Bust Liability Bubble, AIGs Greenberg Urges

While implementation of the federal terrorism reinsuranceprogram might help restore some stability to the commercial market,a growing “liability bubble” remains a major threat to theindustrys and the economys viability, warned Maurice Greenberg, thehead of American International Group.

“We fought hard to get a federal backstop in place on terrorismlosses, but now we have to fight just as hard to get tort reformsin place,” said Mr. Greenberg, chairman and chief executive officerof AIG in New York.

“Asbestos suits, class actions and unlimited punitive damagesare among the greatest threats to our industry and economy,” headded, speaking in New York at the recent “2002 ExecutiveConference for the Property-Casualty Industry,” co-sponsored byStandard & Poors, The Conference Group, and the Black DiamondGroup.

“Liability costs have exploded,” he said. “We had an assetbubble, which captivated juries and judges. They saw wealth growexponentially on the asset side and began to build that into juryawards. The asset bubble has burst, but not the liability bubble ithelped create.”

Mr. Greenberg said that “the liability bubble has got to comedown to earth if this industry is to have a future in manylines.”

He explained that “if the tort system was more definable,insurer reserve estimates would be a lot more precise. But untilthe tort systems costs are made more definable by reforms at thestate and federal levels, insurers are going to have to continuelooking over their shoulders to see how losses are developing.”

He added that while “those who have been injured deserve fairand reasonable compensation, damage awards should not be a prizeall out of proportion to the harm done.”

He said the uncertainty of the tort system has resulted insoaring insurance premiums, shrinking coverage, lowerreturns-on-investment for insurers and increasing difficulty inattracting capital to the p-c industry–all of which are ultimatelyto the detriment of the public.

He also noted that despite double-digit price hikes, mostclasses of business are only now approaching the rate levels of adecade or so ago, adding that the idea that were in a “hard” marketis relative if considered in a broader context.

In addition, premium hikes have not left insurers flush withextra cash, he noted. Indeed, Mr. Greenberg said that low interestrates and a poor equity market, combined with rising liabilitylosses and reserve deficiencies have mired the industry in a“profitless recovery.”

Making matters worse is that the industrys single-digit returnon equity has made it very difficult to replace the capital lost inthe investment markets, Sept. 11 claims, and reserve boosts forprior-year liabilities. “Its hard to raise capital just to fill ahole in your balance sheet,” he said. “Why would anyone commitcapital to that?”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, December 30, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.