Insurance Executives Fear Price Wars; Reinsurers Should Use Cash To Improve; CNA Settles Claim Rega

Bruising competition may be a far greater risk for insurers than are problems with subprime mortgages. Insurance company executives gave that assessment when they participated in an informal survey during an insurance industry conference organized by KPMG. Only five percent of the 270 survey participants identified subprime mortgage risk as the most significant risk facing the industry.

Pricing risk was by far the most popular answer. The percentage of executives listing pricing risk as the most significant risk increased to 56 percent this year, up from 49 percent in 2006.

Although 51 percent of the participants believe the effect of the subprime market woes on insurers' investments would be significantly negative, only four percent of the participants believe the effect would be extremely negative.

About 33 percent of the participants responded their companies are extremely confident about their ability to understand their exposure to subprime losses and related losses, while 18 percent answered they do not know whether they can do so, and nine percent said they are not at all confident about their ability to analyze subprime exposure.

Reinsurers and primary insurers flush with cash after a few good years could be spending their money more wisely and beef up their training and technology, according to an industry expert. "With the profitable years the industry has had, it's a great opportunity to invest in technology and training and best practices that would sustain earnings over the long term," says David M. Siesko, a principal with Siesko Partners, a New York-based firm that helps resolve conflicts between policyholders and their carriers.

"It's disappointing," says Siesko of the industry's spending habits, "especially in the technology and training areas. Global customers expect insurance carriers to be global, not regional. Lack of technology is a competitive disadvantage for both primary insurers and reinsurers."

An emphasis on training also is a necessity. "The results begin at the underwriting and claims-desk levels," says Siesko. "High-minded strategies can leave that fact out."

A $250 million reinsurance claim settlement will have minimal impact on CNA's earnings, a rating agency reports. CNA Financial Corporation announced it reached a settlement of $250 million with John Hancock Life Insurance Company to settle four excess-of-loss reinsurance treaties issued by CNA Reinsurance Company Limited, a former CNA subsidiary.

The insurer expects to record an after-tax loss, net of reinsurance, of approximately $110 million in the third quarter of 2007 in connection with a one-time $250 million payment. "The settlement with John Hancock eliminates an exposure from CNA's book of runoff business," says Stephen W. Lilienthal, chairman and CEO of CNA. "We are pleased to put this matter to rest."

Standard & Poor's Ratings Services says the settlement would result in a modest reduction in the company's net operating income for 2007. For the first six months of this year, the company's income was $625 million. The rating service adds the charge was not viewed as material and would have no impact on the carrier's current ratings.

The Financial Industry Regulatory Authority (FINRA) is gearing up to impose new regulations on variable annuity sellers. The U.S. Securities and Exchange approved a FINRA VA sales practices rule, according to SEC officials. The new FINRA VA suitability rule will affect broker-dealers that sell deferred variable annuities.

The new rule will allow broker-dealer firms to: make sure a client actually needs a deferred variable annuity, rather than some other product; set standards for principal review and create a requirement that broker-dealer firm principals review transactions before a customer's application is forwarded to the issuing insurance company for processing; and establish and maintain specific written supervisory procedures designed to achieve compliance with the standards set forth in the proposed rule.

The order will permit FINRA members to hold customer funds for up to seven days while complying with the new principal review requirements without the firms becoming fully subject to Exchange Act Rule 15c3-3. Firms that hold customer funds longer than seven days while conducting suitability reviews must maintain higher levels of net capital, officials say.

Creating a federal regulatory option could cut U.S. producer licensing costs $268 million to $377 million per year, according to Laureen Regan, associate professor at Temple University, who published the estimate in an analysis commissioned by insurance industry groups. The groups want Congress to permit insurers and producers to choose between state regulation and a new federal insurance regulatory system.

In addition to cutting licensing costs, an optional federal charter system would help producers by creating uniform requirements for prelicensing and continuing education, according to Regan.

Regan's analysis was released by the American Council of Life Insurers and the National Association of Independent Life Brokerage Agencies. The ACLI and NAILBA are backing the National Insurance Act.

Regan reports the typical insurance producer carries an average of 7.9 licenses, at a cost of about $100 per license. An OFC system could cut the total cost of about $432 million by at least 60 percent, according to Regan.

