Washington policyholders to share in Aon settlement
More than 9,500 insurance clients of Aon Corp. in Washington are qualified to share $2.4 million in restitution as part of an agreement signed by Insurance Commissioner Mike Kreidler.
Kreidler said the restitution is part of an agreement with the national brokerage firm to settle allegations of misconduct and anti-competitive practices against the company that surfaced in the insurance industry's widespread scandal of 2004.
He said that Aon clients -- businesses, associations, individuals, government agencies and other entities -- need to decide for themselves if the settlement offer is sufficient compensation for damages they might have suffered as a result of Aon's alleged misconduct.
"We won't offer case-by-case recommendations," Kreidler said, "but our overall evaluation is that this is very comparable to last year's Marsh settlement, and it provides a fair deal to Aon's Washington clients."
Kreidler's reference was to Marsh & McLennan, the nation's largest insurance broker that was the primary target of a scandal investigation launched in 2004 by New York Attorney General Eliot Spitzer, who charged that Marsh and other brokerage firms made improper payments, rigged bids and allowed other anti-competitive activities.
As in the Marsh settlement, Aon neither disputes the allegations, nor admits them in the agreement. The settlement covers the period between Jan. 1, 2001 through Dec. 31, 2004. Individual settlement amounts available to Washington policyholders range from $71,234 to amounts of less than $10. Clients who accept the settlement must sign a release forfeiting the right to pursue any claims against Aon related to the misconduct and anti-competitive practices. Clients who elect not to accept the settlement can pursue legal remedies.
In the aftermath of the Marsh investigation, Kreidler issued a strongly worded technical assistance advisory, reminding Washington's licensed brokers and insurance companies of their duties and responsibilities to insured parties.
Kreidler also launched a separate investigation in Washington, targeting top brokers and brokerage firms. The year-long investigation did not uncover criminal or unethical behavior, but it revealed minor violations where brokers were not disclosing compensation arrangements with consumers. The violations did not approach the magnitude or scope that was revealed at the national level.
The Office of the Insurance Commissioner is working with brokers and representative associations to ensure that compliance requirements are met.
Three insurers sue to recover claims paid in '02 wildfire
Three insurance companies filed a federal lawsuit to recover $7.04 million in claims paid for homes damaged or destroyed in the 2002 Hayman Fire in Colorado.
State Farm Fire & Casualty Co. Inc., three Hartford insurance entities, and Allstate Insurance Co. claim the U.S. Forest Service was negligent, partly because of how the agency supervised the forestry worker who started the worst wildfire in Colorado history.
Terry Lynn Barton, 42, pleaded guilty to a state felony arson charge for starting the blaze by burning a letter in a drought-stricken area, where a fire ban had been issued. The fire scorched 138,000 acres, destroyed 133 homes and forced more than 8,000 people to leave their homes.
The lawsuit claims that the forest service was negligent in its duty to prevent and suppress wildfires and it breached its duty by allowing Barton to "act alone and unsupervised" by not having teams of two patrolling the area.
Failure to keep radio dispatch lines available to report the fire and failure to adequately respond to the report also contributed to the forest service's negligence, the lawsuit claims.
The Hartford and Allstate companies paid about 160 claims ranging from less than $300 to nearly $300,000, totaling about $3.51 million according to court documents. State Farm did not include the individual amounts of its approximately 150 claims, but the lawsuit said it paid out $3.53 million.
Jim Maxwell, a spokesman for the forest service in Denver, said he hadn't seen the suit.
"The forest service pursued justice in this case with great zeal," Maxwell said of its investigation of Barton. "We already have pursued justice."
A civil trial: "will bring out all the factors that led to the loss of each home, and we'll just let the legal chips fall where they may," Maxwell said. "We always want justice to be served."
Barton is appealing her 12 year prison sentenced handed down on state charges. She is also serving a six year sentence on federal charges.
The companies named the United States as a defendant because the forest service is one of its agencies, according to the suit.
