Reinsurers Urged To Fight Unjustified Claims

Mr. Kielholz said that any return to underwriting basics needs to include an emphasis on only providing coverage when the wording has been properly agreed upon.

While a bank would never contemplate providing a loan without a completed contract, he said the reinsurance industry regularly accepts thousands of coverages that are not properly closed. (For more on this issue, see related stories on pages 20 and 23.)

Regarding claims management, Mr. Kielholz said that the industry needs to be more aggressive about fighting unjustified claims from "predators" so they can preserve capital for legitimate claimants and for shareholders of companies.

"We have to fight this notion, for example, that no one is responsible for his life," he said. "Theres always some guilty party out there. At the end of the day, youll sue your mother just because she gave birth to you."

He added that reinsurers "just have to make sure that we only pay what has been agreed in the contract. That is our right and it is our duty, in my view, to shareholders and policyholders Its their money were paying out."

"Unlimited liability is unacceptable," agreed Patrick Ryan, chairman and CEO of Aon Corp. in Chicago, another speaker at the meeting.

For example, the lack of caps on medical malpractice awards in some U.S. states has created a crisis, and is making it almost impossible to price a medical malpractice policy, he said. As a result, he noted, tort reform is necessary to create caps for all awards involving professional practice, he said.

In the United States, 40 percent of jury awards go to plaintiffs lawyers, and "in certain cases a much higher percentage goes because a lot of it is just the cost they say theyve incurred," he said.

"The cost of the plaintiffs bar in the United States is a huge social drain," Mr. Ryan emphasized.

"We have a couple of statesAlabama and Mississippiwhere judges run unopposed. They have no opponent in the election and yet they receive huge campaign donations from plaintiffs lawyers. I usually think that is a bribe," he said.

Mr. Ryan spoke of the recent lawsuit filed by overweight people in the United States against the fast-food industry, which the plaintiffs bar believes has the same potential as tobacco.

"We have a whole new risk issue to deal with," he added. Mr. Ryan said that Sept. 11 "put a new perspective on risk because it introduced terrorism in a way that none of us ever believed terrorism could impact our lives."

For example, he said, the concentration of employees in one building has been revealed to be a major risk. (Aon lost 175 people in the World Trade Center disaster.)

"We have believed for a very long time in risk management, but 9/11 gave us a whole new ballgame," he said.

"We moved in yesterday [Sept. 9] to our new facilities in midtown Manhattan," he said, noting that Swiss Re also has offices in the same building.

Aon, he said, has split its facilities to avoid the same concentration of employees it had in the World Trade Center, where 1,150 people from Aon worked.

"Now were going to have half of them in midtown and half of them downtown," he noted. "Its still more concentration than we would like in New York, but the practical needs obviously dictate."

Mr. Ryan said Aon employees have been educated thoroughly on safety. "They know how to get out of these buildings, and how to get out of them quickly," he said.

Sept. 11 also highlighted the volatility of the reinsurance business, both speakers concurred. "Since Sept. 11, risk appetite in the world has drastically reduced," said Mr. Kielholz.

There has been a significant retreat from volatile risks, leading financial services companies to move out of the reinsurance business or at least contemplate such a move, affirmed Mr. Ryan. (For more on this issue, see the related story on page 28.)

Both the property-casualty and life insurance industries have been hit on the asset side of their balance sheets, he said, referring to a global "asset meltdown."

"In fact, this whole capital issue, as it relates to the balance sheet side, is one that we think leaves a very important question unansweredwhere will the capital come from for these new risks, and who will be willing to take them, and what returns will they demand?" he said.

Mr. Ryan noted that Aon was one of the principal companies behind the creation of Endurance Specialty Re in Bermuda. He said private equity investors in Endurance wanted to see a combined ratio of 85 to get the returns they were looking for.

Mr. Ryan referred to Mr. Kielholz requirement of a 100 combined ratio as a "cake-walk."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 16, 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.