Reinsurers Won't Waive Deductibles

By Arthur D. Postal, Washington Bureau Chief

NU Online News Service, Oct. 27, 4:31 p.m.EDT?Reinsurers are making clear they won't participate inany waiving of deductibles for Florida homes damaged by multiplehurricanes, meaning that if primary insurers decide to waive thepayement of multiple deductibles, as some have, they will have toabsorb the cost on their own.

In comments made at this week's annual meeting of the PropertyCasualty Insurers Association of America, held in Washington, D.C.,staff officials of both American Re and Swiss Re said they wouldpay for losses "only to the extent they are coveredunder thereinsurance contract."

The reinsurers are making their positions clear at this time forseveral reasons, one of which is to establish a line in the sandagainst so-called "ex gratia" payments, the "unknown unknowns" inthe words of an American Re official that have made the U.S. marketa difficult one to make money in, especially for European-basedreinsurers that dominate the reinsurance industry.

The reinsurers also used the PCI meeting to make clear to tradegroups that they should support the industry as Florida legislatorsand regulators gear up to put pressure on primary insurers to waivethe multiple deductibles.

The Florida legislature is scheduled to take up the issue inspecial session next month. Gov. Jeb Bush is expected to proposethe enactment of legislature that would reimburse homeowners forcedto pay multiple deductibles with funds from Florida's HurricaneCatastrophe Fund, and that Gov. Bush has asked the CAT fund to lookinto how it can refund premiums to insurers that coverdeductibles.

Many insurers, one industry official in Florida said, arewaiving the deductibles.

In an apparent response to the reinsurers' call to trade groupsto support them in the coming legislative session and the Floridaregulator/industry meetings scheduled to follow in December, theAmerican Insurance Association this week noted that the industrywill be able to pay all claims as a result of the reforms,including the multiple deduction provision, put into place as aresult of Hurricane Andrew in 1992.

Cecil Pearce, AIA vice president, southeast region, added, "Welook forward to continuing our dialogue with Florida's politicalleadership in the weeks to come, as we address the public policyissues that this season's hurricanes have raised, including theissue of percentage hurricane deductibles."

American Re officials cited the wave after wave of asbestoslitigation, unexpected losses on environmental coverage andconstruction contracts and other multiple claims that reinsurersdidn't anticipate when they priced their coverage for their hardline. These losses made the companies either unprofitable ormarginally so.

Another issue that apparently sticks in the craw of reinsurersis the Enron episode, when they bought into coverage that turnedout to be financing agreements designed to improve Enron earnings,and not insurance contracts. "There is a renewed emphasis on duediligence," said Steve Morello, chief underwriting officer atAmerican Re.

Matthias Weber, senior vice president and chief propertyunderwriter, U.S. Direct, at Swiss Re Americas, said in aninterview that deductibles "are a good thing." Mr. Weber explainedthat they allowed insurers to "filter out" the small claims thatpolicyholders can handle, so that insurers and reinsurers canconcentrate their time and capital on the larger claims that arebeyond the resources of the insured.

Mr. Weber added that if the policy language calling for multipledeductibles is waived, "this would have an impact on pricing," inother words make insurance more expensive both for the homeownerand the primary insurer seeking to lay off some of his risk on thereinsurer.

Steve Dreyer, practice leader for financial institution ratingsat Standard & Poor's, said he expects the primary insurers toabsorb the cost of waiving the deductibles, if that is what theydecide to do. Mr. Dreyer said he doesn't think the cost of thiswill be material, but has made no calculations. "If this turns outto be a large number, then this will turn the heat up" on everyoneinvolved, he said, including the insurers and the Florida stateofficials dealing with the issue. "But I don't see the reinsurerstaking any other position on this," Mr. Dreyer said.