Copyright 2006 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Washington's Ethel Adams legislation takes effect
Legislation changing the uninsured motorist law in Washington that is named in honor of accident victim Ethel Adams has taken effect.
Adams was injured in an automobile accident in 2005 when her car was hit during an intentional act of road rage by Michael R. Testa. She sought coverage under her uninsured motorist coverage but her insurance company denied her claim. Adam's insurer believed that because Testa intentionally caused the accident, her coverage did not apply. The injustice of Adam's case received unprecedented public outcry.
"Consumers have a right to trust that if they pay their premium, they will be taken care of by their insurance company if they're involved in an accident," said Insurance Commissioner Mike Kreidler. "And most people assume they know what the word accident means. This new law will make certain no insurance company pulls a similar stunt in the future."
The new law adds a paragraph to the existing uninsured motorist law. The change defines "accident" as an occurrence that is unexpected and unintended from the standpoint of the person who is insured. If an insurance company wants to deny coverage, the burden of proof is on the company to demonstrate that the covered person intended to cause the damage.
"Ethel Adams' insurance carrier tried to apply an imaginative interpretation of the law to keep from paying her claim," Kreidler added. "This new law bears her name with the hope that no other innocent insured will have to go through the nightmare Ethel experienced."
The law was sponsored by Rep. Mark Ericks and Sen. Jean Berkey.
Appeals Court rejects market-value loss claim
A man who wrecked his new truck is not entitled to payment from his insurance company for the resulting loss of market value, the New Mexico Court of Appeals ruled.
In the first ruling in New Mexico on the issue, the court said it was following the trend in other states to disallow recovery for diminished market value.
The plaintiff in the case, Robert Davis, wrecked his truck two months after buying it. His insurer, Farmers Insurance Co. of Arizona, had it repaired.
Davis then traded the truck for another new one, accepting a trade-in value he estimated was $15,000 less than his previous truck was worth before the wreck.
He claimed that under his insurance policy -- which stated that Farmers would "pay for loss to your insured car caused by collision" -- that he was entitled to compensation for the reduced market value as well as repairs.
Farmers rejected that claim and Davis sued in state district court in Bernalillo County, which ruled for the insurance company.
The Court of Appeals said the plain language of Davis's insurance policy gave Farmers three options: cash payment, repair or replacement.
The policy did not provide coverage for diminished market value in addition to adequate repairs, the court held.
Copyright 2006 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Golden State adopts new regulations to reduce worker injuries and death from high heat
California workers may soon be able to file for workers' compensation if they become injured due to high heat. The California Occupational Safety and Health Standards Board has adopted a permanent heat stress regulation, which protects all California employees working outdoors. The measure now goes to the Office of Administrative Law (OAL), which has 30 days to approve, upon which date it becomes effective.
"California has adopted the first heat illness prevention regulation in the country, taking the lead in prevention and saving lives," said Len Welsh, acting chief of the Division of Occupational Safety and Health (Cal/OSHA). "With temperatures in California summers often reaching triple digits, it's imperative that we protect those who work outdoors."
The Standards Board adopted emergency heat regulations in August 2005, prompted by a significant increase in the number of possible heat-related incidents reported to Cal/OSHA last summer. A Cal/OSHA investigation revealed that heat illness was directly responsible for 13 work-related deaths in 2005, as well as in a high percentage of other incidences such as accidents.
Heat illness is a medical condition that results from the body's inability to cope with heat and cool itself and includes heat cramps, heat exhaustion, fainting, and heat stroke.
Since no other state or federal regulations were in place, Cal/OSHA drafted the first Heat Illness Prevention standard in collaboration with the Labor and Workforce Development Agency, worker and employer communities, Cal/ OSHA, the Standards Board and other interested parties. The permanent heat illness prevention standard, Title 8, Chapter 4, Section 3395, Heat Illness Prevention, applies to all outdoor places of employment and focuses on the provision of shade, water, acclimatization and training.
"Prevention is the best defense against heat-related illnesses. Once a worker actually becomes ill from the effects of heat it can be too late," Welsh said.
