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A survey of the social changes and historical events of the 20th century reveals a parallel timeline of insurance products and trends.

At the turn of the century, the primary insurance product was fire protection. The industry was put to the test early in the century when, in the wee hours of April 18, 1906, a violent earthquake shook San Francisco, and the city erupted in flames. Three days later, the fire was under control and 243 insurers and reinsurers faced about $225 million in looses.

It was an exciting time as inventions like the horseless carriage, the electric light bulb and airplanes ushered in a new way or life--and new risks. Social changes, such as the rise of labor unions in the 1900s and civil unrest in the 1960s, spawned new insurance products, like strike insurance and government-sponsored riot reinsurance. Industrial accidents led to the creation of workers' compensation insurance in 1911 for workers who were injured on the job.

Throughout the century, many of the titans of the U.S. insurance industry were owned by their policyowners. But as the 20th century came to a close, most of the largest mutual insurers began the process of converting to stock-owned companies so they could compete in the changing financial-services landscape.

The following articles illustrate how insurers have reacted to events and social changes to craft new products and reinvent themselves for the times.

Underwriting Strike Risk

A national manufacturing group helped determine probable losses from labor strikes.

At the turn of the century, America's work force was becoming more organized, a trend that led to more labor strikes and strike insurance.

Work stoppages have been a part of life in North America since colonial times. Between 1880 and 1900, employees at more than 117,000 U.S. companies went on strike. By 1905, employers across the country were increasingly interested in covering that risk, yet only one insurer--Mutual Security Co. of Waterbury, Conn.--wrote strike insurance.

Railroad workers organized the first nationwide strike in 1877, but strikes of smaller magnitude had, become more frequent in the late 19th century. The rise of strong labor unions fighting for better working conditions contributed to the frequency of strikes.

With strike insurance still in its infancy in the 20th century's first decade, few insurers knew much about it. How much should the product cost? How much in reserves should be set for particularly bad years? How could it be made equitable for companies of vastly different sizes? What kind of information could help in creating strike insurance, and where could insurers obtain it?

The National Association of Manufacturers appointed a committee to answer those questions. The committee based its proposals on data in the 1900 census and in the U.S. Labor Bureau's report on strikes and lockouts from 1881 through 1900. The Labor Bureau report provided the number and duration of strikes during that 20-year period, and the census provided the number of "employing establishments" in the United States.

"Twenty years is certainly a period long enough, and the United States a field wide enough, to afford an ample basis for that law of average which is the foundation of all insurance rates," the committee wrote. The analysis excluded the transportation, mining and coke industries, whose data were not classified in a way similar enough to be meaningful. Coking was the production of an industry fuel from coal.

After factoring in several assumptions, the committee recommended an annual premium for strike insurance equal to 1% of the company's profits and overhead, the amount to be insured. Therefore, if a business's profits were $100 a day and its fixed charges another $100, and the insurer would cover 300 days in a year, the insured amount would be $60,000 and the premium $600.

Here's how the committee arrived at those numbers:

* There were 512,254 "employing establishments" in 1900 and 253,852 in 1880, according to census information. That totaled 383,053 for the 20-year period.

* Establishments producing less than $500 annually made up about one-fourth of the total, leaving 287,228 establishments. After 245 coke establishments were deducted, the total fell to 286,983.

* During the 20-year period, 99,593 establishments were struck, excluding the coal, coke and transportation companies.

* On average, 4,980 establishments each year experienced strikes.

* The ratio of establishments with strikes to the total was 4,980 divided by 286,983, or 0.0173.

* The average duration of a strike was 23.8 days. Assuming a working year of 300 days, the actual loss ratio was derived by dividing 23.8 by 300 and multiplying the result by 0.0173 to get 0.00137, or a little more than one-eighth of 1%.

Those calculations accounted for lost profits. Adding in a like amount to cover fixed expenses brought actual expected insurance costs to more than one-quarter of 1%. Assuming the expected loss ratios were reasonable, the rest of the premium would be held during the year in reserves. At the end of the year, any remaining reserves would be refunded to the insureds as an excess of premium.

"The insurance method of distributing strike losses among the employing interests is by far the most convenient, equitable and scientific," the committee concluded. "The benefits received are in exact proportion to the premium contributed, so that the large and small fare alike; and the burden of disturbance in any one line of trade is not necessarily concentrated on that trade, but is borne by the broad shoulders of all trade, whether of manufacture, commerce or transportation."

Ron Panko

War Fuels Life Sales

Congress establishes Bureau of War Risk Insurance to satisfy demand.

Early in the 20th century, more life insurance was sold in the United States in a single year than the total amount in force at the start of that year.

It was not a surge of salesmanship that accounted for this great acceleration of life insurance written. It was not a slick advertising campaign or an awakening of the masses to the virtues of the product. What brought about this sales surge was U.S. participation in World War I and a big government program.

In June 1917, shortly after Congress had declared war on Germany, Secretary of the Treasury William G. McAdoo proposed that the U.S. government underwrite life insurance for officers and enlisted men in the Army and Navy. "No organized effort has ever been made by any government to provide this sort of protection and comforting assurance to its fighting men," he said. "Why should not America take the lead in this noble and humane action?"

McAdoo conferred on July 2, 1917, with representatives of the insurance industry on how to design a "great system of insurance." All but four representatives voted in favor of the government "attending wholly to the matter with the expert assistance of the companies."

In October 1917, Congress established the Bureau of War Risk Insurance in the Treasury Department to run the system. Insurance against death or total permanent disability was made available to every soldier, sailor or nurse in active service. The term coverage was available without medical examination in face amounts from $1,000 to $10,000 in $500 multiples. It was convertible to any form of life insurance of that day within five years after cessation of hostilities, again without a medical exam.

By July 28, 1918, more than 2.95 million people had purchased coverage averaging $8,511 per policy. The purchases amounted to $25.1 billion in face amount, and the purchases rose to almost $37 billion by December. This purchase total for 1918 overshadows the policies in force at the end of the previous year. The August 1918 edition of Best's life Insurance News reported that at the end of 1917, legal reserve life insurance companies had a total of $27.2 billion in force. The Bureau of War Risk Insurance employed about 8,500 people to administer the program.

To put this life insurance sales binge into perspective, consider the figures for 1997 and 1998. At year-end 1997, there was $17.90 trillion of life insurance in force. For new purchases to exceed this amount, every man, woman and child in the United States in 1998 would have had to purchase more than $66,300 of coverage each. In reality the face amount of life policies sold in 1998 was $2.73 trillion, an average $8,700 per person.

In an editorial, Best's Life's Insurance News pointed out that comparing the government program with the industry figures "would not be proper."

