Demutualization Concerns.

Catching up on my reading, I had to respond to this and the spread of articles on demutualization, including the article, "A Nation on the Brink of Demutualization." (Best's Review, Life/Health, October 1999)

I want to be sure I understand a company's motivation for demutualization. I understand it will introduce the opportunity to enter the capital market, thereby making public funds available to improve product development, marketing and investment strategy, and thereby the company can maintain a competitive position in the expanding market of "public financial service companies."

Since the mouths of stockholders are at the head of the table, they of course are fed dividends first, and policyholders (who are not stockholders) follow behind. This would seem to dilute the dividend full nourishment that policyholders had enjoyed for more than 100 years. Am I wrong?

It is this closed family, sumptuous dining that has always made the traditional, old-fashioned whole life policy so attractive and blew away the sparse offerings of nonpar, universal life and all other fare that siphoned off nourishment to hangers-on.

Whole life has not changed and is as healthy as it has ever been in the marketing hands of companies that still believe in feeding policyholders first, last and always. But the lust for more and more of more and more is turning the heads of too many mutual companies.

Nowhere in all the hoopla about demutualization have I been given any reason to believe the policyholder is going to be better off by sacrificing dividends to satisfy a stockholder. Every dollar in a stock dividend is a compound loss in death benefits when paid-up additions are sacrificed.

Are we still in the business of first and foremost providing maximum death benefits and long-term accumulation for people, families, business owners, children and grandchildren at the lowest possible net cost, or are we irretrievably sacrificing all to the "golden calf"? Pitiably, more and more the latter would seem so. I am sad.

John H. Danahy, CLU 

Cowan Financial Group

St. Augustine, Fla.

Securitizing Catastrophes

The property/casualty insurance industry faces several critical challenges in the next century. None of these challenges, however, is greater than the threat of losses related to natural disasters. According to a report by the National Geographic Society, about one-third of the U.S. population now lives in coastal, hurricane-prone states. Forecasters tell us that the South and West areas--prone to drought, fires, hurricanes, earthquakes and mudslides--are expected to grow in population from 32% of the U.S. total currently to 51% by 2025.

In light of these facts, the National Association of Independent Insurers is working independently and in conjunction with the National Association of Insurance Commissioners on several innovative ways for property/casualty insurance companies to protect themselves from catastrophic losses. At the forefront of the debate is how we make securitization options more available to more companies. Securitization refers to the process of utilizing capital market investment to transfer catastrophe risks.

The NAIC recently endorsed one alternative when it adopted the Protected Cell Company Model Act. Simply put, a company can create an identifiable pool of assets and liabilities, commonly referred to as a protected cell, for the purpose of transferring catastrophic risk exposure to capital market investors. Investors (bondholders) in these protected cells can come from a wide variety of financial buyers who are willing to assume some of the high-level risk in a trade-off that allows them to earn a somewhat higher return than more traditional investments offer. In 2000, more companies may want to utilize this option to protect themselves from "the big one" -- the catastrophe that could seriously impair a company.

Another alternative in the process is the establishment of special-put-pose vehicles (SPV). SPVs are being considered by the NAIC as another insurance securitization approach. SPVs currently are done primarily offshore. The objective of commissioners and industry is to create regulatory, legislative and tax environments that will promote onshore SPVs. The value of having more than one structural option is that a broader range of insurance companies may be able to participate in insurance securitization transactions that meet their unique requirements and structural preferences.

SPVs are different from protected cells, because they are totally separate legal entities from the insurance company. This option offers another way to tap capital market investment and transfer high-level catastrophe risk. It is hoped that the onshore SPVs will grow in use as an additional option for property/casualty insurance companies.

In addition to the securitization options above, the NAII board of governors recently affirmed support of two federal alternatives. The first is H.R. 2749, The Policyholder Disaster Protection Act of 1999, which encourages insurers to prefund coverage for natural disasters, such as earthquakes and hurricanes, by allowing them to set up voluntary tax-deferred catastrophe reserves. H.R. 21, The Homeowners Insurance Availability Act of 1999, also is supported by the NAII. This proposed legislation would enhance available underwriting capacity for disaster perils by authorizing the Treasury to sell catastrophe reinsurance contracts to state disaster insurance facilities and to individual investors.

The NAII is a serious and committed participant in the debate and the development of all the various strategies that will give property/casualty insurance companies more choices to deal with catastrophic exposures. An insurance company's ability to adequately protect itself from financial disaster allows it to accomplish its basic goal--to protect its policyholders. With the increased migration of Americans to high-risk, catastrophe-prone areas in the next century, we can't think of a better New Year's resolution.

Joseph Pomilia

Assistant Vice President, Financial Reporting

National Association of Independent Insurers

Des Plaines, Ill.