Since the initiation of the emergency regulations, Cal/ OSHA has stepped up its outreach efforts to educate employers and workers on heat illness prevention. Public Service Announcements, regarding heat illness and other worker's rights and safety issues, can be found in eight languages on their Web site. For more information about protecting workers from heat stress, visit www.dir.ca.gov or call 415-703-5100.
California's mandatory investment reporting unnecessary, insurers say
California is considering legislation that would require insurers to report California community-related investments to the insurance commissioner every two years. AB 925, authored by Assemblyman Mark Ridley-Thomas, D, and sponsored by California Insurance Commissioner John Garamendi, recently passed in the Senate Banking, Finance and Insurance Committee. The bill now is in the Senate Appropriations Committee.
The American Insurance Association says the bill is unnecessary, will increase costs and will further complicate data collection. "California insurers are the largest purchaser of municipal bonds in the state," said Steve Suchil, AIA assistant vice president for the western region. "Insurers have demonstrated their significant commitment to California communities by investing more than $23 billion in state and local bonds, which includes funding for schools, as well as low-income housing and redevelopment. Insurers also are major contributors to California's General Fund, paying $2.3 billion in premium taxes in 2005-2006. In 2005, Commissioner Garamendi himself praised insurers for investing more than $7 billion in emerging and underserved communities.
"The Insurance Commissioner already has the authority to request this information from insurers at any time," Suchil continued. "Nothing in state law prevents him from asking for this information and posting it on the Department of Insurance Web site. AB 925 does not benefit anyone, but it will require insurers to change their data and information collection processes in order to comply," Suchil said.
Appeals Court rules insurer's indemnity obligation is joint and several
The Court of Appeals of Oregon has decided that an insurance company's indemnity obligation to its policyholders is joint and several, not pro-rata, in environmental liability insurance coverage case. In Cacade Corp. v. American Home Assurance Co., the Appeals Court expressly rejected pro-rata application rules that apply between insurance companies as applicable to policyholders.
In the case, Cascade Corp. sought coverage for both its expense in defending administration and judicial actions, which sought to hold it liable for contamination to groundwater under and near its business property, and for the expenses of remediating the contamination that was legally its responsibility.
Since the 1950s, Cascade has manufactured attachments for truck lifts at a location in Gresham, Ore. From 1961 to 1975, it used chlorinated solvents to clean metal as part of its manufacturing process. Those solvents contaminated the groundwater under and near Cascade's plant. In 1992, the Boeing Corp., which has a manufacturing plant that borders Cascade's, sued Cascade to recover the expenses for which Boeing was liable in cleaning up the groundwater contamination on its property. The federal court determined that Cascade was responsible for 70 percent of Boeing's costs, in addition to Cascade's own obligation to remedy the groundwater contamination on its property.
Because of the substantial expense incurred to defend and remedy the contamination, Cascade made claims against all insurers that it could identify as having issued primary or excess liability policies that might cover its liability for the groundwater contamination.
Cascade settled with most of the primary and excess insurers, but sought coverage for its legal and remediation expenses from Employers Reinsurance Corp.
The jury verdict was for the full amount that Cascade sought for its past expenses that it had not recovered from the primary insurers. However, the trial court entered judgment for only a small percentage of that judgment, and it declared that ERC was liable only for the same small percentage of Cascade's future expenses. On appeal, Cascade asserted that those actions were erroneous, and it raised issues concerning prejudgment interest and attorney fees. In its cross appeal, ERC argued that the trial court erred by entering judgment for Cascade in any amount and also raised an evidentiary issue.
The Appeals Court reversed the lower court's ruling and remanded the case with instructions to enter a modified judgment in favor of the insured for past expenses in the amount of approximately $3.8 million, to declare the insurer liable for future expenses beyond those that other insurers have paid until its policy limits are exhausted, to reconsider the award of attorney fees, and to award prejudgment interests.
Federal insurance antitrust exemption: Insurer, consumer friend or foe?
Congress opened debate on the insurance industry's exemption from federal antitrust laws, with some larger insurers indicating a willingness to relinquish the exemption in exchange for regulatory reform that would free them from state regulation.
