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Academics place emphasis on cycles, solvency.

Academics Place Emphasis on Cycles, Solvency

Taking a break from tossing around theories, equations and statistics during the recent meeting of the American Risk and Insurance Association (ARIA) in Orlando, FL, insurance academics met in plenary sessions to focus on underwriting cycles and insurer solvency.

"The insurance industry thinks it's as solid as a rock, while the public thinks it's the next S&L crisis," Mark Puccia, senior vice president of Standard & Poor's Corp., told insurance professors and students from around the world during one featured session. In Mr. Puccia's view, although many insurers are troubled by inadequate capital and investment pitfalls, they are part of "one of the strongest industries in the financial area."

To help assure the public that insurers are solvent, state insurance regulators are putting more of their resources into "solvency policing" and trying to improve those resources, according to Sandra Gilfillan, executive vice president of the National Association of Insurance Commissioners.

Regulators, through the NAIC, are trying to enhance their departments' resources by encouraging state legislators to allow them to spend more of the money derived from fees, taxes and fines insurers pay, she said. At the NAIC, she said, the computer system has been revamped after a $5 million investment in hardware and software. Now more than 5,000 reports from insurers, sent in on diskettes, are loaded on the system and can be accessed by regulators around the country. In addition, she said the NAIC is re-evaluating its solvency examinations, improving the quality of its staff, increasing its actuarial services and seeking academics and retired insurance executives and regulators to serve on independent audit teams.

Despite these improvements, Joseph Belth, an insurance professor at Indiana University, attacked the regulatory system by saying that insurers have found ways to doctor their statements, including using sale and lease-back agreements, a point with which Mr. Puccia later agreed. He also pointed out that regulators disagree on how to assess solvency. "In some instances, the disagreements make the difference between solvency and insolvency," he said. Furthermore, he said, they refuse to release public information about companies.

Thus, Mr. Belth had "four suggestions for regulators in this fishbowl atmosphere in which they operate." One, they should "lift the veil of secrecy" and keep the public informed. Two, they should "welcome assistance from wherever they can get it." Three, they should screen directors and officers of insurance companies. And finally, they should require insurers to provide policyholders with prospectuses. "It seems ironic that someone who invests in an insurance company can get a prospectus but not its policyholders," he concluded.

On another but related front, the NAIC is promoting research on the causes of the underwriting cycle.

"We're still dealing with the aftermath of the early 1980s," said Robert Klein, director of research for the NAIC, referring to the worst underwriting cycle in history. As a result, regulators want to better understand what drives the cycles to develop policy implications, he said.

"We're not against new theories, new regulations, change. We want to make sure they will impact the marketplace," said Illinois Deputy Gov. John Washburn, who as former NAIC president spearheaded the research efforts.

With financial support, data and referrals from the NAIC, researchers at the University of Pennsylvania, University of South Carolina and Stewart Economics in Chapel Hill, NC, are studying areas that may affect cycles, including insurer capital flow, interest rates, adverse selection and price cutting. Professors J. David Cummins and Neil Doherty of the University of Pennsylvania and Scott Harrington of the University of South Carolina went on to explain their work. The results, according to Mr. Klein, will be published late this year or early next year.

Other research discussed during conference sessions also related to cycles, solvency and regulation, as well as risk classification, health care and coverage, international insurance, no-fault auto insurance, workplace accident rates, insurer profitability and economic insurance and risk management theory.

One of the few non-academics on the program and perhaps the only risk management practitioner was Maureen McDonough, an attorney with the Massachusetts Water Resources Authority, which is in charge of cleaning up Boston Harbor. During a roundtable session sponsored by RIMS, Ms. McDonough discussed the scope of the 11-year, $6.1 billion project, which includes the construction of a new wastewater treatment plant for 43 cities and towns, and its insurance and risk management program. To her displeasure, as a governmental entity, it had to develop detailed program specifications and purchase coverage through a competitive bidding process. "Competitive bidding is not necessarily the best means of purchasing insurance," she said, explaining that the process inhibits the long-term relationships with insureds that insurers prefer.

Also of note, Sandra Gustavson, a professor at the University of Georgia, was inducted as ARIA's new president, replacing Jerry Todd of St. Mary's University in San Antonio, TX.
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Title Annotation:American Risk and Insurance Association on insurance underwriters
Author:Schussel, Mark L.
Publication:Risk Management
Date:Oct 1, 1990
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