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Slip-sliding ahead?

Slip-Sliding Ahead?

Indiana insurance executives, like log rollers, don't know which way the log will turn as their industry faces a multitude of questions. But they're afraid that ill-conceived solutions to misperceived problems will push some insurers underwater.

Solvency, the most fundamental issue facing insurers, goes right to the heart of the promise of insurance companies: being there when customers need assistance. "There have been some recent cases - Executive Life in California and Mutual Benefit in New Jersey - that are examples of large insurance companies that have had financial difficulties," notes David Reddick, a deputy commissioner of the Indiana Department of Insurance. "The number of calls that we have had about the solvency of a particular insurance company has gone up considerably in the last six months."

Those who pose the question will find out that, with only a couple of exceptions, Indiana-based insurance companies are in pretty good financial shape. Insolvency, consumers will find, is not a big problem in Indiana. How big a problem it is across the nation as a whole is a matter that continues to be debated.

"I think in general there is absolutely a crisis," says John E. Seward Jr., chairman and CEO of Munster-based Universal Fire & Casualty Insurance Co. Seward expects to see more big U.S. insurance companies fail before the crisis is over. "I don't think there is any one item you can put your finger on; I think its a number of things. In property-casualty it's a rate problem. In life-health it's pretty obvious that some of them have got some bad investments."

But H. Peter Hudson, president of Monroe Guaranty Insurance Co. of Carmel and a former Indiana insurance commissioner, says the issue isn't a new one and isn't necessarily any more of a crisis than it normally is. "The solvency issue has been with us for years. The greatest concern now seemingly stems from the recent collapse of some life insurers, particularly inasmuch as they were involved in junk bonds or heavily in real estate with the decline in real estate. Investments always have been a concern from the solvency perspective. Those issues - except for this specific type of investment mechanism, the junk bond - are not necessarily unique."

Dale F. Stephenson, president of the Indianapolis-based National Conference of Insurance Guaranty Funds, says part of the problem is the crisis mentality itself. Fear of problems, he says, can make those problems worse. Case in point is the Mutual Benefit Life story in New Jersey. Policyholders heard the news that the company had some bad investments, and created essentially a "run on the bank." In the course of a few weeks, Stephenson says, policyholders sought about a billion dollars, and the company asked to be taken over by the state to stop the outflow. "A massive run, basically nobody's going to be able to handle in the short term because those assets are simply not in immediate liquid form. If policyholders come forth within three weeks asking for a billion dollars, that puts a severe strain on anybody's liquidity."

Whether they define the current situation as a crisis, a scattered thundershower or business as usual, most people in the insurance business seem to agree that some regulatory changes are needed. Indiana, they say, keeps a pretty watchful eye over its insurance companies, but that's not true everywhere. And that has some lawmakers in Washington pondering a federal solution, even a federal takeover of some regulatory responsibilities. Most insurers find such proposals abhorrent.

"The states are not doing an adequate job, in my opinion, but I do not think the federal government represents any improvement," warns J. Patrick Rooney, chairman of Indianapolis-based Golden Rule Insurance. "When the federal government was examining the savings and loans, the feds didn't do a good job."

"We don't believe there is a necessity for increased federal regulation of the insurance industry," agrees Ian M. Rolland, president and CEO of Lincoln National Corp. in Fort Wayne. "We do, however, believe that state regulation should be strengthened. We believe that more resources need to be put into it. States need to take a harder look at the job they're doing."

"The attention that's being focused from the regulatory standpoint and from within the industry is valid," Stephenson says. "But the degree to which that causes panic is a problem, and the degree to which it could result in turning the regulatory system upside down I think is very risky. We need change, but we don't need to cut down the tree to make a toothpick."