Yet the industry's biggest rating organization that operates under the exemption argued that its services save typical and smaller insurers, and therefore consumers, millions of dollars per year. A national consumer group estimated that eliminating the exemption would save insurance consumers at least 10 percent on current premiums, or about $45 billion per year.
The U.S. Senate Judiciary Committee heard testimony recently on whether to continue the limited insurance antitrust exemption contained in the 1945 McCarran Ferguson Act. The act placed responsibility for insurance regulation with the states and has permitted insurers to engage in certain joint data collection, price trending and form and policy development activities. The law makes possible rating organizations such as Insurance Services Office, the National Council on Compensation Insurance and the American Association of Insurance Services.
Kevin B. Thompson, senior vice president with Insurance Services Office Inc. told lawmakers that insurers' access to advisory organization materials "deserves to be preserved and protected." He warned that "[s]ince repeal or substantial modification of the McCarran-Ferguson Act's limited antitrust exemption is likely to create legal uncertainty and have a chilling effect on legitimate insurer use of those materials, no change should be considered without proof that it is needed and that it will help, not harm, competition in the property/casualty insurance business."
He argued that ISO's products and services reduce an insurer's operating costs by providing information and services that an insurer needs to write business at relatively lower costs than would be possible using its own resources. Many insurers, especially smaller ones, do not generate enough of their own loss information to predict expected costs reliably, according to ISO.
Thompson said that his company's information permits insurers to be more confident in making pricing decisions, leading to lower premiums. The information also helps small insurers to compete with large insurers in places where they have low premium volume or no business.
However, Marc Racicot, president of the American Insurance Association, said a repeal or limitation of McCarran's antitrust provisions "cannot be divorced" from a discussion of state insurance regulation.
"Repeal of McCarran might impact legitimate information gathering undertaken pursuant to state law and regulation, thus undercutting the ability of the states to decide the types of information they want to allow insurers to collect, share and analyze under state supervision. As a result, a repeal of McCarran cannot be justified as a matter of law. Nor would it be sound public policy," Racicot testified.
But if Congress were to shift regulation of the industry from the states to Washington, the federal antitrust exemption would take on new meaning. AIA supports the National Insurance Act of 2006, which would allow insurers, agents and brokers to opt into a federal regulatory system. S. 2509 would dispense with state government price controls in favor of price competition among insurers.
Racicot told the Senate committee that AIA's members are willing to open themselves to federal antitrust law as part of the price for being freed from state regulation because they "strongly believe that a competitive market, without government rate and price controls, is critical to being able to serve their customers in the years ahead."
"We are willing to shift McCarran's current balance between regulatory supervision and antitrust policy to one that reduces the role of regulation and returns that role to the federal government, and increases the role of the federal antitrust laws. However, we do not believe it is appropriate to repeal McCarran-Ferguson in the context of insurance pricing without initiating the paradigm shift that would result from S. 2509," Racicot said.
Elinor Hoffmann, assistant attorney general from the Office of the Attorney General for New York, asked Congress to reexamine McCarran because it hinders antitrust enforcement. She cited her department's investigations of bid-rigging and questionable brokerage fees. New York Attorney General Eliot Spitzer prosecuted cases under federal antitrust law, but the McCarran-Ferguson Act likely would have delayed, or maybe precluded, settlement, she said.
"A uniform federal antitrust standard would facilitate antitrust enforcement and benefit plaintiffs and defendants alike, in contrast to disparate actions, under different laws, that may yield inconsistent results," she said.
Hoffmann said the McCarran-Ferguson exemption "precludes federal antitrust enforcement of serious anticompetitive conduct" in insurance, and requires state enforcement agencies to examine each state's varying laws on antitrust activities.
She urged Congress to heed any particular requirements of the insurance industry and carve out provisions to save certain activities from antitrust restrictions if necessary.
