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Insurers face a brave new world.

IN AN ERA OF GLOBAL economic forces and rapid change, the property/casualty industry is facing a period of transition, according to Maurice R. Greenberg, chairman and chief executive officer of American International Group Inc. "The insurance industry is undergoing a fundamental global restructuring," he said at Coopers & Lybrand's Fourth Annual Executive Conference for the Property-Casualty Industry held in New York.

Noting that the property/casualty industry is under pressure to improve results for shareholders, Mr. Greenberg said that "the growing difference between the 'have' companies and the 'have-nots' is likely to get greater." To maintain a competitive advantage, Mr. Greenberg said that insurers must not lose sight of the principal focus of their business underwriting. "To believe that any other form of business will substitute for underwriting success is a fool's game," he said.

For insurers, developing the means to survive and prosper in this new environment is compounded by a number of challenges, including a prolonged soft market and the erosion of profit margins, a trend toward globalization of business, a new regulatory environment, and the threat posed by environmental, pollution and asbestos liabilities.

Regulatory Changes

THE THREAT OF regulatory reforms remains one of the most important issues facing the property/casualty industry. For example, insurers are now confronted by an uncertain regulatory environment that can affect their ability to underwrite risks they may not be able to cover. "We're quickly reaching the point where professional underwriters will be totally unwilling to write a policy under rules that, six months or a year later, will have been changed retroactively," said Mr. Greenberg. "As a result, we may underwrite a policy only for a certain class of business that will respond only to the law that existed at the time the policy was entered. We intend to underwrite what we promised, and not what everyone else can think about retroactively."

Solvency issues should be the primary concern of any new regulatory efforts, said Robert E. Vagley, president of the American Insurance Association. "The industry would benefit from a more streamlined system," he said. "And in today's world, there is a need for a regulatory system that meets the requirements of an increasingly global marketplace." In order to achieve this goal, Mr. Vagley advocated a system that makes solvency its primary focus, eliminates the barriers to the free movement of capital, removes burdensome guarantee fund rules, and eliminates duplicate and conflicting state regulations. Though some federal involvement may be needed to effect some of these changes, Mr. Vagley said a system with conflicting state and federal regulation would have an adverse effect on the industry.

Rate regulation represents another area of concern for insurers. "Because of the large increases in personal automobile insurance in many areas of the country, the public has the perception that insurers are making enormous profits," said Dennis H. Chookaszian, chairman and chief executive officer of CNA Insurance Cos. "One of the consequences of this is a call for rate regulation." However, despite the political popularity of rate regulation, Mr. Chookaszian said that the insurance industry is better served by free market competition.

Globalization Trend

REGARDLESS OF WHATEVER happens on the regulatory front, many U.S. insurers are expanding their operations overseas in an effort to develop lucrative new markets. "Globalization does provide substantial opportunities for growth, but there are dangers and obstacles to starting businesses overseas," declared Mr. Chookaszian. "For example, many insurers must ask themselves whether or not they have the resources they need to move into other countries." The decision to pursue overseas markets is further complicated by a number of other [actors, such as political instability and language and cultural differences. "Another issue is the fact that in some countries, the very concept of insurance is fundamentally different than in the United States." In some nations, the issue is further exacerbated by an inadequate infrastructure for banking, securities and legal systems, he said.

The high cost of administering medical and disability coverages represents another major challenge to the industry, said Mr. Chookaszian. However, insurers can enhance their results by streamlining the management and administration of claims. "Managing claim costs is becoming a significant competitive issue in the property/casualty industry," he said. "Health care and workers' compensation are crises that need to be resolved. The creation of 24-hour plans is a response to this demand for cost management and flexibility of services." Citing four or five different ways to market 24-hour plans, such as packaging them as rehabilitation services or health care coverage, Mr. Chookaszian added that the present regulatory environment does not facilitate the use of these coverages since each state has its own set of regulations. Other means of improving business results include offering products to clients that are time-sensitive. "The future will be characterized by a move to time-sensitive products," he said. "By the turn of the century, those companies not selling time-sensitive products will lose market share."

Environmental Pollution

ANOTHER CRUCIAL ISSUE facing the property/casualty industry are the exposures many insurers face from environmental, pollution and asbestos liability. "Asbestos and pollution liability are big problems that can't be paid for solely through the insurance mechanism," said Mr. Chookaszian. "The problem therefore requires a broader means to pay for the cleanup." Noting that the enactment of the Superfund law in 1980 was intended to provide an efficient way to clean up the nation's hazardous waste sites, Mr. Vagley declared that the law "isn't working as planned." To illustrate his point, he cited that of the over 1,000 hazardous sites alleged to be covered by Superfund, only 63 have actually been cleaned up. "Additionally, cleanup for a single site costs an average of $50 billion and takes 10 years, seven of which are spent arguing about who will pay."

In addition, the Superfund law is structured in such a way that it does not actually facilitate cleanup measures, said Mr. Vagley. "The law is constituted so that it invites litigation instead of cleanup," he remarked, citing a recent Rand study indicating that 88 percent of Superfund expenses are used to cover transaction costs. Since studies indicate that sites could be cleaned up for approximately 10 percent of the costs currently expended, Mr. Vagley said that the Superfund law needs to be reformed. Since Superfund will be up for reauthorization in 1994, he said that insurers should make their voice heard on the issue, particularly in light of the recent change in administration in Washington. "We don't know what Mr. Clinton will do, although there will probably be some reform efforts made," he said. "However, this is an opportunity for the insurance industry to try to play a role in getting the law changed."
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Title Annotation:property, casualty insurance industry is in transition
Author:Christine, Brian
Publication:Risk Management
Date:Feb 1, 1993
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