Risk Management Reports

Is it possible to shoot yourself in the foot and then put your bloody foot in your mouth, doubling your agony? The non-life (property and casualty) insurance business may have performed that feat, in the aftermath of September 11 and the Enron collapse.

Consider these news items, all of which suggest an amazing inability of the insurance industry to create any sort of credibility with its policyholders and the public:

1. Four major contracting firms cleaning up the debris of the World Trade Center bombing and collapse in New York can’t buy any commercial liability insurance. They are “too risky,” according to insurance companies declining to underwrite them, led by Liberty Mutual and AIG. Didn’t these insurers consider the adverse publicity that would follow this decision?
2. CEOs of the leading US insurers and reinsurers rushed to Washington after September 11, pleading for government financing for terrorism coverage, arguing that, should another attack occur, the industry could collapse. Congress stalled. Economists cautioned that government should stay away from terrorist coverage. By March 2002 one leading insurance executive changed tacks and tried to persuade the government to back out of the limited protection that it had offered US airlines. Do they need help or don’t they?
3. A major reinsurer sues the owner of the Twin Towers, arguing that the event is a single loss, not two. Its argument may be right but bringing a highly visible lawsuit is lousy public relations.
4. Eleven insurance companies refuse to pay for surety bonds issued to J.P.Morgan Chase as performance guarantees for Enron oil-and-gas derivatives contracts, suggesting that these were disguised outright loans. A judge agrees with this contention and the case now goes to trial. The bank has no interim surety payment. The refusals generate more newspaper headlines.
5. Two insurers try to void directors’ and officers’ liability policies they wrote for Enron, alleging “misrepresentation.” The explanations of “misrepresentation” are “vague,” according to The New York Times, creating the perception that this is another attempt by insurers to avoid claim payments.
6. Directors are threatened not only with non-payment by their D & O policy insurers but also by the suggestion of Treasury Secretary, Paul O’Neill, that the government should completely disallow the use of insurance to cover lawsuits alleging director and officer misconduct. Could the entire D & O market be scuttled?
7. Insurance companies levy massive rate increases, offer reduced limits, and add new policy exclusions, arguing that crippling losses threaten their existence. At the same time, investors are throwing upwards of $27 billion in new money into the business, lured by promised huge profits in the next few years. Who is right? How are policyholders likely to respond?
8. Conning & Co. publishes a new research report suggesting that US insurance company reserves are deficient by $16 billion. This has been an almost chronic criticism over the past ten years. Is the industry really this far off in its reserving practices?
9. AIG, one of the companies leading the Congressional charge for financial relief, is now the subject of critical evaluation. The Economist, of March 2, 2002: writes that “. . . conflicts of interest on Wall Street, impenetrable accounting, the offshore registration of corporate vehicles, large financial exposures, unhealthy deference given to celebrity chief executives and high share valuations (are all) concerns germane to AIG. . . . AIG has yet publicly to anoint a successor, clear up its overseas registrations, find a way to provide confidence in accounting for derivatives, and persuade investors that it is properly scrutinized by regulators.” It says the AIG market valuation is $100 billion too high. The next week Sanford Bernstein argues that the valuation is $50 billion too low! Who is right?
10. Lack of underwriting skill, say many observers, is the primary ingredient in the huge insurance underwriting losses of the past decade. Now new money is being shoveled into the same hands. Will it slip through just as fast? Where will the industry find qualified underwriters? An ad seeking an “active underwriter” for a “start-up Lloyd’s composite syndicate” appears in The Economist on February 9. This creates little sense of confidence that the industry knows what it is doing.
11. Insurance broker Marsh creates a new insurer named Axis Specialty, displaying a total lack of historical memory. Don’t brokers read the history of World War II? Then President Bush uses the phrase “axis of evil” in his January 2002 State of the Union address. When will Marsh change the Axis name? Why not try “Enron” or “Andersen?” Both may be available shortly.
12. Marsh also initially offered the families of the employees that it lost on September 11 one year of continued health insurance. Publicity and complaints followed. It then offered the coverage for three years, deducting the additional costs from the fund it had established for these families. More uproar. Now it promises to pay all these costs directly. Didn’t anyone think before acting?
13. In London last fall, the House of Lords settled an appeal on a case involved Aneco, a Bermuda-based reinsurer, and Johnson & Higgins (now part of Marsh). The brokerage firm tried to serve as broker for both a Lloyd’s syndicate and Aneco on the same transaction, a blatant conflict of interest. The wearing of two hats is ludicrous but it is still common practice.
14. The insurance brokerage community continues to be unwilling to eliminate other conflicts of interest that burden its relationships. It steadfastly tries to maintain the status quo of serving a client and being paid by the vendor that it chooses for that client. It adds to this mess by accepting from insurers profit, bonus and other commissions and holding insurer funds for its own interest income. Brokers also blur relationships by creating their own insurers (see Axis above). Now the Enron scandal highlights the insidious use of “facilitation payments,” a euphemism for bribes. As The Economist wrote in early March, “Accepting small gifts, invitations to lavish events or the loan of someone’s luxury car can soon lead to bigger things, in a vicious circle of quid pro quo . . . . Today’s facilitation payment is tomorrow’s bribe.” These so-called “small” gifts are endemic to the insurance world. When will buyers and sellers wake up to their pernicious effects?

Am I over-reacting? I admit that the insurance industry fed and schooled me for thirteen years, before I shifted to risk management consulting and writing over 32 years ago. I hesitate to bite this once-generous hand. But the yawning abyss between how the industry sees itself and how others see it is too glaring. For example, Patrick Liedtke and Christophe Courbage, writing in the Geneva Association’s Information Newsletter for January 2002 suggest that September 11 “could turn not only into the most costly in insurance history; it might also become the finest hour for the industry.” What publications and materials have they been reading and smoking? Another writer, in the February CFO, comments “few blame the insurance industry for rushing to the exits.” Really? The general press (not the insurance press) is full of irate customers chastising the industry and seeking more rational and economic alternatives. Orio Giarini writes in the December 2001 Progres, also from the Geneva Association, that “once again we see how far the insurance industry has moved toward the center of the economic and social picture.” I suggest that the movement is entirely opposite!

Why is it that this industry, potentially so valuable to so many throughout the world, and with such a rich history, has a death wish, a desire to alienate its customers and marginalize itself? Why is it that when a loss occurs, especially a large one, it tends to present the face of a reluctant dragon? I acknowledge that this is not a universal reaction: in the Hurricane Andrew and Oakland fire aftermaths, insurance companies responded quickly and generously to those sustaining losses. Yet in the corporate world it carries a reputation of slow and questioning payments, coupled with volatility in both pricing and coverage that perplexes buyers seeking greater stability.

It’s a problem. Insurers, where are you when we need you?