Congressional Spotlight To Hit Insurers

Lets go back to the late 1970s and early 1980s, when interest rates were at double-digit levels and insurers engaged in what was called "cash flow underwriting." The theory in those days was that because interest rates were so high, the best financial strategy was to write as much business as possible at very low rates, invest the money in high-yielding securities, and reap substantial profits.

On a personal note, one of the first major articles I did for National Underwriter featured an anecdote about a small-business umbrella policy that carried a premium of $105,000 in 1979. The next year, the same insurer wrote the same risk for a premium of $5,000. (This is not a misprint.)

Naturally, the bubble eventually burst. Interest rates came down and losses started coming in. By now, it was the late 1980s and I had just arrived in Washington. One of the first issues I covered here as Washington editor was the "liability crisis." Insurance rates skyrocketed, and when Congress asked why, some in the industry said that the liability system was out of control and Congress should rein in excessive jury awards.

But when Congress also said that if there is going to be federal liability reform, the insurance industry would be obliged to report liability data to a federal government office, the industry balked. Shortly thereafter, the market seemed to stabilize and the urgency for liability reform faded.

Sometime later came the catastrophe insurance crisis. After Hurricane Andrew struck in South Florida and some major insurers experienced substantial losses, the industry went to Congress asking for federal assistance in the catastrophe market–an issue that is still alive today.

There were major market disruptions in Florida and other disaster-prone states, and insurers blamed it on the unpredictability of major catastrophes. But it also turned out that there was another factor in the pattern of losses in Florida following Hurricane Andrew.

Some major insurers that were hit hardest had done a less than effective job of managing their portfolios. Companies that were supposed to be experts in the underwriting and spreading of risk committed the classic mistake of concentrating risk in one location. Whatever the degree of predictability of catastrophe risk, I think it is fair to say that some insurance company underwriting practices exacerbated the problem.

Now here again, in the medical malpractice area, the industry is in a down cycle and there is a liability crisis.

I do not presume to comment on the legitimacy of the liability crisis, but simply to point out the coincidence. There does seem to be pattern developing. The four Democratic senators made note of it, Bob Hunter of the Consumer Federation of America makes note of it regularly, and Republican leaders in Congress will not be able to ignore it.

In the give-and-take bargaining process that characterizes Congressional lawmaking, any liability reform will come at a price. And for the insurance industry, that price might be some federal oversight of the industrys underwriting procedures.

At a minimum, I think the insurance industry will be asked for some very detailed explanations of the seeming coincidence between liability crises and down cycles.

On the terrorism insurance front, the question of how to price terrorism coverage is also starting to raise concerns. Most notably, D.C. Insurance Commissioner Larry Mirel questioned one possible methodology under which businesses in Washington, D.C. would face much higher rates for terrorism insurance than those just across the borders in Maryland and Virginia.

The problem for industry ratemakers is trying to predict the mind of a terrorist. I can understand the logic that D.C. is a high-profile jurisdiction and should face a higher rate. But I can also understand the logic that a terrorist might seek a softer target, perhaps where security is not so intense, somewhere else.

In the absence of any data upon which to base an actuarially sound rate, any underwriting and rating judgments made by the industry will be subject to challenge.

Whatever the industry does, someone will not like it. And it is bound to draw significant Congressional scrutiny and, perhaps, federal government oversight, especially since terrorism insurance is a federal government program.

It might seem as if some of my comments here are unduly critical of the insurance industry. If so, I apologize, but with the caveat that however harsh these comments may seem, they are mild compared to what I think awaits the industry on Capitol Hill.

Steven Brostoff is NU's longtime Washington Editor. He may be reached at sbrostoff@nuco.com.

Reproduced from National Underwriter Edition, February 10, 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.