Insurers, Reinsurers Not Living Up To Promises To Pay: Marsh Exec

Mr. Egan said that there has definitely been a change in claims-paying attitudes that goes beyond much-talked-about payment issues in the reinsurance area.

"We see it–and its not just limited to reinsurance. Were seeing an erosion of the basic promise to pay" on both the primary and reinsurance levels, he said

In some cases, "it might be exacerbated by reinsurers," he said, noting, in particular, situations where reinsurers are put into runoff and sold to financial managers.

He explained that if a financial institution is just in the business to work out losses of a company in runoff, then that firm wont be in business in the future and isnt concerned about its future reputation.

The "can pay, wont pay" description doesnt apply to every company, "but its an issue for the industry," he said. There are many primary companies "that dont follow that promise to pay" and many reinsurers that dont honor the "time-honored" tradition to follow-the-fortunes of the lead company.

From his perspective, Joseph Brandon, chairman and chief executive of General Re Corporation in Stamford, Conn., said his company has actually been involved in fewer disputes today than five years ago in the firms U.S. operations. He said the company carefully tracks both formal and informal disputes.

Insurers and reinsurers both experienced far more losses than they expected in the late 1990s. "But that doesnt mean they are the victims of misrepresentation or fraud," or that they raise those possibilities as excuses "to hide behind or not to pay losses."

Mr. Brandon referred to a new phrase hes been hearing"creditwillingness"noting that while its being distinguished from "creditworthiness" in the market, the two are correlated. "If youre a company with a solid balance sheet and adequate reserves, then youre going to be more willing to pay your claims" than a company with inadequate reserves and a poor level of capitalization.

Noting that he has seen some reinsurers fitting the latter description that are, in fact, hiding behind excuses not to pay claims, Mr. Brandon said hes amazed that he also continues to see insurers continue to do business with the reinsurers who arent paying.

Marshs Mr. Egan vowed: "Thats going to change, if we [brokers] are going to be pulled into the collection of reinsuranceas we often are today."

"Im involved in this just about every day, unfortunately," he continued.

"People are going to have to be more discriminating about who they do business with," refusing to do business with reinsurers that dont have appropriate claims-paying attitudes.

Mr. Egan said theres a lot of information available on the financial strength of insurers and reinsurers from the major rating agencies. But its harder to discern claims-paying attitudes, he said, raising the possibility that Marsh might try to rate claims attitudes of insurers.

Such an undertaking, he said, is "not without certain issues," although he did not expand on the specifics of the possible rating system Marsh could develop or identify the issues that stand in the way.

John Degnan, vice chairman of The Chubb Corporation in Warren, N.J., said he did not see the unwillingness to pay claims as a major issue with most reinsurers. "I read a lot about it, but I dont see it. We are not seeing a fundamental change in behavior."

Mr. Degnan asserted that "if you pick your reinsurers carefully, you can rely on the ability to talk through the issues that will come up occasionally." He noted that Chubbs reinsurance recoveries for World Trade Center losses, for example, brought a $3 billion gross loss down to $645 million net of reinsurance recoveries.

"We had some interesting discussions along the way, but by and large, [the reinsurers] all behaved in a professional way," he said.

For his part, Marshs Mr. Egan, in addition to citing the "reaffirmation of the promise to pay" as one of the major challenges facing the industry, also called on insurance underwriters "to differentiate among risks" in a rising rate environment.

The industry executives also weighed in on the question of whether the hard market has started softening.

"Experts have predicted that there would be a soft landing to the hard market"–that while there were precipitous price increases, there wouldnt necessarily be precipitous declines to end this hard market, Mr. Egan noted. "There are many things to indicate that should be the case. When surplus falls three years in a row, when theres negative cash flow–these are things that cant correct themselves in one year," he said.

On the other hand, "when you see new capital come in, unencumbered by the past, then you see competition," he said, noting that brokers are seeing competition "heat up a bit in the third quarter."

Susan Rivera, president of ACE INA Holding in Philadelphia, said she believes companies are still trying to charge premium rates that are "fair for the risks theyre taking," while at the same time keeping an eye on getting adequate returns-on-equity in order to attract capital to the industry.

Mr. Brandon agreed. "I think the phrase do the math offers insight," he said.

Noting that the industry just came through "a very difficult" six-year period extending from 1996 to 2001, he said "any industry that has six difficult years, two reasonable years and six difficult years is not going to attract the capital needed to support the risks we take as an industry."

Ms. Rivera also said, "It is important for us to become consistent" in light of the fact that there are a lot of new unforeseen risks on the horizon. She was referring to an earlier discussion of the impact recent mutual fund investigations might have on professional liability insurers, which took place during the session. (See related story, Nov. 17, page 19.)

"There are a lot of things we dont understand," she said. Broadening her observation beyond the concerns about systemic problems in the financial service industry that recent mutual fund investigations may reveal, she pointed to other potentially catastrophic events on the horizon.

"I think you have to look at terrorism. Whats going to happen to the workers compensation line if TRIA [the Terrorism Risk Insurance Act] goes away?" she asked. She also noted that while SARS was not a big issue for property-casualty insurers, "the next type of issue like that might be."

"The financial viability of our companies is at risk based on the next event thats unforeseen," she said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 21, 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.