Will Insurers Have The Answers?

One thing is clear going into 2011. While there are signs of economic improvement there is no doubt that there are plenty of challenges that lie ahead for the year.

Of major concern: the end of the soft market is nowhere in sight, despite talk about some moderation in pricing. Some say the soft market has been great for customers, but what about the industry?

Insurers say they are adequately underwriting risk, but industry analysts are concerned that tapping into reserves is a sign that the profit picture is not as rosy as it appears.

More often than not, this soft market is referred to by insurers as being a very competitive market.

Competition is the root of capitalism. Without it, there is no innovation, no growth and limited profit.

However, one lesson that has been taught to us over and over again: capitalism breeds greed. It is greed that creates a run on markets and some loathsome, unscrupulous behavior that has been around for centuries.

Market cycles have been with us since the earliest beginnings of capitalism. We've seen boom-and-bust cycles before, often bought on by binge investing or the involvement of confidence dealers going back to Ponzi in the 1920s.

The trick is separating the honest business interest from the schemer. It has sometimes proven not to be so simple to separate the individual who would sell his mother's eye for a buck from the decent hardworking businessman and woman working to get ahead and doing the best they can for their client.

For insurers, agents and brokers, the vast majority try to do the right thing. However, there have been more than enough cases of impropriety to give one pause and occasionally a black-eye to the industry.

Last year, we saw the conviction of four executives with General Reinsurance, including its chief executive officer, and a vice president for American International Group convicted of allegations that the two companies schemed to hide the losses of AIG with a sham insurance contract. That conviction is on appeal.

Just recently, AIG agreed to pay $150 million in fines to state regulators to settle allegations of underreporting of workers' compensation premiums for more than 20 years.

What this says about the insurance industry is that no one can claim widespread corruption in this industry. However, it does underscore the reality that there are people in this business willing to stretch the rules to their advantage.

So the question insurers need to answer for themselves in 2011 is this: Are they adequately underwriting and pricing risk? Or have they gotten themselves so caught up in the competition that they've become blind to reality?

But the question should not be limited to insurers alone. It is a question regulators should be asking carriers and themselves.

Regulators often comment that they have two obligations. One is to make certain that consumers are not taken advantage of by the industry. The second is to ensure that the insurance market remains healthy and vibrant.

The year 2011 may mark a turning point, not only in pricing, but in scrutiny of the industry. Insurers may complain about regulation, but with the advent of the Federal Insurance Office and the Consumer Financial Protection Bureau, the industry can bet they will be peering over insurers' shoulders–whether it is in the code or not.

And when the market turns, this industry better have some credible answers when customers go running to these agencies asking why their premiums increased.