Scary Times Indeed!

Fear was the most prevalent topic at this year's IIABA conference in Washington, with inflation, the deepening recession, federal regulation, health care reform and swine flu among the bogeymen cited.

Indeed, the most popular giveaway at this year's Big I exhibit area was not the iconic Aflac duck spiffily dressed in a businessman's attire, but the bottles of hand sanitizer courtesy of Liberty Mutual, with most folks choosing the fist bump rather than shaking hands in these perilous times.

With Uncle Sam printing money like there's literally no tomorrow to jump-start our moribund economy, the CEO panel addressing the Independent Insurance Agents and Brokers of America didn't pull any punches about the possible impact.

Liberty Mutual's outspoken president, Ted Kelly–never one for sugar-coating–spoke with disgust about the way Washington is responding to our economic woes. “We're looking at double-digit inflation in a few years with these deficits,” he said, arguing that “inflation is a much bigger threat long-term” to our national well-being.

“It's not just all the money we're printing,” he lamented. “There is just no political will to raise taxes or cut spending, so the only alternative is inflation.” He predicted that “we'll need another [Ronald] Reagan and [Paul] Volcker down the road to set us straight.”

XL Capital CEO Mike McGavick chimed in that underwriting discipline is more important than ever with inflation looming, threatening to devalue the dollar. “Your worst nightmare as an underwriter would be to under-price with inflation coming down the road,” he warned.

The panelists were equally rattled by the heavy hand and direct control the federal government is exerting in the private sector to keep companies such as AIG and major banks from falling by the wayside following reckless investment decisions. Mr. Kelly was especially agitated about Washington dictating who runs a private company.

“The federal government is running roughshod right now in firing CEOs,” he said. “We need the federal government to step back and let the free market operate again.” If that means certain companies go under, so be it, he implied.

Mr. Kelly had the sound bite of the day on this topic: “Capitalism without failure is like religion without sin. It just doesn't work,” he insisted.

He complained bitterly about how an insurer that writes too much business in one heavily exposed line or region and is overwhelmed with losses goes out of business, period. “We aren't going to be bailed out of bad underwriting decisions, so why are others being bailed out for bad investment decisions?” he demanded to know.

“It makes no sense!” Mr. Kelly concluded, lambasting Washington for pouring billions into AIG instead of letting nature take its course after credit default swaps threatened to drive the organization into bankruptcy. At best, he said, the government “should have just covered [AIG's] counterparty risk and run off their companies.”  

“AIG made a mistake that is just incomprehensible,” he said. “The one risk they never considered was what would happen if they lost their rating.”

Mr. McGavick added that he was “appalled by the notion that in order to fix these company failures, they have to be propped up by the unlimited resources of the federal government,” which, he said, “terribly skews the competitive landscape.”

As for federal regulation, it appears the only point the entire industry agrees on is that the worst result would be dual regulation, with the both the Feds and states having a say over their operations. Yet most fear that could end up being the case, giving the industry the worst of both worlds.

Glenn Renwick, president and CEO of Progressive, said that he “would like to focus on what's regulated, rather than who is regulating,” noting that rate regulation, for example, is a huge cost and very time-consuming for insurers, without benefitting consumers.

Health care reform also generated its share of controversy, as Mr. Kelly had the second-biggest sound bite of the day after warning that should a single-payer system be established, or should an optional government coverage inevitably lead to that result, the amont of cost-shifting to other medical bill payers–such as workers' comp and auto insurers–could prove to be overwhelming.

“At some point,” he conceded, “it might come to the point where it just makes sense for us to just let the medical portions go.”

All this doomsday talk included numerous mentions of the difficult times ahead for p-c insurers in a shrinking economy. Even if insurers manage to raise rates, the bottom line boost will be limted or non-existent because of the number of firms shutting down units, laying off millions or just going bust. And while Wall Street has rallied this past month, I get the feeling we're in a Looney Tunes episode, pumping our legs wildly but with no floor beneath us, setting us up for another big fall.

Conspicuous by his absence was Ramani Ayer, CEO of The Hartford, who bowed out of the CEO panel because his quarterly earnings report was due–the troubled firm reported a first-quarter loss of $1.2 billion–and no doubt because his p-c units are reportedly in play. It's a shame, because Mr. Ayer has been one of the industry's true leaders for quite some time, yet poor investment decisions appear to have forced them to seek government aid and at least partial liquidation.

All in all, these are most troubled times indeed. What do you folks make of the fears raised here at the IIABA meeting?