IIS Conference Hears Industry Leaders’ Views on Current Concerns

The International Insurance Society’s 39th Annual Seminar, held at New York’s Waldorf Astoria Hotel, last month, differs from other big insurance gatherings. It brings together CEO’s, top managers, academics and executives from the big four accounting firms, to discuss the current industry conditions, problems and possible solutions, with an emphasis on the macro aspects rather than the micro.

Gordon Stewart, IIS Board president and head of the conference organizing committee, set the tone, reminding the 650 plus attendees of the “critical role” the industry plays in assuming society’s risks, a poignant observation in the city that suffered the Sept. 11 attacks. Over the next three days the conference covered a range of industry concerns—topping the list, according to a delegate survey, was “Recovery from adverse political, economic and market conditions.”
The roster of speakers was a virtual “who’s who” of industry leaders. The first day, after a keynote speech by NYC Mayor Michael Bloomberg, Douglas Leatherdale, former CEO of the St. Paul Companies and current IIS chairman, introduced AIG’s Maurice “Hank” Greenberg, Ewald Kist, CEO of the Netherlands ING Group, and Kunio Ishihara, the president of Tokio Marine and Fire (part of the Millea Group).

“Divergence is not good,” said Kist, referring to the current differences, political and otherwise, between the U.S. and Europe. In response to a question, he noted that the two are converging economically and therefore need to “accept and agree with one another.” To do that a broader dialogue is urgently needed.

Insurers are specifically worried about differing accounting standards (U.S. GAAP vs. IAS rules), corporate governance rules, and changing demographics (aging populations, etc.). After discussing the current state of the Japanese market, Ishihara stressed the need for transparency and the necessity of creating business models that address capital problems by concentrating on “asset liability management” that are not “fragile to business risks.”

Greenberg emphasized the changes wrought by the Sept. 11 attacks, which he feels have reduced risk management flexibility and made it more passive. “Our job is to manage change,” he said, adding that in the last three years there have been quite a few. He also pursued some of his favorite bugaboos—the U.S. tort system and the need to reform class action lawsuits, the recent calls for outside corporate directors (unjustified), regulations to implement “fair value accounting,” which he said “has no place in the insurance business,” and the apparent failure of any meaningful legislation to control runaway asbestos claims.

In the question and answer session that followed all three men expanded on their original remarks and emphasized the industry’s need to adapt to the changed circumstances, primarily by emphasizing underwriting discipline, and recognizing that it’s no longer possible to rely on investment returns to make up for underwriting losses, a theme echoed by many other speakers.

Tuesday’s session concentrated on the issue of corporate governance in the wake of the Enron, World Com, Tyco and other scandals. Lord Colin Sharman, chairman of the U.K.’s Aegis Corp. and Zurich Financial Services CEO James J. Shapiro addressed the problems that included how to keep management honest, how to help company leaders deliver on their promises and how to adequately reward them for doing so, without stifling the “entrepreneurial flair” that introduces needed innovations to a company’s operations. “You need to create an environment that encourages it,” said Sharman, “but at the same time you have to control it.”

They indicated that new rules don’t offer much of a solution, and emphasized the need to create the culture, the principles and the values within the company, i.e. “principles, not rules.” They also expressed concerns, as did other speakers, including Greenberg, about the added burdens of compliance imposed by the new strictures and the increased costs of implementing them. Schiro noted the increasing pressures in many companies to separate the functions of CEO and chairman of the Board—leaving the former to concentrate on running the business, while the latter deals with compliance issues, shareholder concerns and long-term planning.

At a press conference following the session, XL CEO Brian O’Hara noted that “during the 90s bubble underwriting discipline practically went away,” now the industry is facing “D&O and E&O claims in the billions,” plus new corporate governance rules and the runaway U.S. tort system, all of which are having “a big negative impact on the industry.” The other panelists, ING’s Kist, Sun Life of Canada chairman Donald Stewart and Klaus Dorfi, chairman and CEO of Atlantic Mutual, agreed. Kist pointedly stated that a major factor in ING’s decision to exit the P/C business in the U.S. and to concentrate on the life and asset management sectors had been the concern over tort liabilities. The panelists also largely agreed that the “Sarbox reforms” (the new rules mandated by the Sarbanes-Oxley Bill) would probably cause companies to be more cautious, but would not solve the governance problems. Ultimately the only way to address the problem is to instill managers with a real sense of the responsibility they bear.

The final plenary session Wednesday morning, moderated by ACE Limited CEO Brian Duperreault, featured Edward G. Creasy, the CEO of Kiln Plc, one of Lloyd’s largest underwriters, and Anton van Rossum CEO of the Belgian-based Fortis Group. Creasy noted that Lloyd’s has historically taken the lead in introducing new products to insure new industries, and assured the audience, along with Duperreault who asked the question, that Lloyd’s reforms and the newly installed franchise system would enable the London market to do this even better in the future.

Van Rossum stressed Fortis’ position as a world leader in combining banking and insurance (bancassurance), noting that it works both ways, but not in all countries – notably not in the U.S and the UK. He got a good laugh when he observed that while accountants accuse insurance executives of not understanding “fair value accounting,” it was really the accountants who don’t understand the insurance industry. With 28 years of experience at McKinsey & Co. before he became Fortis’ CEO, it was pretty clear he understands both.

Seeking that understanding was a leitmotif of the IIS conference. Every CEO agreed that understanding the problems, whether financial, political, technical or legal, is of primary importance in finding solutions to them. Creasey summed it by noting that, “change is constant,” and involves the constant balancing of the risks (new and old) and the rewards. He added that it’s important for the insurance industry and its business partners to be able “to address any risk they throw at us.”