Cat Fallout, Terrorism, Regulatory Reform Dominate Big I Talks

The long-term impact of last year's record hurricane losses, a stubbornly softening market for most, as well as battles over terrorism coverage and national regulatory reform are just some of the challenges keeping insurers and their producers up at night, with no long-term resolution in sight on any of these critical questions, industry leaders here conceded.

While it was not all doom and gloom here at the Independent Insurance Agents and Brokers of America National Legislative Conference and Convention, serious concerns were expressed about the direction the industry is taking and the role of the federal government in overseeing and/or supporting the business. If agents were expecting to hear a unified message on any of the threats facing the industry, they were disappointed.

IIABA's chief executive officer, Robert Rusbuldt, led off a panel discussion featuring five insurer CEOs with a question on the minds of all agents and brokers: Where is the current erosion in commercial pricing headed?

“It's too soon to tell,” said Michael Browne, president and CEO of Harleysville Insurance, based in Harleysville, Pa. He said the market is still in transition, going through a soft cycle, but “could still go anywhere.”

Gary R. Gregg, president and CEO of Boston-based Liberty Mutual Agency Markets, noted, however, that while markets are flat to soft, reinsurance costs are escalating, which could stabilize or even turn around pricing trends before long.

He added that clients with favorable loss histories are still in the best position to see falling rates, while those with less emphasis on loss control might not–meaning the market remains more rational than soft.

Paula Rosput Reynolds, still relatively new on the job as president and CEO of Seattle-based Safeco, said rates are softening because there is still plenty of capital available for insurers, but warned that catastrophe losses will continue to impact selected, disaster-prone regions.

Ramani Ayer, chairman and CEO of The Hartford, called the commercial market “competitive” rather than soft. However, increased reinsurance premiums and the demands of increasingly vigilant rating agencies on company operations will restrain any radical decreases and enforce underwriting discipline, he predicted.

On the personal lines side, Edward M. Liddy, chairman and CEO of Northbrook, Ill.-based Allstate–which operates the independent agent subsidiary Encompass–said his side of the market is in relatively good shape. However, he warned of adverse effects from Hurricane Katrina to the homeowners market if steps aren't taken to better spread risk.

Allstate has advocated the creation of a national catastrophe fund to backstop state disaster pools to deal with huge losses. Mr. Liddy said that despite recent industry profits, insurers are in no position to withstand three or four storms like Hurricane Katrina in one season.

“The United States needs to think differently about this issue,” he said. “We need a better way of [insuring this risk]. We really need to deal with this in advance instead of after the fact.”

However, it is clear Mr. Liddy has a tough sales job ahead of him–even within his own industry. “As a practical matter, a [federal] backstop would be hard to achieve,” said Mr. Browne of Harleysville. “In the near term, we need to rely on our own exposure management.”

While conceding that federal support will take time to develop, Mr. Liddy countered that more states are looking to create this kind of option and possibly form regional coalitions to deal with disaster exposures.

Liberty Mutual's Mr. Gregg expressed skepticism over the Allstate catastrophe proposal. “We have to think long and hard before we invite the federal government into our business,” he said. “The industry will find a way out of this.”

In a separate panel discussion for IIABA's young agents, Cynthia Hardy Young, president of Encompass Insurance, said the need for a national catastrophe plan was underscored by the current capacity problems along the Gulf Coast.

She and other carrier executives on her panel agreed that achieving price adequacy in the face of recent catastrophes is a challenge. Despite the population growth in coastal regions coupled with rising costs for homes and repairs, the industry will not be able to achieve the premium rate it feels it needs to cover the risks, she warned.

Others on the young agents panel–John Ammendola, senior vice president at Safeco Personal Insurance, and Robert V. James, senior managing director, president and CEO of New York-based Countrywide Insurance Group–said their companies were pulling out of Florida because they could not achieve rate adequacy.

Mr. Ammendola appeared to be skeptical of a federal answer to the problem, but Mr. James wondered if all the federal dollars for aid in the aftermath of the past hurricane season could have been better spent in some other way. Neither explicitly said they did or did not support Allstate's plan.

Conceding that a national catastrophe plan was something Congress was not going to touch in an election year, Safeco's Ms. Reynolds said the short-term answer for carriers was more careful underwriting and diversification of exposure.

Ultimately, to survive in a suppressed rating environment, she said insurers will need improved exposure modeling, consumer education and updated building codes to construct homes that would be better able to withstand a hurricane.