California lawmakers have approved a new measure that restructures and reduces backup catastrophe assessments on insurers that participate in the California Earthquake Authority. The bill, which Gov. Arnold Schwarzenegger is expected to sign, would replace existing legislation creating the quasi-public CEA, which is due to sunset in December of next year.

Organized 12 years ago with $700 million from participating home insurers, based on their share of the market, the tax-free fund now has $2.65 billion in immediate capital on hand. Under current law, in the event of a catastrophe exceeding that amount, insurers would be immediately assessed $2.2 billion, and if additional money was needed, the fund would begin dipping into layers of reinsurance and eventually go to revenue bond money before finally hitting insurers with another assessment of $1.5 billion.

Under the bill that has been approved, the current $2.2 billion assessment would be reduced to $1.3 billion. In a restructuring, that $1.3 billion would be assessed only after the CEA had used up its layers of reinsurance, bond money, and the $1.5 billion assessment. The new legislation also would give the board that controls the CEA the ability to ask a newly joining insurer to pay a higher, nonrefundable initial assessment if it brings a risk portfolio with a higher level of risk.

Under California law, all home insurers must offer earthquake insurance; for participating carriers, their offering comes through the CEA.

The U.S. Treasury Department is asking for public comments about ways to improve the tax forms that life insurance companies file. The department is about to review and revise the U.S. Life Insurance Company Income Tax Return. Life insurers with $10 million or more in assets must file the return each year and use it to compute and pay any taxes due.

The businesses that file the forms probably spend a total of about 436,614 hours filling the forms out, Treasury Department officials estimate. The federal Office of Management and Budget, which helps manage regular reviews of government forms, has posted a notice about the Form 1120-L revision in the Federal Register.

Florida Insurance Commissioner Kevin McCarty announced he has denied property insurance rate-hike requests from The Hartford Financial Services Group that ranged from nearly 30 percent to more than 226 percent. According to the commissioner, the filings submitted were not actuarially justified and lacked supporting information.

McCarty reports his Office of Insurance Regulation has sent notices of intent to deny the rate filings, because the proposed rate increase was not commensurate with the savings obtained when the legislature made low-cost reinsurance available to carriers through the Florida Hurricane Catastrophe Fund.

Hartford had requested a statewide average rate increase of 29.5 percent for its homeowners business, a 46.4 percent rate increase for its AARP homeowners program, a 50.5 percent rate increase for its dwelling fire business, a 100 percent increase for its AARP dwelling fire program, a 146.3 percent rate increase for apartment building coverage under its Spectrum program, a 210.8 percent rate increase for apartment building coverage under its Property Choice program, a 121.7 percent rate increase for condominium building coverage under its Spectrum program, and a 225.9 percent increase for condominium building coverage under its Property Choice program.

Healthy nonsmokers may be paying lower prices for term life insurance policies with 10-year level-premium terms, but smokers and purchasers of 30-year term policies are paying higher rates. Robert Barney, president of Compulife Software, a Web-based term life quote service, has presented his analysis in a discussion of the recent history of term life rates.

Rates have been falling steadily for 10-year and 20-year term policies for applicants in the preferred and preferredplus nonsmoker categories, Barney says. But rates for smokers have reached a plateau, and rates for 30-year term coverage for nonsmokers in "regular" health have risen a total of about 20 percent since 2000, according to Compulife price data. Factors pushing rates up for some buyers and some products include consolidation in the life insurance industry and increases in reserve requirements for term life policies with level-premium terms longer than 10 years, Barney says.

A Treasury Department official testified legislation creating a joint federal-state program supporting programs providing homeowner catastrophe insurance would have a negative impact on business and taxpayers. The proposed measure would displace private markets, promote riskier behavior, and be costly as well as "unfair to taxpayers," says Phillip Swagel, Treasury's assistant secretary for economic policy, at a hearing before two subcommittees of the House Financial Services Committee.

Also voicing concern about the legislation was Frank Nutter, president of the Reinsurance Association of America, who says it would "unnecessarily crowd out the private reinsurance market." While the RAA does not support this legislation and has significant concerns with provisions of it, Nutter says the group does agree "with some of the principles in the legislation and pledges to work with the committee to improve it as it moves through the legislative process."