rising costs are also creating an opportunity for fraud. Unlicensed health plans have operated in all 50 states, and have left consumers with millions of dollars of unpaid claims. In addition to taking business away from legitimate health insurers and causing providers to make up for lost payments with higher rates, they give health insurers a bad rap. "People may see the reports [about unlicensed plans] on the news and come to the conclusion that it's the practice of all health plans," Young said. Something fairly dramatic must happen soon to mitigate the problem, Fitzgibbon said. He thinks forcing consumers to budget their health care, such as through direct-to-consumer health plans, and focusing on people with manageable medical conditions See carpal tunnel syndrome, computer vision syndrome, dry eyes and deep vein thrombosis. such as diabetes, could help. Marie Suszynski Factors Driving Rising Costs in Health Care (2001-2002) General Inflation (CPI) 18% Drugs, Medical Devices & Other Medical Advances 22% Rising Provider Expenses 18% Government Mandates & Regulation 15% Increased Consumer Demand 15% Litigation & Risk Management 7% Other 5% Source: Prepared by PricewaterhouseCoopers from publicly available information Note: Table made from pie chart Bermuda Insurers Hold Their Own The ascendancy as·cen·dan·cy also as·cen·den·cy n. Superiority or decisive advantage; domination: "Germany only awaits trade revival to gain an immense mercantile ascendancy" Winston S. Churchill. of Bermuda's insurance industry in the wake of the 2001 terrorist attacks came as no surprise, but the influx of capital to the island--much of it to form new companies--brought wider recognition of a new reality: Bermuda is no longer a mere safety valve safety valve, device attached to a boiler or other vessel for automatically relieving the pressure of steam before it becomes great enough to cause bursting. in times of tight capacity, but a permanent and influential part of the insurance world. Some industry observers went so far as to say Bermuda has eclipsed London as a leader, having attracted more than half of the capital that poured into the industry in 2001 and 2002. The sequence of events after Sept. 11 doesn't necessarily mirror what followed Hurricane Andrew--the previous watershed event in Bermuda's development as an insurance center. Then, new companies sprang up, and most were absorbed by larger, more established players within a few years. But the same companies that feasted on the newcomers in the 1990s now have fewer holes to fill in their portfolios, and there are fewer truly independent start-ups in the current crop. Michael Hallett, an equity analyst with Fox-Pitt, Kelton in New York, said companies that might otherwise look to buy up their new competitors don't have the capital to do so, at least in the short term. Besides, he said, the current market offers "pretty reasonable organic growth opportunities." The new companies didn't find all their expectations met when they started operating early in 2002. Big, established insurers used their long-standing relationships and defended their market positions aggressively, leaving relatively slim pickings in areas such as property catastrophe, where the newcomers had hoped to grab business. The older companies also held their place as the drivers of pricing, at least in the early going. But the start-ups found plenty of ways to deploy their capital, opportunistically filling gaps in both reinsurance and primary coverage, observers said. The Bermuda operation of Arch Capital Group Ltd., for example, "has been fairly disciplined in how they approach the market, and yet they've seen ample opportunity in how to use their capital," said Jay Cohen Jay Cohen (born 1968) was the CEO of World Sports Exchange (WSEX), an online gambling company from 1996 until July 24, 2000, when he was the first United States citizen to be convicted in US Federal Court for violation of the Federal Wire Act for operating an online gambling , an equity analyst with Merrill Lynch Merrill Lynch & Co., Inc. (NYSE: MER TYO: 8675 ), through its subsidiaries and affiliates, provides capital markets services, investment banking and advisory services, wealth management, asset management, insurance, banking and related products and services on a global basis. Global Securities in New York. And the battle between the startups and the older players is hardly over. "Given the reserve problems that many of the large reinsurance companies have, there is a clear benefit in having an unencumbered Unencumbered Property that is not subject to any creditor claims or liens. Notes: For example, if a house is owned free and clear (meaning the owner owes no mortgage to anyone), it is unencumbered. balance sheet with very little reserve risk," Cohen cohen or kohen (Hebrew: “priest”) Jewish priest descended from Zadok (a descendant of Aaron), priest at the First Temple of Jerusalem. The biblical priesthood was hereditary and male. said. Over time, Hallett said, some of the new companies could become lasting powerhouses, aided by "impressive management teams" and relatively clean capital. "I think you could see some of these companies emerge as leadership companies" with global franchises, he said. In early December, Endurance Specialty Holdings Ltd., itself barely a year old, formed a new, London-based subsidiary, Endurance Worldwide Insurance Ltd., to write commercial insurance and reinsurance in the United Kingdom. Hallett noted a strong London presence among the top executives of the start-up companies--and a growing tendency for traditional Lloyd's business to be written in Bermuda. This includes high-excess coverage for Fortune 500 customers and lines such as marine, aviation and satellite. Brendan Noonan |
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