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:
- 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?
- 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
- 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.
- 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
- 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.
- 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?
- 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
- 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?
- 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
- 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.
- 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.
- 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?
- 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.
- 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
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?
The Dragon is a reminder of the incalculability, the might and the chthonic force of the
Unconscious; he is a perpetual adjuration to seek below the surface for the truth of things;
he is a counsellor that instinct is often the surest guide in important human affairs.
Robertson Davies, from “Jung and Heraldry,” Book Forum 5 (1980), as quoted in
Judith Skelton Grant, Robertson Davies: Man of Myth, Viking, New York, 1994