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Good news is fleeting at Atlanta RIMS Conference.

The Persian Gulf war and the deepening U.S. recession may have been to blame for the subdued and somewhat uneasy mood shared by speakers and attendees at the recent Atlanta Risk Management Educational Conference. However, the state of the insurance industry probably did not help raise anyone's spirits either. Indeed, the record number of 275 people attending three days of sessions on minimum federal solvency standards, balancing the cost of AIDS care and negotiating environmental liability found that good news was fleeting.

According to Dick Dorsey, vice president of the American Insurance Association, the insurance industry has become the "scapegoat" for people angered over the increasingly prohibitive cost of insurance.

"When I talk to people about our industry I hear words like profitable, necessary evil, arrogant, big, rich and uncaring," he said. "I believe around 80 percent of those people think insurance profits are too high; an acceptable level ought to be 23 percent to 25 percent."

Mr. Dorsey said this perception has led to a swing from deregulation to re-regulation in the form of rate rollbacks. "It's been safe for state legislators to propose legislation offensive to our industry." he said. "For example, state regulators want to decrease automobile insurance rates without examining why the rates are set at their current levels. Premiums are high because of things like fraud."

Although primary action in insurance legislation usually takes place on the state level, several key federal initiatives have been spawned, including Rep. John Dingell's much-vaunted proposal for minimum solvency standards due out this month. In fact, according to Paul Brown, acting director of governmental affairs for the Risk and Insurance Management Society Inc., Washington will play a major role in future insurance regulation.

Mr. Brown said the savings and loan debacle is viewed by many as having opened the door for federal regulation of insurer solvency, and the leader of the "posse" is Rep. Dingell, D-MI. The clampdown extends to the National Association of Insurance Commissioners, which will be investigated by the General Accounting Office regarding its procedures for preventing insolvencies.

Sen. Don Riegle, D-MI, chairman of the Senate Banking Committee, "has gone so far as to request that the Treasury Department conduct a separate in-depth study into insurer solvency issues." Mr. Brown said.

Amidst the dismal talk about the insurance industry, Mr. Dorsey, on a lighter note, invoked the famous humorist and governmental skeptic Will Rogers when he said, "Be extremely thankful that you don't get all the government you pay for!"

Four Cornerstones

According to David Holbrook, president of Marsh & McLennan Inc., the U.S. insurance system is expensive, cumbersome, inefficient, cyclical and in need of reform-not necessarily regulation. "The amelioration of our industry's poor image could come by implementing four cornerstones of reform," he said. "First, there should be federal chartering of insurers and reinsurers that write large risks. They should be regulated for solvency only and be free from rate and form considerations."

Such a measure, he said, would encourage alien and unauthorized underwriters to seek federal charters and would repatriate offshore earning capacities and jobs.

The second cornerstone involves creating an atmosphere of mutual trust in which litigation is the exception not the rule. "In 1988, $12 billion was spent by the industry for outside legal talent, with estimates of $66 billion by the year 2000. It must stop," Mr. Holbrook said.

The third cornerstone he mentioned concerns building an industry where service reigns, not the commodity mentality. Last, he said integrated, specialized global underwriting must be stressed to create a more efficient market.

"A broker with an Atlanta-based risk should be able to place it with someone in the Geneva market," Mr. Holbrook said. "Insurance branch offices with regional underwriters will bury the industry."

Paying a 'Heavy' Price

Although Jeffrey Greenberg, president of National Union Fire Insurance Co., agreed with the other speakers that insurers have a social obligation to provide coverage at affordable rates, he warned that the industry is paying a "heavy" price in the form of a sluggish gross national product and lack of competitiveness abroad.

"We have to determine the precise role of government bailouts, among other things," he said. "Do we want to bail out weak insurers? In my view, responsible companies pay twice for that. The cost of regulation must be weighed against its benefit."

According to Mr. Greenberg, the insurance industry has a writings to surplus ratio of 1.5-to-1, but capital reserves are weak, and he believes cash flow will soon turn negative.

To forestall the onset of another hard market, Mr. Greenberg said that overall service in the insurance industry must be improved. "It all boils down to meeting clients' needs," he said. "In the area of product innovation and differentiation, we aren't doing very well."

To prevent the loss of capacity in a hard market, he said, one must look at what individuals are doing in the market to avoid dislocation.

"We have the advantage of better technology and real-time information to track our books of business," he said, "although I'm not sure this is true for the industry as a whole. And you must remember that it is an industry made up of lots of different people, so you must choose your business partners carefully."

Regarding the consolidation of insurers through mergers or acquisitions by non-insurance-related businesses, Mr. Greenberg sees a slackening off.

"The insurance industry used to be viewed by non-insurance owners as a cash cow, but now they see the complexities," he said. "Many non-insurance owners still look for a bottom line return, but others are experiencing the phenomenon of 'the more you know, the less you realize you know."'

In order not to paint an entirely bleak picture of the future of insurance in this country, Mr. Greenberg reminded attendees that 40 percent of the world's insurance purchases are made in the United States. "If you want to be a global player," he said, "you've got to come here."
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Title Annotation:Risk and Insurance Management Society
Author:Johnson, Tom
Publication:Risk Management
Date:Mar 1, 1991
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