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Insurers face a troubled future.

MOST OBSERVERS would agree that 1992 was a portentous year for the property/casualty industry. Insurers were racked by costly disasters such as Hurricanes Andrew and Iniki and the Los Angeles riots, and the year ushered in a new presidential administration that is likely to enact far-reaching changes in the U.S. health care system. In addition, the property/casualty market remained mired in a soft cycle, and workers' compensation, which has been a troubled line of business for years, recorded sizeable losses.

As insurers ponder their strategy for the future, risk managers may also wonder what lies ahead for the industry - and to what extend their coverages and rates could be affected by the tumultuous happenings of the previous year. Judging from the remarks made by the insurance industry panelists at the Annual Meetings and Joint Industry Conference of the American Insurance Association (AIA), Insurance Information Institute and Insurance Solvency Office held in New York City onJanuary 12-13, the property/casualty industry is beset by enormous challenges that are not likely to be resolved easily, and that could affect rates in some lines of business.

Clearly, the colossal toll that resulted from catastrophe losses last year is a major contributor to the talk of firming rates, especially for reinsurance. "Last year saw $22 billion worth of catastrophes," said N. David Thompson, president and chief executive officer of North American Reinsurance Corp. "In 1992, with Hurricane Andrew, we endured the single worst catastrophic loss in the property/casualty industry." Although the high estimate of losses due to .Hurricane Andrew is at $16 billion, had the storm struck 20 or 30 miles farther north, damages could have reached $45 billion, said Mr. Thompson. "The lesson we learned from Andrew is that there is a very significant problem out there," he said. "The retrocession capacity available to world reinsurers is something like $10 million to $15 million, which is nothing."

Adding that reinsurance pricing for some risks will increase by as much as 200 to 300 percent, "insurers and reinsurers have to ask: 'What's the greatest loss that we can pay?"' Many in the industry believe that a proposed federal earthquake fund should be expanded to include wind storms, stated Mr. Thompson. However, if the initiative were to be so extended, federal coverage should kick in at a rate that is above the point at which the industry could cover losses. "I don't believe that we have a right to ask for government backing at a point where private industry can reasonably pay," said Mr. Thompson. "But we have a right to ask for help if the viability of our industry - and hence the public good - would be in serious trouble because of a major catastrophic loss."

Besides the prospect of rising rates due to catastrophe losses, Mr. Thompson added that "according to the best estimates, the industry is going to add to its policyholders' surplus over the next year, due to capital gains realized from lower interest rates and the sale of securities needed to pay for losses. "However, when the bull market and interest rates finally decline, "fear will overcome greed, and the market will change," he said.

The catastrophe losses of 1992 have resulted in many lessons for insurers, said Douglas W. Leatherdale, chairman and chief executive officer of The St. Paul Companies. "What we've learned from catastrophes - especially those of us in the reinsurance industry - is that they can cause severe damage in a hurry," he said. One result will be that primary insurers will have to operate under different terms than they did in the past - which means higher retention levels and caps. "Reinsurers are going to put insurers into two groups, those who understand their risks and manage and track them properly, and those who don't," said Mr. Leatherdale, "The reinsurance community would be much more inclined to support the first group."

Many insurers are also concerned about the industry's lingering soft market. "It's clear that our industry is cyclical in nature, but it's hard to tell when prices will firm," said Mr. leatherdale. "And although over the last several years we have had more than adequate capital to support the demands of the industry, we've also had too many risks that we've priced at levels that simply have not produced an adequate return on equity." As a result, the industry has seen a return on equity in the single digits business results that are inadequate to sustain the industry over the long term, he said. "The industry has brought a lot of these problems onto itself," said Mr. Leatherdale. "Although we've focused on writing more business and increasing market share, in many cases we have forsaken underwriting discipline and pricing and management controls?

Workers' Compensation Woes

THE TROUBLES PLAGUING the workers' compensation industry are another source of concern for insurers. "The workers' compensation line sustained an underwriting loss of $7 billion in 199]_, the first such loss in two decades," said Robert Vagley, president of the ALA. "In addition, we haven't had an operating profit in a decade, and in fact lost $2.7 billion in 1991."

The sad state of the workers' compensation line has arisen from a number of factors, said David A. Kocher, group executive of Aetna Life & Casualty. "The problems are due to a confluence of events, such as an increase in medical knowledge, which has led to more sophisticated and expensive ways to treat injuries, as well as cost shifting, inadequate cost controls and a weak economy," he said. "This latter cause has created a situation where insurers are perceived as the deep pocket, which has led to conditions such as stress and attention deficit disorder now being defined as compensable problems."

Reform is needed to return workers' compensation to a profitable line of business while ensuring that it remains an effective means to get injured employees back on the job, said Mr. Kocher. However, achieving successful reform will not be easy, said J. John wortman, president and chief executive officer of Amerisure Companies., and chairman of the National Council on Compensation Insurance (NCCI). "Reform is critical for survival of the system, but I'm a little pessimistic," he said. "If we can't get labor, management, legislatures and activists on our side, then workers' compensation might be a doomed line of business."

Reform efforts are further exacerbated by the fact that workers' compensation regulations are different in each of the 50 states, said Caleb L. Fowler, president of CIGNA Property and Casualty Companies. "Battling for reform in all 50 states simultaneously and believing you can get a successful outcome requires a degree of faith that 1 haven't had since 1 believed in Santa Claus and the Tooth Fairy," he said. "Besides, we have to ask ourselves what we are trying to accomplish through reform. Judging from the effects of the reforms initiated over the last decade, our efforts have been unsuccessful."

Despite these glum assessments, Mr. Vagley pointed out that some in the industry regard cost control measures, such as 24-hour plans, as a way to curb expenses and bring some sanity back into the system. "Twentybur-hour coverage is no silver bullet, although it can be used to control health care costs," agreed Mr. Fowler. "In addition, benefits can be gained by using some of the other cost containment measures used in health care for workers' compensation, although many states don't allow this." However, the debate over national health care seems to reflect society's view that all injuries are compensable, declared Mr. Fowler. "That's why the debate about national health care is critical to the industry and how we deal with workers' compensation."

Still, reform is "key to the salvation of the workers' compensation system," said Mr. Wortman. And when it comes to reform, the insurance industry must play a leadership role, declared Suzanne Bump, a former member of the Massachusetts House of Representatives and now senior counsel with the AIA. "The insurance industry has the best information on which legislatures can make rational decisions," she declared. "Insurers are also in the best position to form the kinds of coalitions, particularly with business, that are needed before the system can be improved."
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Author:Christine, Brian
Publication:Risk Management
Date:Mar 1, 1993
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