The argument for complete repeal came from J. Robert Hunter, director of Insurance for the Consumer Federation of America. He maintained that "anticompetitive behavior has been a prime cause" of a homeowners insurance crisis along America's coastlines. Also, state attorneys general have had to jump in to stop bid-rigging, market allocation arrangements and hidden kickbacks to brokers because state regulators failed to act.
He argued that organizations such as ISO restrain competition because they make "loss costs" that represent about 60 to 70 percent of the rate; share expense data so insurers can compare costs; and establish classes of risk that are adopted by many insurers.
"The business cycle of the property/casualty insurance industry is exacerbated by the availability of pure premium and other rate guides the rate bureaus publish. These guides are not used by many insurers during the 'soft' market periods but become a kind of safe harbor when the periodic hard market strikes the commercial property/casualty market," Hunter said.
California earthquake insurance rates decreasing
California earthquake insurance policies issued by the California Earthquake Authority will see rate decreases by an average of 22.1 percent.
Approximately 85 percent of CEA policyholders will see their rates reduced beginning July 1, 2006, while 15 percent will see rate increases, said Nancy Kinkaid, CEA spokeswoman. Recent geological and soil surveys created more refined maps that indicated areas are more stable than previously thought, leading to the reduced rates, she said. However, the areas of Riverside, Palm Springs, Palmdale/Lancaster and Humboldt are likely to feel an increase because of less stable soil conditions. "A two-story home with a raised foundation in those areas will likely see the largest increase," she said.
Independent agents can calculate the estimated premium and do a comparison of rates after the rate changes on www.earth quakeauthority.com. The Web site also has other information to assist agents, Kinkaid said.
One of the big misunderstandings about earthquake insurance is that the deductible is based on coverage A dwelling, not on the value of the home, Kinkaid said. Also, the deductible is not something the homeowner pays. "The deductible is merely subtracted from the total claim payout. It's important for agents to know that because consumers are often misinformed," she said.
In addition to the rate changes, the CEA has made product enhancements so that coverages no longer need to be sold in packages, but "now consumers can choose individual coverages that work for them," Kinkaid added. For example, "now under the new bifurcated packages, consumers more concerned about finding another place to live can buy up to $15,000 for temporary housing. Before that coverage was only sold in packages," she said. As another example, consumers can buy additional coverage for building upgrades. "This is significant because a lot of homes in California are 25 years or older, and we wanted to be able to offer additional coverage to meet new building codes," she said.
Kinkaid said the rate changes do not affect policies issued by non-CEA insurers. CEA writes 70 percent of the 1.1 million earthquake policies in the state through 19 private insurance companies. Approximately 14 percent of California homeowners have earthquake insurance.
Supreme Court: Workers' comp premiums not priority in bankruptcy
A workers' compensation insurer does not have a claim against a bankrupt business for unpaid premiums under bankruptcy law, according to the U.S. Supreme Court that insurers are warning could disrupt the insurance marketplace unless Congress acts to reverse it.
In a 6-3 decision, the Supreme Court majority rejected an insurer's argument that an employer's liability to carry workers' compensation coverage fits the employee benefit plan category that would assign it priority in the event of a bankruptcy.
Instead, the high court ruled that workers' compensation premiums are more like liability premiums than employee benefit costs, and as such, do not fall under the section of bankruptcy code (11 U.S.C. section 507(a)(5)), which assigns priorities to unsecured creditors' claims for unpaid contributions to an employee benefit plan.
"Weighing against such categorization, workers' compensation does not compensate employees for work performed, but instead, for on-the-job injuries incurred; workers' compensation regimes substitute not for wage payments, but for tort liability," Justice Ruth Bader Ginsburg wrote on behalf of the majority.
In Howard Delivery Service, Inc., et al v. Zurich American Insurance Co., handed down June 15, the high court reversed the Court of Appeals for the Fourth Circuit, which had held that payments for workers' compensation coverage were "contributions to an employee benefit plan ... arising from services rendered" and thus subject to the bankruptcy priority provision.
Zurich had urged the court to borrow the broader definition of employee benefit plan contained in the Employee Retirement Income Security Act of 1974: "[A]ny plan, fund, or program [that provides] its participants ... through the purchase of insurance or otherwise ... benefits in the event of sickness, accident, disability, [or] death."
