Hard Market Carries Big Risks
To The Editor:
For those of us who have been around the property-casualty industry for a long time–and that includes most of us, since the young people are staying away in droves–the memory of a cover of Time magazine in 1984 is still vivid. "Sorry, America, Your Insurance is Cancelled" read the headline, and the articles inside documented horror story after horror story about communities and businesses that either couldn't get any coverage or could not afford the coverage they were offered.
Memory fades a little regarding what happened next, but we need to force ourselves to remember. We need to remember how the budding alternative market that had taken root in California in the late 1970s came into full bloom in 1985 and 1986 and 1987. We need to remember that in the following years as much as 20 percent of the available commercial insurance market moved to captives and paid-loss retros and large-deductibles and other forms of self-insurance.
The industry leaders of the day were very sure that when the hard market had earned back for them the profits lost in the price war of the early 1980s, and when they were good and ready to offer coverage at affordable prices again, all the self-insureds would return to the fold. They were wrong!
Once business managers got accustomed to the lower volatility and greater control the alternative market afforded them, they decided to stay with their self-insurance programs, even when the insurance market got really soft again.
As an industry, we shot off one foot in the mid-1980s, and now when presented with a perfect opportunity to shoot off the other foot, it looks like we are going to take it. This time we want to earn back as quickly as possible all the profits lost during the cash-flow underwriting of the past 12 years–and, by the way, we want to exclude terrorism coverage in the process, [and want the government to reinsure terrorism exposures]. Now the cover of Time magazine can read, "Thank God, America, Your Government Has Saved You from the Insurance Industry."
Its a mistake to ask the government to take on the terrorism peril, and we will regret it if we prevail upon them to do so. Except with regard to national security, and possibly the building and maintenance of highways, government is almost always the problem and never the solution. Pushing the terrorism peril onto the government invites still more intrusive and expensive regulation and puts one more nail in our credibility coffin.
Our customers dont like us because of things like this, and we cant change their minds through education. Customers dont want to be educated. They want to have their coverage problems solved so they can get on with their businesses and their lives.
Why dont we stop crying about capacity and engage our creativity? Couldnt we look at risk aggregation a little differently? Thats the way we handle catastrophic flood and earthquake perils. Maybe for large accounts, insurance companies should write either property or liability or workers compensation, but not all three. Maybe we could "share the line" like we did in the 1950s. Maybe we could create an industry reinsurance pool.
If we dont have the capacity, and we cant pool our resources to create it, we can rent it through catastrophe bonds or catastrophe lines of credit or other creative financing techniques. The securities industry will be happy to oblige us if we are willing to pay, and even happier to take our place if we are not.
In fact, the risk securitization business is budding today like the alternative market was budding in 1984. It will most certainly come into full bloom if we abandon our best customers or make critical coverage unaffordable. What the government doesnt take from us, the risk securitization business probably will, unless we quickly engage our creativity. Then well be left to fight like jackals over the scraps in a brand new cash-flow inspired price war.
The only way to earn our customers loyalty and rebuild our image as an industry is to hang in there now that times are tough. We need to remind ourselves that this business is about so much more than aggregating other peoples money so we can earn the investment income. Its about keeping the wheels of commerce turning and providing peace of mind, and about being there like the fire fighters and police and emergency medical workers when people really need us.
Patricia L. Marquis
Executive Vice President
Glatfelter Insurance Group
York, Pa.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 14, 2002. Copyright 2002 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.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.