"The war-risk insurance is upon a very low rate, term basis, and moreover it is not payable in a lump sum, but in installments running over a long period of years," the editorial said. "And the government assumes all of the war risk (the rates being based on the mortality to be expected under normal conditions) and also the whole expense of administration. The regular life insurance companies on the contrary have issued policies upon forms having a much greater element of permanency and necessarily at much higher rates." In fact, the government insurance benefits were payable in 240 monthly installments.

The publication wrote that the insurance industry "rendered a great and generous voluntary service" in educating those eligible for government insurance to apply for the maximum amount. "Considering the far-reaching benefits which the bureau will confer upon mothers, widows and orphans, it is safe to say that no service rendered during the war by any private interest was of greater importance and value."

Three months later, after the armistice had been signed, McAdoo encouraged the "insurance men of America" to urge returning veterans to keep their policies in force. "No argument from me is needed, I am sure, to prove that the continuation of this insurance is of immeasurable benefit to the Government, to the soldiers and sailors who have offered their lives, and to the institution of life insurance," he wrote. "The Treasury will deeply appreciate your patriotic co-operation."

Ron Panko

Compensating Injured Workers

Industrialization led to a new philosophy about employer responsibility.

In the early part of the century, the United States was making a transition from an agrarian to an industrial economy. As the workplace became mechanized, workers who were injured on the job were dependent on the compassion of their employers to compensate them for their medical bills and lost wages. Common law favored the employer; only through a long and costly court battle could an injured worker receive compensation.

The first workers' (originally workmen's) compensation laws did not meet constitutional standards. For example, New York's first law, passed in 1910, was declared unconstitutional the next year by a court of appeals, which said it deprived employers of property without due process of law. In 1913, New York voters adopted a constitutional amendment authorizing workers' comp legislation.

Wisconsin passed the first constitutionally acceptable workers' comp law in May 1911. Using that law as a model, other states followed suit.

In September 1911, a group of mill owners, manufacturers and business owners in Wausau, Wis., organized Employers Mutual Liability Insurance Co., the first workers' comp insurance company. Now known as Wausau Insurance Co., it is currently part of the Liberty Mutual Group, Boston. The second workers' comp company Massachusetts Employees Insurance Association, was formed in 1912. The company believed it could provide workers' compensation at cost by preventing losses, controlling expenses and sharing savings through dividends under a mutual plan of operation. It was permitted to write additional liability lines by 1916, and it became Liberty Mutual Insurance Co. in 1917, according to Liberty Mutual spokesman Glenn Greenberg.

Workers' compensation had its first big sales year in 1918, according to a report in the May 1919 edition of Best's Insurance News, the predecessor of Best's Review. In that year, stock companies wrote $94.8 million in premiums, compared with $269 million since the inception of the line in 1911. Mutual insurers wrote $20.8 million in 1918 and $56.6 million since the inception of the line.

Not only were premiums up substantially, but the business was profitable. In 1918, stock companies had losses and claims expenses equal to 40.1% of premiums. Commissions and brokerage fees accounted for 13.1% of premiums, and all other expenses were equal to 13.9% of premium written. Mutuals had better overall experience, with the respective percentages at 31.1% paid for losses and claims expenses, 0.8% for commissions and brokerage fees and 10.4% for other expenses.

Workers' comp was profitable through 1921, according to A.M. Best Co. data. In that year, the combined ratio rose to 93.8 from 79 in 1920. In 1922, however, it hit 105.6 and remained high through the 1920s. "That was the period when the companies discovered that they had set up insufficient reserves for pending claims," the editors of Best's Casualty News wrote in September 1938. "In the early '30s, the loss ratio again showed a sharp increase. Payrolls were off, and the additional earned premiums usually developed by audit in normal years were sadly lacking." The worst year was 1932, in the depths of the Great Depression, with a combined ratio of 131.

In 1918, one stock company wrote 21.2% of the total workers' compensation premiums of all stock companies. Seven companies each wrote more than $5 million in premiums. The eight companies accounted for 71.4% of the total. "This centralization of the business is a striking development of the past few years," the editors of Best's Insurance News wrote in May 1919.

Ron Panko

Upward Bound

Premium volume soars as aviation takes off.

The year was 1929, and Charles Lindbergh had already flown solo across the Atlantic Ocean. Airplanes were becoming bigger and faster, and they were used for more commercial purposes. Insurer interest--and premiums--were growing exponentially.

Perhaps the most telling indication of this interest was a chart published in the August 1929 casualty edition of Best's Insurance News indicating that aviation-risk premiums tripled in 1928 over 1927. Premiums for 1929 were originally expected to increase by 50%, but after the first three months of the year, the estimate was revised to project triple the 1928 premiums, according to the chart.

"The persistent upward progress of this insurance underwriter's business, in spite of extraordinarily keen competition which has arisen during the past eighteen months, would seem to provide a true and valuable index to the development of commercial aviation," according to Aero Analyst, a trade publication. It identified the typical risks as fire; accidental damage; tornado, cyclone or windstorm; theft; robbery or pilferage; public liability and property damage; legal liability in respect to passenger compensation and employers' liability; personal accident; life insurance; cargo; damage to ground property; airport liability; airmeet liability; and special forms of coverage.

Almond D. Fisk, an attorney, wrote in the October 1929 edition of Best's Insurance News that there was not yet any clear legal understanding of when planes should be considered common carriers. He warned that "the general relaxation by insurance companies" of their policy not to underwrite aeronautics in accident insurance "arouses an interest in the tests to be applied to determine the status of aircraft as common carriers."

The editor of Best's Insurance News noted that Fisk's article "directs attention to the uncertainty and confusion caused by the fact that the law has not been able to keep pace with the rapid development of aviation." This situation existed "in every phase of human activity," though not to so marked a degree.

"Courts will not, as a general rule, decide abstract or theoretical questions; real issues or controversies must be presented before legal decisions can be had, and it will be some time before the many perplexing legal questions relating to aviation will have been decided by courts of last resort in the various jurisdictions."

Although planes already carried mail and merchandise in the 1920s, by the close of the decade, most flights carried passengers. One of the most prolific sources of dispute then was double-indemnity claims in life and accident policies. Insurers were beginning to address these questions by inserting exclusions and exceptions into policies, Fisk wrote. These provisions stipulated that insureds must be fare-paying passengers on regularly licensed aircraft operated on an established route and schedule. Accidents caused by any other aeronautical activity would not be covered by double indemnity.

The editor predicted that the number of aircraft, "both lighter and heavier than air," would greatly increase in the near future. They would not approach the number of automobiles, "but there will be so many that they will present a great problem," and "the amount and scope of litigation concerning them will be increased proportionately."

The aeronautics branch of the U.S. Department of Commerce was making an effort to have all states adopt uniform laws on the licensing of pilots and planes. "It is claimed that the failure of the various states to have adequate regulatory laws respecting such licensing and supervision contributed very largely to the recent heavy toll in air plane accidents," Fisk wrote.