What, then, is the answer? If state regulators are the key, what must they do? "The National Association of Insurance Commissioners has come out with an accreditation process that insurance departments will need to meet in order to be accredited," Rolland offers as one answer. "The thinking is that there will be some consequences for companies domiciled in states that don't get accreditation. States are going to have to meet some tough standards laid down by the NAIC, and we would hope it will result in better regulation and maybe more uniform regulation across the country."

"If we want to improve regulation - and it's important that it be done - we should privatize it," adds Rooney of Golden Rule. "The states should use private examiners to do the examination for them." He says the state of Maryland does just that, and is able to find all the highly qualified and competent examiners it needs in the private sector.

"Secondly," Rooney continued, "states should ask the people who are doing the examination to make a forecast on the company for what it condition will be next year and the year after. The states, then, would have a prediction of what the future would be. That is only an opinion, but it would enable the states to know which companies to watch." Some states' regulators, he says, complain that they aren't aware that companies are in trouble until it's too late. If they obtained forecasts and took the time to analyze them, he says, there would be fewer surprises.

Seward of Universal Fire & Casualty believes that if states do, indeed, clean up their regulatory acts, the federal government won't find it necessary to step in. "It's only going to happen if we don't police ourselves."

That doesn't mean the federal government won't find another place to step in, a place such as health coverage. Current debate focuses on two key problems, notes Rolland of Lincoln National. First, more than 30 million Americans have no health coverage, and second, those who do are seeing their insurance rates rise 25 percent or 30 percent a year. More and more consumer and business groups these days are discussing the notion of a nationalized health-care system of some sort.

"There certainly are people who are looking for that solution, but I simply don't believe that's the right answer," says Rolland. "You can look at what goes on in other countries with respect to national health insurance schemes, and it's hard to believe that the American public is going to put up with the kinds of systems that exist in other countries."

The Canadian system, he says, often is cited as a potential model for Americans to consider, but "one of the problems with the Canadian system is that it controls cost through controlling access. It controls cost through waiting lines and unavailability of procedures and care. Americans are not used to having to wait."

The insurance industry, he says, would like to bring together various parties involved in providing health care, including insurers and the government. The government, Rolland suggests, needs to better serve the population for which it is responsible: low-income and unemployed Americans. Insurers, in turn, need to solve the cost problems that put group health coverage out of the reach of many smaller employers.

Rooney finds wisdom in recent studies by the Congressional Budget Office and the National Center for Policy Analysis. According to the experts, those who don't have coverage are, from a risk point of view, quite insurable: They generally are young and in good health. "The reason they don't have health insurance is they cannot afford it," he says.

"The average cost of group health insurance in the U.S. last year was $3,217," he continues. "I talked with a labor lawyer a few weeks ago and he said, |I tell all my client to plan on the cost going up 25 percent every year.' You can take your pocket calculator and take $3,217 and add 25 percent per year for about three years and you've got a lot of money. Are small businesses going to be able to afford this?"

And yet, he laments, most proposals in Washington simply try to force small employers to offer health insurance but do nothing to make it more affordable. "They have failed to address the matter of cost."

One solution Rooney prefers involves having employers fund only a catastrophic health-care plan while funnelling additional money to a special medical-care savings account. The catastrophic-care plan, for example, would cover costs in excess of $3,000, and employers would direct $3,000 into the special savings account. The account would function like an individual retirement accounts, and any money not used for health care would stay in the account and belong to the employee. The result, says Rooney, would be that employees would have an incentive to control health-care costs. The amount paid out by the employer would be little more than it is today, and it would be much less likely to skyrocket.

Reddick of the Department of Insurance has heard talk of other plans, including a system that would work like today's Medicare. The federal government would offer all Americans basic health-care coverage, and private insurance companies could then sell supplemental policies for those who want better coverage.

In addition to health, the cost of insurance also is a problem on the property-casualty side. But while some consumers think their automobile and homeowner insurance is too expensive, in many cases the premiums that carriers collect aren't covering all of the settlements they pay out. "The property-casualty industry, nationwide, has not made an underwriting profit since 1978. We have lost over $100 billion in underwriting in that period," notes Seward of Universal Fire & Casualty. "Rate structures right now are probably 15 to 20 percent low nationwide. But our investments make it up, so nobody gets too excited about it."

