Reinsurance's Malady Is Bad Risk, Not 9/11

By E.E. Mazier

NU Online News Service, Jan. 24, 2:57 p.m.EST?The problems of the reinsurance industry are not dueto the "calamity" declared by reinsurers in the weeks following theSept. 11 terrorist attacks, according to an industry insider.

James F. Duffy, chairman of Minnesota-based The St. PaulCompanies' Reinsurance Group and current chairman of theReinsurance Association of America, said much of the currentdifficulties in the reinsurance and insurance industries areattributable to sloppy underwriting, particularly over the pastfive to 10 years.

Speaking at the annual joint luncheon of the APIW (Associationof Professional Insurance Women) and the New York Chapter ofChartered Property Casualty Underwriters, Mr. Duffy suggested athree-pronged approach to improving underwriting standards.

First, underwriters must get the facts about each risk beingconsidered. "A past filled with pertinent and accurate data isabsolutely needed in order to make risky decisions," Mr. Duffysaid.

He observed that throughout the 1990s, reinsurance clients didnot provide and reinsurers did not request "good risk-assessmentdata."

"We have let ourselves down and our customers down by not doingan accurate risk assessment," Mr. Duffy declared.

But in 2002, "everyone involved in the insurance and reinsuranceworld must work at creating good, pertinent risk-assessment data--losses, exposures, where the company is, where it is going," headvised.

Otherwise, "we'll be making bad decisions," Mr. Duffywarned.

Second, insurers, reinsurers, brokers, agents and clients mustunderstand the coverage grant, or "what we're insuring," he stated.If these parties fail to take the time to sit down with each otherto iron out coverage definitions, "claims people will be settlingclaims in 2022" emanating from what the parties intended in termsof coverage, he said.

Mr. Duffy admitted that "we're not going to eliminate some ofthe controversies surrounding what was intended in the insurance orreinsurance contract, but we certainly can mitigate them."

Third, he recommended that underwriters forego making "bigbets."

While noting that some reinsurance coverage for terroristattacks is still available, Mr. Duffy quickly added that thisremains a looming problem for which the federal government shouldprovide a solution.

He indicated that the industry, including the Washington,D.C.-based RAA, will continue efforts to convince federal lawmakersto create a mechanism to help shore up the reinsurance industry inthe event of another terrorist attack.

Mr. Duffy believes another such attack is likely.

"Just because the Taliban has been defeated and the al-Qaedanetwork is in disarray does not mean that there isn't otherterrorist potential around the world," he observed.

Mr. Duffy admitted that convincing Congress to pass backstoplegislation will be harder this year than it was in 2001 and thatthere is no guarantee that this year will prove any moresuccessful.

He then indicated that the necessary reform may have to start atthe state, rather than federal, level. He revealed that the RAA isstudying options in this regard.