Ron Panko

Much Ado About Women

Married women whose husbands were beneficiaries on their life insurance policies were almost twice as likely as "spinsters" to die soon after getting coverage.

Read any life insurance advertisement to day and it's clear that coverage is less costly for women than men. In 1921, however, that was not the case. Through the second decade of the 20th century the insurance industry based life insurance rates on the mortality experience of adult men.

Some of the earliest considerations that women should be underwritten differently can be found in an August 1921 issue of Best's Insurance News. The publication ran excerpts of a speech given by Dr. Carl Stutsman, medical director of the Merchants Life Insurance Co., Des Moines, Iowa, at a meeting of the medical section of the American Life Convention. While "generations of underwriters" had given the question careful deliberation and all the best sources of information had been surveyed, Stutsman said, "the canvass does not seem to have produced such a crystallization of opinion as to result in a satisfactory uniformity of action."

Already by that time, census returns indicated that women lived longer than men. But there was a sticking point. According to Stutsman, another well-established tenet was that women whose lives had been insured for more than nominal amounts didn't live as long as men of the same class.

Stutsman gave three possible reasons for the anomaly. He dismissed two as having little significance: that women are exposed to the extra hazard of bearing children and that doctors did not examine them as carefully as they examined male patients, especially from the waist up. "The thorax is not usually bared and gross legions of the heart or lungs are overlooked," he said.

But he dedicated a great deal of attention to the third possible reason: that women of the time "speculated" in the purchase of insurance more than men did. In other words, they were more likely to cheat by concealing important underwriting information.

To support his case, Stutsman cited a study of a "very large group of insured female lives." His statistics showed that insured spinsters, widows and divorcees were far more likely to live longer than married women, particularly when the married women had named their husbands as beneficiaries. The mortality differences were even more striking in the first two policy years. Married women who named their husbands as beneficiaries were almost two times as likely to die during the two-year period than spinsters of the same age.

Among Stutsman's inferences from the data: "That the group taken as a whole shows that women manifest a superior ability in adverse selection" and "That married women as insurance risks present us a genuine sporting proposition."

Stutsman recommended that insurers severely limit the face amount of policies they write for women. "This severity undoubtedly does an injustice to the spinster, but this is commonly disregarded in our desire for regulations which shall be comprehensive and homogeneous," he said. He warned that it is "illogical" for insurers to accept a woman for a much larger amount "with the consoling thought that our reinsuring connections will assume the excess."

The editor of Best's Insurance News pointed out that the demand for insurance by women was increasing daily and suggested that life insurance executives should strive to better appreciate that demand so as to better serve that population. "Undoubtedly the want of an insurance average has been the underlying cause of many errors of judgment in regard to female risks, almost, if not quite, to the extent of a pronounced prejudice against them."

Ron Panko

Managed Care Debuts

The debate over who controls medical decision-making remains unresolved.

As the United States began to pull out of the Great Depression, seeds of prepaid health insurance sprouted in various forms around the country. Kaiser Permanente, for example, was once a 12-bed hospital serving the men who built the Los Angeles Aqueduct. The hospital was financed by insurance companies that paid a fixed amount per covered worker up front.

In 1938, as the aqueduct project wound down, Henry Kaiser enticed Dr. Sidney Garfield to upgrade the hospital and recruit a team of doctors to work in a prepaid group practice to provide health care to 6,500 workers and their families at the construction site of the largest concrete structure in the United States--the Grand Coulee Dam in Washington state. The rest, as they say, is history.

The early health plans, however, were not without controversy. Although today's managed-care disagreements about choice of physicians, medical decision-making and health-care control are fueled by the rising costs of medical services, the fundamental philosophical conflicts are nothing new. People were arguing about them before World War II.

In 1939, the New York Legislature introduced a bill providing for the formation of nonprofit medical-indemnity corporations and hospital-service corporations. The idea of a medical-indemnity corporation was new, and the catch was that the nonprofit corporation could be either medical indemnity or hospital service, but not both. Doctors did not think hospitals should control medical-care associations.

On the other hand, hospitals saw a reasonable amount of medical care and nursing, particularly before and after a hospital stay, as a logical extension of their work. "The real dispute is not so much over the principle as over control," Louis H. Pink, New York superintendent of insurance, wrote in the June 1939 edition of Best's Insurance News.

The proposed medical-indemnity corporation plans were designed to supplement the hospital plans that were already in effect. New York, at the time, had nine hospital associations. The largest was the Associated Hospital Service of New York, which had a membership of more than 1 million.

Under the medical plans, a subscriber paying $1 a month would be entitled to a credit of $150 per year for the doctor's bill. A person paying $2 a month would become entitled to a credit of $300. Pink wrote that perhaps the most important feature of the hospital plans and the proposed medical plans was that subscribers were allowed to pick their own hospitals and their own primary physicians--sort of a liberal preferred-provider organization.

But the question of referrals was a thorny one. A rival organization, the cooperative group practice, consisted of a group of doctors, including specialists, who formed a single unit that offered complete medical services--preventive and curative--for a fixed sum per month per person. The doctors were paid a fixed salary for their services, regardless of the number of patients they treated, and the amount paid by the subscriber included medical care and hospital care.

The American Medical Association argued that the group cooperatives eliminated free choice of a physician. It also said a fixed salary for the doctor eliminated competition and lowered the quality of the medical care. Lastly, the association feared physical examinations would become superficial and the cooperative might hire mediocre doctors to save money.

Advocates of the cooperative practice criticized the proposed medical indemnity plans on the grounds that they ignored preventive medicine, provided no hospital care, offered no diagnostic service beyond what could be rendered in a physician's office and permitted physicians to collect all they could from the insurance fund.

Pink believed there was merit in both plans. His greatest concern was that an adequate voluntary system should be developed before the state or the nation established compulsory insurance.

Sally Whitney

World's Fair Brings Windfall

The fairgrounds were ripe with business for insurers.

Property and liability insurers seized the new opportunities presented by "Building the World of Tomorrow," the New York World's Fair. The fair opened in Flushing Meadows in April 1939 and ran through that summer and the summer of 1940. Comprised of exhibits from 60 nations and international organizations, as well as 33 states and territories of the United States, the fair was organized into seven zones: theme center, transportation, communication, production and distribution, government, food, and amusements. The World's Fair Corp. decided early on to let exhibitors select their own agents and insure their own hazards.

Best's Insurance News reported in August 1939 that practically every major insurance company had a part in insuring the possible hazards of the fair. It was estimated that the fair brought about $10 million of new business to fire, casualty, surety and marine insurance companies. The total was separated roughly into 60% for public liability, compensation and allied lines; 25% for fire insurance; and 15% covering automobile, fine arts and other marine coverage.