But the majority noted that federal courts have questioned whether ERISA is appropriately used to fill in blanks in a Bankruptcy Code provision.
The court further noted that workers' compensation also differs from fringe benefits in that while nearly all states require employers to carry workers' compensation, they commonly do not mandate employee benefits.
In the case before the court, Howard contracted with Zurich to provide workers' compensation coverage for its operations in 10 states. After Howard filed a Chapter 11 bankruptcy petition, Zurich filed an unsecured creditor's claim for some $400,000 in premiums, asserting that they qualified as "contributions to an employee benefit plan" entitled to priority under 507(a)(5).
The Bankruptcy Court denied priority status to the claim, reasoning that because overdue premiums do not qualify as bargained-for benefits furnished in lieu of increased wages, they fall outside 507(a)(5)'s compass. The District Court affirmed, similarly determining that unpaid workers' compensation premiums do not share the priority provided for unpaid contributions to employee pension and health plans.
But a Fourth Circuit panel reversed without a rationale, which resulted in the case being brought before the Supreme Court.
Justice Ginsburg was joined in her majority opinion by Chief Justice John Roberts and Justices John Paul Stevens, Antonin Scalia, Clarence Thomas and Stephen Breyer. Justice Anthony Kennedy filed a dissenting opinion, in which Justices David Souter and Samuel Alito joined.
Insurer reaction
Insurers said the decision is flat out wrong and could have serious repercussions in the marketplace.
"The court simply got it wrong. The majority's narrow focus on the priority provisions of the bankruptcy code overlooked that workers' compensation coverage is mandatory, and the consequences of an employer's lapse in coverage," charged Bruce Wood, American Insurance Association assistant general counsel.
Wood also maintained that the decision could undermine the workers' compensation system and benefits for injured workers.
"This decision means that an employer trying to reorganize its business will no longer be required to pay its workers' compensation premiums. This result will jeopardize continued coverage, because an insurer now has no legal authority to compel payment of premiums and doubtful incentive to continue coverage," according to Wood. "Under current law, employers without workers' compensation coverage -- even bankrupt employers -- are subject to huge fines, criminal prosecution and business shutdown."
"At the same time this decision puts worker protections at risk, along with the viability of the employer's business," he added. Employers that self-insure their workers' compensation coverage will face related problems, Wood said.
AIA participated in the case as an amicus in this case. The industry will likely now press lawmakers to a change the bankruptcy law.
In its ruling, the Supreme Court said questions over priority status should be decided with the bankruptcy code's aim of equal distribution in mind.
"Every claim granted priority status reduces the funds available to general unsecured creditors and may diminish the recovery of other claimants qualifying for equal or lesser priorities" the court noted. "To give priority to a claimant not clearly entitled thereto is not only inconsistent with the policy of equality of distribution; it dilutes the value of the priority for those creditors Congress intended to prefer."
Slimmed-down SMART bill to reform surplus lines insurance regulation; brokers pledge their support
In a step to overhaul the current state of insurance regulation, Reps. Ginny Brown-Waite, R-Fla., and Dennis Moore, D-Kan., have introduced legislation that would mandate states to establish a uniform system of regulation for the surplus lines industry.
The new bill, which is a slimmed-down version of the proposed State Modernization and Regulatory Transparency Act (SMART), pulled out incremental pieces of the SMART legislation targeting nonadmitted insurance and reinsurance, in an effort to ease the legislation's path through Congress.
Rep. Richard Baker, R-La., chairman of the House Financial Services Committee's Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises, held a hearing on the new bill, the Nonadmitted and Reinsurance Reform Act of 2006, last month.
Several trade groups, including the American Association of Managing General Agencies, the National Association of Surplus Lines Stamping Offices and the Council of Insurance Agents and Brokers testified in support of the legislation at that hearing.
