Alliance Tackles Insurance ‘Jungle’ The insurance “jungle” is filled with dangers that must be addressed if the industry is to find its way and return to safety, noted Rodger S. Lawson, president of the Downers Grove, Ill.-based Alliance of American Insurers. Many of these dangers were slated to be explored during the Alliance’s April 27-29 annual meeting in San Diego.

In an interview with National Underwriter prior to the conference, Mr. Lawson and Alliance general counsel Ann Spragens mapped out the key issues now facing the industry and what can be expected in the near future.

“Corporate ethics and public trust” dominate the headlines, Mr. Lawson pointed out, and it was no coincidence that this was the topic of the keynote address by former Secretary of Education William Bennett.

“Insurance is predicated on a trust relationship–it is a conditional promise to pay,” said Mr. Lawson. “The insurance industry must operate in an ethical and prudent manner. Should a claim arise, the public must have confidence that their insurers will be there to respond. Insurer executives must lead the way by managing their companies with the highest ethical standards.”

Terrorism, asbestos and tort reform are three leading issues, according to the Alliance executives.

While acknowledging that few businesses are purchasing the terrorism coverage made available under the Terrorism Risk Insurance Act, Mr. Lawson views this as “consistent with the intent of the law to offer businesses a chance to make an informed choice regarding their need for this coverage.”

Mr. Lawson also acknowledged that reinsurance for limits under the threshold at which the TRIA backstop kicks in remains high. “Reinsurers are stressing underwriting and profitability, so pricing will stay firm.”

As for the industry’s seemingly endless asbestos woes, Mr. Lawson asserts that insurers are “not even at the halfway mark for cases related to asbestos. He pointed out that most of the exposure dates back to about 1973. Since there is normally in the neighborhood of 40 years between exposure and the onset of symptoms, the industry “will continue to see cases come into the system, and there will be even more additions to reserves. “

Putting the problem in perspective, Mr. Lawson noted that, whereas the World Trade Center disaster was a $40 billion hit to the industry, knowledgeable sources predict that the asbestos bill could ultimately be closer to $250 billion.

Among the most controversial issues relating to asbestos is forum shopping, notes a statement on the Alliance’s Web site. This occurs when plaintiffs choose a court in a jurisdiction with a reputation for awarding high damages and readily granting class action status, even though that jurisdiction may have only a remote connection to the alleged injuries. The Alliance supports the tightening of venue statutes and rules to eliminate forum shopping.

Tort reform is high on the Alliance’s agenda and the subject of a discussion by a panel of judges at the Alliance’s annual meeting. Ms. Spragens said that there are now approximately 360 civil justice reform bills pending in 49 states.

With respect to reforms affecting the troubled medical malpractice sector, Ms. Spragens noted that “this is an individual, ground-level matter for the states and no one particular type of reform package is showing up consistently.” She added that “caps on non-economic damages are integral to controlling costs in this area.”

Reform of the automobile insurance system in certain states has also been targeted by the Alliance. “Certain high-profile states, including New Jersey and Massachusetts, have major problems relating to medical costs and the ratemaking process,” Mr. Lawson said. He cited South Carolina as an example of a state where Alliance-backed reforms quickly improved the auto insurance environment.

The rise of mold as a possible industry crisis is also on the Alliance’s radar screen. Ms. Spragens noted that many states have been approving coverage limitations for mold, and that claim activity has been moderating in those states. Mr. Lawson added that, in the personal lines area, many consumers are being misled by mold-related service providers and that the health risks have been exaggerated.

In commercial lines, he sees mold increasing the number of construction defect claims. The Alliance is closely monitoring mold-related legislation in all states, especially in Texas, where most of the claims and court cases have arisen.

The public’s perception of insurer “price-gouging” in the current hard market is something that must be dealt with, according to Mr. Lawson. “There was over a decade of declining premiums. In the current hard market, the insurance companies have to re-underwrite and have pricing discipline. They are charging prices that are commensurate with the risk.”

Mr. Lawson also addressed the growing use of alternative risk transfer mechanisms such as captives in the current hard market. “Captives are a check-valve. They can be useful when the traditional market hardens. They can be a competitor [to the Alliance member companies], but they are really just another player in the market.”

Of more concern to insurers than captives is the potential of having uncollectible reinsurance. “The primary companies are very concerned, as they must pay claims even if the reinsurers don’t. Some reinsurers are in desperate financial shape, and that is making the primary insurers nervous,” said Mr.Lawson.

As respects workers’ compensation, the Alliance is seeking reforms in problem states such as Florida and Texas.

The Florida problems include too many permanent total disability ratings, high hospital costs, construction employee exemptions, and too much administrative costs, litigation and attorney involvement, according to an Alliance statement.

Rising medical costs, especially for chiropractic care, were cited by the statement as among the sticking points plaguing the Texas workers’ comp system. The Alliance is advocating limits on the use of chiropractors and acupuncturists as primary care physicians, as well as rules that allow the employer to influence the choice of the initial treating physician.

Will insurers return to cash-flow underwriting once investment returns pick up?

“That would take a crystal ball to answer,” Mr. Lawson admitted. “It depends on reinsurance. If that market remains hard, companies will be forced to keep prices up.” Investment income is not the only factor influencing pricing, he noted.

Reproduced from National Underwriter Edition, May 5, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.