There was $30 million worth of paintings and fine arts on view at the fair, $5 million worth of jewels in the House of Jewels and a $2 million collection in the Belgium exhibit, which the magazine noted were all fair game for marine coverage.

In the Food Zone, restaurants and "purveyors of the hot dog and hamburger" had to protect themselves with products liability insurance, the magazine said. A staff of 35 health inspectors daily examined the fair's 600 eating and drinking establishments. One of the Food Zone's most popular attractions was the Borden building's Rotolactor, on which 150 pedigreed cows were washed, dried and mechanically milked. Some enterprising insurer might have insured the cows.

Covering roughly one-third of the fairgrounds, the Amusements Area featured the Cyclone roller coaster, dance floors, a synchronized swimming show starring Esther Williams and Johnny Weismuller, and simulated vaudeville acts or strip shows marketed as educational exhibits. These offerings presented their own distinct risks, so much so that 10% of the gross income, or 25% of the operating expenses, of the Amusements Area was spent on insurance protection.

Sally Whitney

Regulatory Battle

Landmark legislation enacted at the state and federal levels set new business boundaries.

As war raged around the world at the beginning of the decade, the U.S. insurance industry thought it was under attack. In 1937, President Franklin D. Roosevelt called for an investigation into the practices of U.S. business, suggesting that concentrations of power among a few organizations were impairing the economic effectiveness of private enterprise.

Congress established the Temporary National Economic Committee, composed of six members of Congress and six representatives of the executive branch, to investigate.

In January 1940, the committee authorized the Securities and Exchange Commission to look into life insurance investments, but the probe soon spread to include almost all functions of life insurance companies. Many people in the industry already feared that Roosevelt and some members of Congress wanted the federal government to take over life insurance and that they were going to use Social Security to do it. The committee's report, A Study of Legal Reserve Life Insurance Companies, did not allay their fears.

Forrest W.Wheeler, president of the Mutual Fire Insurance Association of New England, wrote in the April 1941 edition of Best's Insurance News that three of the recommendations offered by the SEC in conjunction with the report were so threatening that the insurance industry must respond. "Otherwise we are going to have not only federal regulation, but will find the assets we have so carefully built up for the protection of policyholders over a period of more than a century dissipated in compulsory 'venture capital," he said.

The recommendations advised Congress to create federal agencies to assist the states in strengthening their regulatory machinery, to assist insurance company managers in solving their problems, to report annually to Congress on the state of the insurance business, and to conduct a thorough investigation of all forms of fire, casualty and marine insurance.

Wheeler said that at a time when the United States was preparing to defend itself against totalitarianism, government should not be attacking business. He also urged mutual and stock companies to put aside their differences and join together to defend themselves against "the attack being waged on the insurance business generally by certain sections of the government."

Although the investigation ultimately imposed no significant changes on the insurance industry, it set in motion ideas and motivations that led to change. In 1941, in response to the probe, New York established the first guaranty fund to protect policyholders against losses from the insolvency of life insurers. Debate continued to swell concerning state vs. federal regulation of insurance, as evidenced by the article, "The Future of State Supervision," by Edwin W Patterson, professor of law, Columbia University, in the October 1944 edition of Best's Insurance News.

Following the Supreme Court's decision in United States vs. South-Eastern Underwriters Association that Congress could regulate insurance transactions that were truly interstate, Patterson said state regulation of interstate insurance activities must justify itself thoroughly. "Every state regulation which adversely affects interstate commerce must stand scrutiny as to its manifest purpose, its underlying public policy," he said.

War Affects Sales

In the meantime, World War II caused a mushrooming of life insurance sales. Before the United States entered the war, men of military age rushed to buy policies before war exclusions were added as they had been in World War I. In preparation for war, Congress authorized National Service Life Insurance, offering policies of up to $10,000 to armed forces personnel.

World War II also caused a change in the way insurance was sold. The rationing of gasoline and tires and the shortage of automobiles forced agents accustomed to driving to visit prospects to use the telephone and, eventually, direct mail.

After the war ended, life insurance sales continued to soar. Many people switched from buying war bonds to buying life insurance, and although jobs were plentiful and salaries were good, there were still few things, such as appliances and cars, to purchase. Major employers, looking for ways to fill their positions, adopted the concept of providing free group life insurance as part of employee benefits.

Total life insurance in force in the United States grew from $123.7 billion in 1940 to $202.2 billion in 1947 with 48% of that growth occurring after 1945, according to A.M. Best Co. data. Group life insurance in force grew from $15.3 billion in 1940 to $37.5 billion in 1948. A.M. Best estimated in 1949 that group life insurance covered more than 17 million employees working for 45,000 corporations.

Business was good for the insurance industry during the decade, but companies still were struggling against South-Eastern's implication that as interstate commerce, insurers were subject to federal antitrust laws. Insurers argued that after operating for nearly a century without being subject to antitrust laws, the change would be a significant burden on them.

An Antitrust Reprieve

Sens. Patrick McCarran and Homer Ferguson introduced a bill late in 1944 that would delay the antitrust impositions until state legislatures could respond in January 1945. The February 1945 edition of Best's Insurance News reported that Roosevelt had sent the Senate a letter in support of the moratorium. "I can assure you that this administration is not sponsoring federal legislation to regulate insurance or to interfere with the continued regulation and taxation by the states of the business of insurance," the letter stated.

The compromise measure worked out by the House and Senate extended the moratorium on the Sherman and Clayton antitrust acts to June 30, 1948, and provided specifically that after that date, the acts would be applicable to the insurance business to the extent that the business was not regulated by state law Named the McCarran-Ferguson Act, the compromise primarily applied to gathering data for setting rates, and its limited exclusions from antitrust laws did not include boycotting, coercing or intimidating. After it was signed into law, all states enacted some form of rate regulation to qualify for the exemption.

Insurers may have breathed a sigh of relief, but their troubles weren't over. Almost immediately after taking office, President Harry Truman asked Congress to expand Social Security to include national health insurance and permanent and temporary disability benefits,

Sally Whitney

Atomic Risk

With the harnessing of nuclear energy came risks so large that insurers had to band together to cover them.

When Congress passed a revised Atomic Energy Act in 1954 allowing for licensed private ownership of facilities to produce fissionable materials, it opened up risks that insurance companies never had encountered. Until that time, the federal government had controlled nuclear materials and facilities, even though the Atomic Energy Commission was established in 1946 to administer the production and use of atomic power.

Congress authorized independent private nuclear activity because the United States had a vital interest in speeding the development of atomic power, and progress in reactor development increased confidence that atomic activities could be undertaken safely, speculated Joseph P.Gibson Jr., president of American Mutual Reinsurance Co., in the June 1959 edition of Best's Insurance News.