Discussing the catastrophe challenge during the CEO panel, Ms. Reynolds predicted that “it will be a several-year journey before companies like Safeco return to catastrophe-prone areas.”

Hartford's Mr. Ayer said the biggest obstacle to writing in Florida is rate suppression. He advised that the market needs to open up on pricing, but at the same time the building boom along the catastrophe-prone coast “can't continue.” He also called on the state to allow the use of catastrophe models in its pricing. “We need freedom of margin to reflect tough, tough losses,” he said.

Echoing earlier comments from IIABA President William Stiglitz, Mr. Rusbuldt said the industry needs a unified approach on a catastrophe plan that the association could support. However, in the meantime, agents need markets, and there is a crisis looming on placement of risks as insurers abandon some catastrophe markets, he warned.

Mr. Stiglitz, speaking to the young agents, said in the aftermath of Katrina an association survey found producers were generally unhappy with company response to claims–specifically critical of the use of independent adjusters. Some of the adjusters, those surveyed said, appeared to have little experience in the field, aggravating an already strained situation.

Tony Pavia, president of American International Group Auto, a subsidiary of New York-based AIG, said his company recognizes the problem and is building a catastrophe response team of 100 that would be mobile and respond to events quickly.

Ms. Young said one lesson Encompass learned was to put company adjusters in the offices of independent agents. Doing so proved to be an effective and efficient way of processing claims, she added.

Countrywide's Mr. James said the displacement of homeowners proved to be a major challenge, noting that his company still has 80 Katrina claims outstanding because it has not heard from policyholders. “They are just now starting to come back,” he said.

“Using independent adjusters is not the way to go,” said Safeco's Mr. Ammendola, adding it is important that both the companies and customers be better prepared when the next catastrophe strikes.

Turning to other industry challenges, Hartford's Mr. Ayer complimented agents for their lobbying efforts to extend the Terrorism Risk Insurance Act, saying the federal reinsurance backstop for such exposures would not be around for two more years without their influence on Capitol Hill.

However, he warned that while the industry won the battle to extend TRIA, the war to establish a more permanent public-private partnership on uninsurable terrorism exposures is far from over. He said nuclear, biological, chemical and radiological terrorism threats remain uninsurable and require federal support. The absence of such a backstop, he said, is “unproductive and counter to the safety and security of this country.”

“We will prevail, but we will need to work at it,” he said of the prospect of establishing a more permanent backstop over the objection of those who claim TRIA amounts to a bailout of the industry.

The other CEOs on the panel echoed Mr. Ayer's support for long-term TRIA renewal, with Harleysville's Mr. Browne saying insurers “will help [cover a large portion of the exposure]…but ultimately there needs to be a federal backstop.”

The CEOs touched on two other hot-button regulatory issues–the future of contingent commissions and modernization of the insurance regulatory system.

While the CEOs were universally supportive of contingency commissions as a reward for quality business, they expressed concern that recent agreements between various attorneys general, insurance regulators and individual companies accused of wrongdoing could undermine the payments industrywide.

Settlements of bid-rigging and contingency fee abuse allegations with major carriers ban the payment of such fees under certain circumstances, which some on the panel viewed as a backdoor approach to ultimately ending the compensation practice.

“There is nothing wrong with contingent commissions,” declared Harleysville's Mr. Browne, who also served as Pennsylvania's insurance commissioner at one time. He called on agents to remain united and fight to preserve the system.

Panelists were also asked about competing Congressional efforts on regulatory modernization–pitting a House bill that would set federal standards for state regulators against a new Senate bill establishing an optional federal charter.

Harleysville's Mr. Browne said while the current system is inefficient, a federal system could be worse. Citing a joke told to him by a friend, Mr. Browne said, “The question is, do you want to deal with 50 chimpanzees or one gorilla?”–emphasizing that whatever approach is taken, it should be done slowly.

However, both Hartford's Mr. Ayer and Allstate's Mr. Liddy said they strongly support creation of a federal regulatory body, preferring the Senate's OFC proposal.

Mr. Ayer said the industry is at a disadvantage in Washington because there is no single insurance advocate in the federal government who could seek new and efficient ways for delivery of products. He argued that such an authority would bring more efficiency to the industry, which would ultimately benefit agents and their clients.

“The current system is broken, antiquated and unworkable,” said Mr. Liddy.