"This is an area where various state regulations are in conflict, and state regulators for decades have been unable to reconcile their differences," said Ken A. Crerar, president of The Council. "With respect to multi-state commercial insurance placements, the current system benefits no one, least of all the policyholders who ultimately pick up the tab."
"We are quite happy with the bill," said Dick Bouhan, executive director of NAPSLO. "A lot of the material in the legislation are issues which we have discussed with the committee and we have publicly supported in the past," he said.
Some of those issues include the requirement that only one state, or the home state of the insured, may require any premium tax payment for nonadmitted insurance. Under the legislation, the amount of any premium tax payment for nonadmitted insurance shall be determined on the basis of any compact or procedures entered for allocation among the states.
The new legislation also calls for no other state, except the home state of the insured to regulate nonadmitted insurance. Additionally, no other state may require the surplus lines broker to be licensed to sell, solicit or negotiate nonadmitted insurance products except the home state of the insured.
"When surplus lines activity is limited to a single state, regulatory problems are minimal," Crerar said.
Bouhan said, "we now have a situation in which surplus lines brokers are getting licensed in a number of these states," because of multi-state risks. "[Brokers] have to comply with virtually every state with which there's an exposure."
The legislation aims to solve those problems by investing regulatory authority in the home state of the insured.
AAMGA's Executive Director Bernd Heinze says he was not really surprised that surplus lines and reinsurance were first on the list for insurance regulatory modernization efforts by federal legislators.
"We have been talking with Congressman Baker and his committee for the past year," Heinze said. "The fact that this is the first part of the marketplace that is looked at for reform is very encouraging," he said.
Heinze says that he expects more reforms and modernization bills to come. "Whether they continue to come after the Fourth of July recess, or prior to mid-term elections, or even in the next Congress," remains to be seen, he said.
CEOs, concerned about capacity and pricing, stress underwriting discipline
Although property casualty insurance capacity still exists in some areas in the U.S.'s East Coast, the rate at which it is vanishing, especially in coastal areas, as well as the steep prices for available capacity, have industry executives concerned about pricing discipline.
"Someone's going to have to blink soon," said Ted Kelly, chairman, president and CEO of Liberty Mutual Group Inc.
Property catastrophe capacity was high on the list of concerns for panelists from the property casualty industry at Standard & Poor's Ratings Services' recent annual insurance conference, "Insurance 2006: Rethinking Risk."
Whether insurers price risk properly is a worry. Although premiums have doubled in the past three to four years, "pricing in primary markets isn't supporting the cost of reinsurance," Kelly said. Reinsurance capacity might still be 20 percent short of demand in the southeastern U.S., he said, and "problems getting insurance in the Gulf region haven't been settled yet."
Companies "should look at their enterprise risk management and what kinds of controls management has on currency and hedging," said Martin Sullivan, president and CEO of American International Group Inc., who also would like to see construction codes improved in the Southeast.
Property casualty industry pricing, looking forward, is a huge question mark, and an additional worry for those CEOs. If 2006's hurricane season is benign, pricing discipline will remain, especially in the catastrophe area, Sullivan said.
Kelly, however, was not so sure. "A pricing bloodbath" could ensue if the hurricane season is moderate, he said. "Watch October renewals -- they will be the first sign of a lack of discipline," he warned.
The role capital markets now play in maintaining financial strength also had panelists, as well as the moderator Standard & Poor's credit analyst Thomas Upton, concerned. Although capital to replace what was lost to the catastrophes of 2005 and 2004 was readily available, it might not be if severe catastrophes hit in 2006.
"I was surprised at the ease of which companies recapitalized after Katrina," said Dinos Iordanou, president and CEO of Arch Capital Group Ltd.
Would companies be better off if they had to replenish capital organically rather than going to the capital markets? Opinions were not uniform. Kelly was emphatic about the industry's need for a free flow of capital, but Sullivan said the industry would be tested if the season were active. Iordanou cited that even if a major hurricane does come, $600 billion to $650 billion of surplus exists in the global marketplace.
Bottom line, underwriting discipline continues to be important, the panelists concurred.
"Clearly, there's room for improvement," Sullivan added.