Congress might have believed atomic activities were safe, but corporations planning to build or operate nuclear reactors wanted protection in amounts that insurers had never seen. Where liability limits of $1 million to $3 million were most common, reactor constructors and potential operators were asking for limits of $25 million to $200 million, and in a few cases as high as $500 million, according to James M. Crawford, vice president of Indemnity Insurance Company of North America, who wrote about the subject in the July 1956 edition of Best's Insurance News.

Insurance companies realized they couldn't handle these kinds of demands by themselves, so they banded together. In 1956, stock insurance companies responded to the new challenges by forming the Nuclear Energy Liability Insurance Association to write third-party liability coverage and the Nuclear Energy Property Insurance Association to write physical-damage coverage. The mutual insurance companies formed a combined reinsurance pool for both types of coverage.

Members of the committee that created the Nuclear Energy Liability Insurance Association included Travelers Insurance Co.,Aetna Casualty & Surety Co., Fidelity & Casualty Company of New York, Hartford Accident & Indemnity Co., Indemnity Insurance Company of North America, Royal Indemnity Co. and United States Fidelity & Guaranty, according to Crawford's article.

Still Not Enough

Crawford anticipated that with the help of additional capacity from British underwriters, the liability association could reach a maximum limit per risk of $50 million. That amount combined with the mutual syndicate capacity of $15 million would create an aggregate of $65 million for any one risk.

But that was not enough to assuage the fears of potential producers of nuclear energy. Corporations like Westinghouse and General Electric told Congress they couldn't proceed with reactor development unless the threat of a major liability was relieved. Under that pressure, Congress enacted the Price-Anderson Act in 1957. The act fixed the maximum liability for any facility licensed by the Atomic Energy Commission at the amount of liability insurance available from private sources. Beyond that amount, the government would pay up to $500 million.

Workers' Comp Excluded

Some people were surprised that workers' compensation risk was omitted from the liability insurance offered by the association, but Crawford explained that employers could handle responsibility for their own employees with their standard policies. A greater risk existed in the possibility that a reactor accident could injure employees at a neighboring plant, he said.

Gibson of American Mutual Reinsurance said owners of houses, stores, churches, schools and small businesses damaged by radioactive contamination from reactors insured through the association could file a claim and tap into the pool's maximum, plus the public indemnity provided by the Price-Anderson Act.

On the property side, the combined capacity of the stock and mutual companies in 1959 provided $65 million of physical damage coverage on an atomic risk at any one location, Gibson wrote.

One of the problems facing underwriters at that time was how to allocate the cause of any one loss among the various perils to be covered. Consequently, the associations and pool drafted a new physical-damage contract on an all-risk basis with some exclusions To rate the new policy, they created the Nuclear Insurance Rating Bureau in 1957, which was the first time stock and mutual fire insurance companies had identical membership in the same bureau, Gibson wrote.

The all-risk policy indemnified the insured against radioactive contamination and all other risks of direct physical loss to the property; with exceptions. The list of exclusions included war risk and loss resulting from interruption of business or manufacturing. Removal of debris and decontamination were special features of the policy. "In some cases the cost of decontamination can exceed the value of the property insured," Gibson wrote. Some exclusions could be removed by paying additional premiums.

The all-risk policy, however, covered only those risks classified as atomic. Insurers recognized there were related risks, such as the hazards of working with radioisotopes, that weren't covered. To protect industries and medical workers and research and educational institutions that were working with radioisotopes, the insurers wrote the Limited Form and Broad Form Radioactive Contamination Assumption Endorsements to regular fire policies.

Loss control involved radiation-measurement badges, protective clothing and special construction and maintenance of buildings used for atomic work. The reclamation building at Brookhaven National Laboratory Upton, Long Island, N.Y., was completed in 1959 and featured a floor with a durable epoxy-base topping compound that had higher physical properties and greater density than concrete. It was "completely unaffected by common alkalis, solvents, salts and other harsh chemicals which attack concrete," Best's Insurance News reported in December 1959. It could be easily cleaned and would not allow radioactive water seepage through seams or even minute crevices in the floor.

Sally Whitney

Civil Unrest Erupts

Riots brought the issue of insurance availability in urban areas to a head.

The turbulent decade of the 1960s reverberated with the escalating war in Vietnam, antiwar demonstrations at home, and the assassinations of John F. Kennedy, Robert Kennedy and the Rev. Martin Luther King Jr.

King's murder in 1968, in fact, triggered riots in major cities across the country--the climax of a three-year period of disturbances that had left urban ghettoes burned out and looted. In all, more than 225 people were killed, 4,000 injured and property damage totaled $112 billion.

In July 1967, amid this turmoil, President Lyndon B.Johnson appointed the National Advisory Commission on Civil Disorders to investigate why the disturbances were occurring.

From the start, the commission heard complaints about the unavailability and high cost of property insurance in riot-affected areas.

"The problem was said to be serious--an impediment to rebuilding these areas and a cause of the spread of urban blight," said Stanford G. Ross, general counsel of the U.S. Department of Transportation, in the July 1968 edition of Best's Insurance News.

Insurers told the commission that without some form of protection against catastrophic losses, they were unwilling to provide any insurance in urban core areas. They feared that private reinsurance for riot losses--their traditional protection against catastrophic losses--would either be withdrawn or become prohibitively expensive.

Believing that a separate group could better deal with the insurance issue, the commission created the President's Panel on Insurance in Riot-Affected Areas, The panel's recommendations led to creation of a new national insurance development program, as provided for in the Housing and Urban Development Act of 1968.

To Herbert S. Denenberg, professor of property and liability insurance at the Wharton School of Finance and Commerce, University of Pennsylvania, this was the most significant insurance legislation yet adopted in the United States. "It provides a means for effectively marshalling the resources of the insurance industry and government to provide an adequate urban insurance market," he wrote in Best's Insurance News, October 1968.

Rise of FAIR Plans

Under the program, the secretary of HUD could sell reinsurance against losses from riots and civil disorders to property insurers on a state-by-state basis. After October 1968, this reinsurance was made available only to companies that fully participated in plans to provide urban property owners fair access to insurance requirements, called FAIR plans.

By March 1969, FAIR Plans were operating in 35 states, Puerto Rico and the District of Columbia. They provided insurance against direct loss to real or tangible personal property at fixed locations resulting from fire and extended coverage perils.

In the first four months of the FAIR plans, New York received as many as 10,000 applications in one week and expected to insure about 50,000 properties the first year. Surprised officials attributed this volume to an enormous demand for insurance in such areas as Harlem and Bedford-Stuyvesant, where many properties were uninsured or owners wanted better insurance value.