People should be concerned, however, say many of those in the business. It's potentially dangerous for companies to rely solely on investments to stay in the black. "Though the industry hasn't made an underwriting profit, better-managed companies have made a profit or broken even," notes Hudson of Monroe Guaranty. "There have been a number of companies that have had tremendous losses that have made the industry look bad in toto."

The property-casualty industry would be better off, says Seward, if companies weren't so tempted to underprice policies in order to gain market share. "If you start buying the business, you have more losses and that creates more insolvencies. Big companies should just say, |Look, I don't care about market share, I just want to get my company health.' It would mean a little higher rates, but the rates wouldn't jump." How would companies compete and gain market share under such scenario? The answer is service, Seward says.

Despite the price competition, some consumer advocates believe insurance companies are more cooperative than competitive. Too cooperative, they say. Consequently, there is a movement afoot to repeal a 1945 piece of legislation known as the McCarran-Ferguson Act, which among other things allows insurers to pool data in order to predict losses better. "It allows smaller players who don't have enough insureds out there to develop good rating and actuarial information to take advantage of information from larger companies," explains Daniel C. Free, president and general counsel of Insurance Audit & Inspection Co. in Indianapolis. "The consumer activists think that allows them to engage in price-fixing."

"The industry has traditionally had need for a large volume of numbers for losses to be predictable," Hudson agrees. Some fear that repealing the act would hurt smaller companies by limiting their access to big-number information.

"There are still probably 50 or 60 small insurance companies in Indiana, a lot of them farm mutuals dealing in particular rural communities, and it's going to be harder and harder for them in the future to compete and also satisfy regulations," laments Doug Steele, executive vice president of Home Mutual Insurance Co. in Tell City, one of the state's smallest insurers. "I've got five employees, and that's our whole insurance company, but we've been doing business down here for 115 years and we make money every year."

Losing access to ratings and statistical information is just one way the potential repeal of McCarran-Ferguson might hurt small insurers, Steele adds. "We wouldn't be able to share common policies like we do now. We use a lot of generic, industry-standardized forms. If each one of us had to come up with our own forms, it would create a real mess in the court system. Everybody would be interpreting things differently."

Another legal matter that concerns Steele is a new state law that took effect this summer. It requires auto insurance carriers to offer their customers the option of repairing cars up to 6 years old with only brand-new parts sold by the car's manufacturer. Used parts or those sold by other companies could be used only with the consent of the policyholder. The problem is, parts offered by original-equipment manufacturers often cost much more: In the case of many models, if one were to order all of the car's parts on the aftermarket, the total cost would be as much as three times the original price of the car. "They can build the car in the factory, including labor, for a third of what just the parts cost in the aftermarket," Steele notes. "Something's wrong."

In spite of all these problems and concerns, Indiana's insurers are confident they'll remain part of the industry's future. And they agree that the better regulation of insurance is, the better that future will be for everyone. Interestingly, unlike some businesses that want government off their backs, insurers welcome regulation. "That's part of the culture of our business, and we've learned to deal with that and understand that, and as long as that regulatory oversight is kept in proper perspective, I think the consumers are served, and the public is served, and the industry is served," says Rolland of Lincoln National.

Hudson adds one more reason that good regulation is good for insurers: The carrier themselves support guaranty funds and end up footing the bill when competitors go broke. "The better the regulation is, the less likely it is that we have to ante up out of our profits or our assets to pay for somebody who has run their ship badly. It boils down to that."
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Title Annotation:includes related article; Indiana insurance executives on the state of their industry
Author:Kaelble, Steve
Publication:Indiana Business Magazine
Date:Sep 1, 1991
Previous Article:Real estate around the state.
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