The early days of the New York plan were marred by charges of "dumping." As George Bernstein, federal insurance administrator, noted in an article in Best's Review's property/casualty edition in November 1969, states with FAIR plans had about $33 million worth of premiums written in fire and extended coverage by July 1969. On an estimated basis, that was about $3.8 billion worth of property coverage.

"How much of that coverage would never have been written and how much of it was dumped into the plans because of lower producer commissions, we can't tell," Bernstein said. "But we do know that the FAIR plans have been offering a substantially lower commission, and this is an incentive to the companies to place the less desirable business through the FAIR plans even had they been able to write this business voluntarily before."

The riot insurance program lasted another 20 years until the Reagan administration deemed it outmoded and decided that the insurance industry, backed by reinsurers, could handle the demand.

Flood Program Introduced

The 1960s also saw development of flood insurance. In 1968, Congress created the National Flood Insurance Program, which has played a critical role in fostering and accelerating the principles of floodplain management.

Before the government program, flood insurance was generally unavailable and most states and communities did not regulate floodplain development. Instead, the focus was on constructing flood-control projects such as levees, dams and channels to reduce flood damage. But after billions of dollars were spent on these projects, annual flood damages and disaster-assistance costs continued to rise.

The origins of the flood insurance program go back to 1956, when Congress passed the first Federal Flood Act following losses that year. But it was never funded because the House said there was no actuarial way to set rates. After a series of hurricanes in 1965, however, Congress directed HUD to study the feasibility of setting these actuarial rates. HUD responded, but nothing decisive happened until the flood program finally was added to the 1968 housing package. "It is unlikely that the flood program would have passed without the riot program or vice versa," Bernstein said.

Flood insurance is marketed through the National Flood Insurance Association, an organization of private insurers. The program offers federally subsidized insurance for existing structures, while supposedly discouraging overdevelopment along coastlines and in other flood hazard areas.

In the flood insurance program s early years, few eligible property owners bought policies. Even so, the program was chronically underfunded. By 1983, the program was paying out nearly $500 million in claims and expenses while receiving only $297 million in premiums.

The Reagan administration launched an aggressive campaign to turn the program around by raising rates, increasing deductibles and tightening coverage requirements.

Burgeoning development of coastal areas has raised concerns about heavy catastrophe losses. In September 1989, the National Wildlife Federation said "unwise" development of coastal areas has left the federal flood program vulnerable to record-breaking claims.

Barbara Bowers

The Global Bandwagon

American insurers followed their clients overseas in greater numbers during the 1970s.

U.S. foreign investments totaled more than $70 billion in 1969, after more than doubling during that decade. The expansion continued in subsequent years, increasing annually at more than $5 billion. In 1973, Fortune magazine's listing of the 1,000 leading U.S. corporations found that only 43 were not operating abroad.

This unprecedented growth of U.S. multinational business also presented complex challenges in satisfying companies' insurance needs abroad.

In the view of the U.S. Department of Commerce, American insurers who ventured into the international market faced several potential problems, including:

* expropriation of U.S. investments;

* forced divestments;

* inability to write insurance on U.S. shipments to the Soviet Union;

* foreign governments' operation of noninsurance companies;

* licensing restrictions against U.S. insurers;

* restrictions on placement of insurance with foreign insurers;

* preferential treatment of domestic insurers; and

* restriction on investment of insurance funds and earnings.

Despite these obstacles, volume was rising by the end of the decade. International insurance was receiving increasing attention with the expansion of American multinational business, the foreign insurance captive movement and the greater need for worldwide insurance capacity to handle the spread of jumbo risks, especially in transportation and the nuclear industry. In 1979, U.S.-based companies had about 23,000 business entities abroad with about $140 billion in total assets.

Experts predicted that U.S. penetration of foreign insurance markets would continue to rise, while foreign insurance penetration of the U.S. market was expected to slow because of unfavorable British underwriting experience and the possible spread of stricter regulations to European countries.

Fikry S. Gahin, professor of insurance and finance at the University of Utah, said in the October 1979 edition of Best's Review that establishment of the insurance Free Trade Zone and the New York Insurance Exchange and their possible spread to other states was likely to have a significant effect on the size and type of trade that U.S. insurance companies would experience with the rest of the world.

The Free Trade Zone was established in 1978 as an incentive to insurers to write unusual or hard-to-place risks. Insurers licensed to write these risks are subject to certain limitations and are exempt from the policy form and rate-filing requirements of the insurance law when writing Free Trade Zone risks.

The New York Insurance Exchange was created in the late 1970s to compete with Lloyd's of London and other insurers that underwrote unusual or exotic risks. Like Lloyd's, various syndicates were formed to underwrite these risks--although they were structured differently than Lloyd's, particularly in terms of the individual liability of syndicate owners.

Both developments, Gahin wrote, "would tend to decrease U.S. dependence on foreign insurers for surplus-line insurance and reinsurance imports, and might even increase our insurance and reinsurance exports to the rest of the world."

Tapping Overseas Talent

Travelers Insurance Co. was a prime example of how one U.S. insurer chose to grow overseas. Travelers had decided early in the decade that its best course of action was to form partnerships with foreign insurers, Richard M. Murray, vice president of Travelers, said in the October 1973 property/liability insurance edition of Best's Review Rather than establish its own subsidiaries and staff them with people who worked at the company's Hartford, Conn., headquarters, the company recognized the need to operate with the help of foreign talent, "with people who would combine the knowledge of U.S. insurance and U.S.-type services with experience in the local markets and their requirements."

Travelers' first overseas partner was Guardian, later Guardian-Royal Exchange Group, which had a network of offices throughout the British Commonwealth. Murray said other companies joined Travelers to complete this network, sometimes providing coverages only in classes where its principal partner lacked adequate facilities. These included Nippon Fire & Marine Insurance Co., Tokyo; Nippon Life, Osaka, Japan; Nationale-Nederlanden Group, Holland; and Skandia Group, Sweden. In the case of the Japanese companies, Travelers encountered severe restrictions on foreign controlling interests in that country. But there were already numerous Japanese companies of considerable importance operating in the United States for whom Travelers had to provide coverages that would suit the head offices in Japan, Murray said.

With these companies, he added, Travelers was developing constant and close contact, through the day-today service of accounts and through formation of extensive links by way of reinsurance, training of numerous foreign executives and technicians in Travelers' U.S. offices and in the exchange of ideas and experiences.

"We are convinced that this feature of mutuality and reciprocity will prove even more important in the future" Murray said, "since multinational corporations of U.S. origin will rapidly be joined by counterparts of foreign origin, who will be equally demanding with regard to insurance services."

Expanded Liability

On another front, the industry witnessed a different and far less desirable kind of expansion in the early 1970s. This was the growing trend of liberal courts to alter the tort liability system.

"All but forgotten was the principle that insurance contracts are based on the assurance of consistent interpretation by the courts of our tort laws which we adopted from English common law," noted an article in the October 1990 property/casualty edition of Best's Review

As a result, insurers no longer had a clear definition of their legal or financial exposure as provided by contracts for liability coverage.

Damage awards for auto liability, medical malpractice, environmental pollution and product liability grew rapidly, both in amount and frequency. These would contribute significantly to the industry's net operating losses of $3.6 billion in 1984 and $5.8 billion in 1985.

Under Attack

Barbara Bowers

Insurers moved into defensive mode as the industry came under financial and political attack.

Insurers faced a barrage of public, political and financial cha1lenges during the 1980s. The industry seemed to be under siege from all sides, with critics attacking the ways in which insurers priced and distributed their services, the system of state regulation and the exemption from federal antitrust laws.

As the Carter administration's tenure wound down, interest rates shot up to double-digit levels. In December 1980, the prime rate hit 21.5%, shaking the foundation of most actuarial assumptions about the future value of funds, including cash values, deposits, investments and premiums.

"The sky-high interest rates woke up most consumers and they started to change their insurance goals from providing service, safety and security to seeking out the lowest cost or the highest rate of return," said Jeffrey A. Koeppel in the September 1991 life/health edition of Best's Review. "Life insurance buyers became investors rather than savers, and property/casualty customers shopped for bargains.

To cater to consumers' new focus, life insurers invented interest rate-sensitive policies and annuities, just as the thrifts turned to offering high-yield certificates of deposit, money-market accounts and even earnings based accounts, where guaranteed minimum interest rates could increase based on the earnings of a particular group. Property/casualty insurers continued hacking away at premium prices. Like the thrifts, these insurers began to find that they had short-term, high-yield liabilities backed up by long-term, lower-yield assets, Koeppel said.

In 1980, federal legislation granted new investment powers to thrifts, and suddenly they were making loans to and investing in major commercial real-estate projects. Insurers' investment departments discovered that their traditional investment opportunities were being swallowed up by savings and loan associations. Ultimately, too many projects were financed and both thrifts and insurers lent money on many deals that turned sour, Koeppel said.

Insurers posted a net operating loss of $3.6 billion in 1984 and $5.8 billion in 1985, reflecting the significant impact of rapid growth in damage awards for auto liability, medical malpractice, environmental pollution and product liability.

Record Insolvencies

In 1985, the property/casualty industry experienced a record number of insolvencies. More than 100 insurance companies domiciled in the United States were in liquidation by year's end.

Given the intense rate of competition in years past, these results seemed inevitable, said a report in Best's Review's property/casualty edition of October 1985.

"Many companies set premium rates that were projected to be inadequate to cover even expected losses, in the expectation that investment income on premium cash flow would more than make up the shortfall," the article said. "These rates proved totally inadequate to cover the recent level of weather-related losses and to cover losses arising out of new theories of coverage, such as certain types of environmental losses."

Failed Promises

Before long, many outside the industry began equating the insurance industry's financial state to the early stages of the savings and loan crisis. This group included U.S. Rep. John D. Dingell, D-Mich., chairman of a House subcommittee that investigated the 1986 insolvencies of three insurers, Transit Casualty, Integrity and the Mission, as well as the 1988 failure of Anglo-American. His committee's 1990 report, Failed Promises, blames the insolvencies on rapid expansion, underpricing, over-reliance on managing general agents, inadequate reinsurance and deficient loss reserves. But Dingell's most serious charge was that these insolvencies were due primarily to fraudulent activity by reckless, greedy and incompetent managers.

In the October 1990 property/casualty edition, Best's Review took issue with several of the report's conclusions.

"First, and perhaps most important, we do not agree that the insurance industry may be on the brink of a financial crisis similar to that which has engulfed the savings and loan industry," the article said. It pointed out that net premiums written in 1989 totaled $209 billion and reported policyholders' surplus was $134 billion, providing a net premiums written to policyholders surplus ratio of less than 1.6. This ratio, a reliable indicator of overall financial strength, was the lowest achieved by the industry in several decades, the article said.

"Further, during the past five years, net premiums written increased 78%, but at the same time loss reserves increased 103% and policyholders' surplus increased 109%. These are hardly indication of an industry that is on the verge of a financial crisis."

The article also pointed out that there were more than 3,500 property/casualty insurers varying in size from those with fewer than 20 employees to those with more than 5,000. "Unfortunately, any industry this large and diverse will have its share of scoundrels who abandon honesty and ethics in the pursuit of personal gain," the article said. "However, we consider it unreasonable for the Dingell Report to suggest that the insurance industry is 'plagued by pirates and dolts' and 'managed by reckless, greedy and incompetent individuals."'

Market Crash

On Oct. 19, 1987, the stock market reeled on what came to be known as Black Monday, the greatest crash in Wall Street history. Financial analysts later would see this 23% decline in the Dow Jones Industrial Average as simply a major correction in a long-running bull market. But at the close of business that day, companies on the Best's Insurance Industry Stock Index were down 14%, said in the March 1988 property/casualty edition of Best's Review. The overall market began to recover, but insurance stocks recovered more slowly, as the Best's index trailed other market indicators. To prevent prices from declining further and to restore investors' confidence, many insurers started buying back shares of their stock.

Black Monday thwarted several planned and announced acquisitions throughout the industry as stock values fell. The lowered stock price of many insurers also lured cash-rich investors, especially from overseas. For example, B.A.T. Industries plc, United Kingdom, was quick to bid on Farmers Group.

At year's end, Best's index of 51 stock companies in the insurance industry closed at 389.90, down more than 13% for 1987, the first year that the index had declined on an annual basis since 1974. Hardest-hit insurance players included Frank B. Hall, Alexander & Alexander, Orion Capital Corp., Home Group, Fremont General Corp. and Monarch Capital Corp.

If the solvency crisis wasn't enough, insurers also had to face the liability crisis during the 1980s. As interest rates declined and underwriting losses increased, prices started rising. Capacity was reduced when reinsurers began withdrawing their capital from the market, driving prices up more. The decline in reinsurance support meant many primary insurers were forced to increase their retentions or limit the amount of business they wrote, which restricted the availability of coverage and pushed prices even higher. By 1986, many types of liability insurance, such as medical malpractice and product liability, became unaffordable or unavailable.

Alternative Market

This hard market of the mid-1980s generally is credited as the primary catalyst for business interest in alternative risk-financing options.

By the late 1990s, self-insurance, or the alternative market, would account for nearly half the $285 billion in U.S. commercial property/casualty business.

Public opinion seemed divided on whether the real villain of the liability crisis was the insurance industry or the courts. Politicians seized the emerging issue and supported consumer-advocacy legislation at the expense of insurers, reported in the October 1990 property/casualty edition of Best's Review "Proposals and legislation in a number of states included rate rollbacks, repeal of antitrust exemptions, elimination of underwriting standards such as sex, age and address, and assessments of insurers for costs incurred by the states in their residual market programs," Best's Review said.

Proposition 103

The most publicized action was Proposition 103, approved by California voters in 1988. The measure required insurers in the state to roll back their rates to Nov. 8, 1987, levels and then reduce them an additional 20%.

As the industry entered the 1990s, the problems of the previous decade lingered.

"The consumer movement is gaining momentum and encouraging more punitive legislation," Best's Review noted in October 1990. "There is the growing threat of banks as they enter the insurance market and from foreign insurers as they seek a greater share of the American market. And finally, the system of state regulation is challenged by those who seek a solution in greater federal involvement."

Barbara Bowers

Sweeping Changes

The winds of change stormed through the industry during the 1990s, beginning with Hurricane Andrew and following through with environmental liability, demutualization and attempts at managed-care reform.

When Hurricane Andrew swept across the southeastern United States in August 1992, it made history as the single most costly natural disaster in the United States. More than 60 people were killed, about 2 million evacuated and damages were put at $27 billion, with estimated insured losses of $18 billion.

A.M. Best Co.'s preliminary survey of more than 230 primary companies that underwrote 97% of the total direct property writings within Florida and Louisiana, the two hardest-hit states, showed that 13 companies had net losses exceeding 25% of surplus and 14 companies had net losses between 10% and 25% of surplus.

"The hurricane's effect on a number of individual companies has been devastating, causing eight insurers to be declared insolvent to date. In addition, many more companies have been significantly affected and are taking corrective steps to preserve and protect their surplus positions in the future," John H. Snyder, now executive vice president of A.M. Best Co., wrote in the property/casualty edition of Best's Review in January 1993.

A.M. Best analysts noted that many insurers had significantly underestimated the average claim severity of Andrew, having based their probable maximum loss modeling on a less destructive Category 4 hurricane. Also, they said, the higher average claim severity might have been related to a possible failure of construction to meet building codes.

As a result of Hurricane Andrew, A.M. Best lowered the ratings of 31 of the 230 companies in the survey.

The Best report saw Andrew as a wake-up call. This "easily could have been a $440 billion hurricane if it had hit land just 20 miles farther north (in the heart of Miami), severely testing the industry's financial health along with the guaranty fund system."

While Andrew's impact was painful, an even greater financial debacle threatened with the crisis resulting from exposure to asbestos and environmental claims.

Environmental Liabilities

In 1980, Congress established a Superfund to help finance the cleanup of toxic waste sites. The Environmental Protection Agency identified more than 36,000 hazardous waste sites in the United States, most of which required remediation.

Large commercial writers of other liability and product-liability business also were exposed to claims related to state pollution sites, asbestos and other mass tort liabilities stemming from chemicals, contaminated blood and tobacco.

Since the early 1990s,A.M. Best Co. reduced its estimate of the industry's ultimate asbestos and environmnetal liabilities to $96 billion, down significantly from estimates as high as $295 billion in 1993. By the end of 1997, the industry paid claims or set aside reserves for about 58% of those liabilities, according to a 1998 A.M. Best report.

"While unfunded A&E liabilities are no longer the industry concern they were several years ago, they remain a signficant financial concern and critical rating issue for insurers that have not yet taken appropriate funding actions," according to the report.

Life Insurers Fail

Like their property/casualty counterparts, life/health insurers encountered their own brand of turbulence during this same period.

In 1991,58 life/health companies-- a record number--declared insolvency, primarily due to overstated assets. The fallen included industry giants Executive Life Insurance Co., Mutual Benefit Life, First Capital Life and Fidelity Bankers Life. The effect of these large failures reverberated throughout the '90s, causing regulators to tighten scrutiny of asset portfolios and prompting the industry to shed all but the highest-quality investments. As a result, the number of life insurance and annuity companies placed under state regulatory control dropped noticeably in subsequent years.


During the waning days of the decade, demutualization swept the life industry like a fever. Many mutuals struggling to compete amid the rapid consolidation of their stock-owned competitors realized they had to reorganize. They had two choices: full demutualization or the formation of a mutual holding company.

Under full demutualization, a company compensates policyholders for their stake in the company, either with cash or stock, and raises capital through an initial public offering in the equity markets or through offerings to fund business initiatives. This was the route announced by the two largest U.S. mutual life insurance companies--Prudential Insurance Company of America and Metropolitan Life Insurance Co.--in 1998. That year, Mutual Life Insurance Co. of New York completed its conversion to become the publicly held MONY Group Inc. And in November 1998, John Hancock Mutual Life Insurance Co. climbed on the demutualization bandwagon. Hancock and MetLife initial public offerings are expected to take place this year.

More controversial was the mutual holding company option. This involves reorganization into a stock-operating company, with a mutual holding company above it. Policyholders who owned the mutual insurer become owners of the mutual holding company, which holds at least 51% of the insurer's stock.

Proponents say this is a solution for raising capital more easily while preserving the mutual company heritage of managing for the long-term benefit of policyholders. But critics, including consumer advocate Ralph Nader, say these conversions don't give policyholders full value to membership and ownership rights. Only 21 states permit formation of mutual holding companies.

HMO Backlash

Also during the 1990s, health maintenance organizations continued to grow at a rapid pace but found it difficult to get past their image problems.A spate of national surveys highlighted patient and physician concerns about managed care.

Consumer complaints ranging from denials of treatment to restricted access to specialists prompted legislatures from Maine to California to intervene. As of April 1997, about 800 managed-care bills--including many that folded dozens of concerns into far-reaching, comprehensive legislation-- had been introduced in statehouses across the country.

In 1998, doctors in California and Texas began targeting HMOs with allegations ranging from false advertising to late or incorrect reimbursements. And in 1999, physicians in private practice from New Jersey to Texas were showing increased interest in joining unions. On Capitol Hill, insurers fought a proposed House bill that would allow doctors to band together to negotiate contracts with HMOs, saying the legislation would raise the price of health care and increase the number of people who couldn't afford insurance.

Spurred by low reimbursement rates, increased administrative costs and stiffer regulations, 43 companies did not renew their Medicare risk contracts in areas they deemed unprofitable, and 52 companies reduced their service areas in 1999.

At year's end, UnitedHealth Group announced it would allow doctors to have the final say on which treatments their patients receive, a cost-saving and image-building move that analysts thought could spark similar actions by other HMOs across the country.

Barbara Bowers
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Title Annotation:insurance products and trends in the 20th Century
Comment:MARKING MILESTONES.(insurance products and trends in the 20th Century)
Publication:Best's Review
Article Type:Brief Article
Geographic Code:1USA
Date:Feb 1, 2000
Previous Article:Best's Rating Changes.
Next Article:Small Pain, Big Gains.

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