Recollections and Renewal: Looking Back at 2001 with an Eye to the Future
This is the year that was. It is one that many people will be glad to see come to an end because the new year always brings hope—for a rebirth, for change, for renewal—and certainly, if our spirits need to be renewed at any time, that time is now.
Looking back over the year’s big insurance themes, one date, Sept. 11 of course, dominates the list of our Top Ten Stories of 2001. After all, as it has been said—many times, many ways—since Sept. 11, things will never be the same. Our top five stories provide snapshots into the human suffering and the financial impact caused by the terrorist attacks, and explore the future through the formation of new companies, the process of creating terrorism risk retention legislation and the issue of whether or not the World Trade Center will be rebuilt.
But other stories prevail. Hardly anyone could live in Texas and not be aware of MOLD—the big, the bad and the ugly. Privacy issues and compliance with the Gramm-Leach-Bliley Act are concerns states and insurers alike continue to struggle with. Southeast Texas has undoubtedly not forgotten Allison, the Tropical Storm that could—and did—create havoc from Houston to Philadelphia, causing more than $5 billion in damages along the way. NAFTA, and the hard issues surrounding how to allow Mexican trucks onto our country’s highways, and how to insure them, is an ongoing story that will profoundly affect this state. Finally, credit scoring, a tool that insurers find useful for underwriting purposes but has consumers up in arms, is likely to be the “issue of the future” and one we are sure to take a hard look at in the coming year.
With our top 10 stories, we’ve presented a look back at the year that was. But more importantly, we’ve set the groundwork for
the year that will be. And now, looking forward with hope, here’s to 2002!
— Stephanie K. Jones
WTC Loss of Life Impacts Insurers
By Dave Thomas
In a moment’s notice, the insurance industry was hit with not only major financial losses, but more importantly, a staggering loss of life as terrorists slammed two commercial aircraft into the World Trade Center early on the morning of Sept. 11.
More than a dozen insurers had a presence in the Twin Towers, and two companies, Aon and Marsh & McLennan Companies (MMC), were especially hard hit by the attacks and subsequent collapse of the two buildings.
Stephen Ban, a spokesman for Aon, pointed out that the human loss of some 200 co-workers is something the company will deal with for years to come. “It was a time of a great deal of chaos immediately after,” Ban said. “It was critical for us to find out who was okay and be able to reach out to those people who were related to those who weren’t. Shortly after, we established crisis support centers all around the New York metropolitan area—places where people could go and talk to a counselor or congregate with other employees. Importantly, we had experts on hand who could answer very specific questions on insurance and benefits.”
Even in the midst of the tragedy, Ban said goodness emerged. “In the face of such evil, you can see so much good come out of people who are really trying to help their fellow human beings. It has been amazing. The outreach we’ve had from partners, carriers, clients and competitors has been overwhelming, literally from all over the world.”
Although declining an interview with Insurance Journal, J. W. Greenberg, chairman of MMC, remarked on the company’s status on its website following the tragic events: “This is a terrible time for all of us. Our hearts, thoughts and prayers are with all of those who are lost or are suffering from last week’s horrifying attacks. We are thankful to many of you in New York and around the world for your extraordinary efforts and outpouring of caring and concern.”
There were approximately 1,900 people from MMC’s businesses working in or visiting the WTC towers on Sept. 11. Of that number, nearly 300 were registered as missing, and two others were confirmed dead, including one that was aboard a hijacked aircraft. Those listed as missing were all in 1 World Trade Center—Marsh and Guy Carpenter occupied floors 93 through 100—the first building to be hit.
To the best of its knowledge, all of MMC’s colleagues from 2 World Trade Center—located on floors 48 through 54—were safely evacuated. In this building were Guy Carpenter’s headquarters and smaller groups from Mercer, Seabury & Smith and MMC Enterprise Risk.
While Aon and MMC suffered the greatest human losses, a number of other insurers had a presence in the two buildings, occupying anywhere from one to several floors. Among those tenants were:
North Tower – Kemper Insurance Companies (Floors 35-36); Hal Roth Agency Inc. (77); Daynard & Van Thunen Co. (79); RLI Insurance Company (80); Metropolitan Life Insurance Company (89); and Marsh USA Inc. (93-100).
South Tower – SCOR U.S. Corp. (23-24); Allstate Insurance Co. (24); Hartford Steam Boiler (30); Frenkel & Company Inc. (35, 36); Guy Carpenter (47-54); Fireman’s Fund Insurance Co. (47-48); Seabury & Smith (49); AON Corporation (92, 99, 100); and Continental Insurance Co.
Fireman’s Fund public relations director John Kozero told Insurance Journal that all 190 employees of the company who worked in the South Tower made it out safely. “When the North Tower was hit, [the employees] began evacuating out of the South Tower,” Kozero said. “They made it safely to the 30th floor when the second plane hit their building. We’ve spoken with everyone, and they all made it out safely.”
According to Laura Margolis, spokeswoman for Allstate, the company had two offices in the South Tower. “Two of our employees made it out safely while the other two had not yet reported for work,” Margolis said.
As of late afternoon on Sept. 11, Linda Kingman, spokeswoman for Kemper Insurance Companies, reported, “The information we have at this time is that our employees were safely evacuated. We are in the process of trying to establish contact with each of our New York City-based employees.”
MetLife had a sales office on the 89th floor of North Tower out of which 35 employees worked. A day after the attack, two employees had been unaccounted for while the other 33 were reported safe.
For those that did survive, counseling was one of the first priorities. “We set up counseling not only for those employees there, but also for our employees in Jersey City and those in Johnstown [Penn.], near where the United plane crashed,” said John Calagna, MetLife spokesman. The United flight from Newark to San Francisco—the last of four planes to crash that Tuesday morning—went down about 80 miles from Pittsburgh.
Sadly, reports from some companies were not as happy as from those whose employees were able to escape to safety. The general consensus, however, was that it could have been much worse.
The good side of an entire industry came out in the moment of need; and while individual companies will continue to compete for business, the insurance industry was one on Sept. 11 and in the days following.
Financial Impact of Sept. 11 Still Being Felt
By Dave Thomas
While the human loss of life from Sept. 11 was overwhelming, bills resulting from the events of that day continue to grow for numerous insurance companies.
According to the Disaster Insurance Information Office, 11,925 commercial disaster claims and 7,668 personal claims, with a total value of $9.64 billion, had been filed as of Nov. 26.
The Insurance Information Institute has listed the attacks as costing $40 billion so far, topping the $15.5 billion attributed to 1992’s Hurricane Andrew.
The greatest impact to date has been felt by Lloyd’s, with Berkshire, Munich Re, Swiss Re, Allianz, Zurich, St. Paul, AIG, XL Capital and Citigroup rounding out the Top 10.
The attacks now have the distinction of being the top insurance catastrophe of all time, a unique position for a man-made event, as the other Top 10 catastrophes are either hurricanes, earthquakes or fires.
Third-quarter numbers drop
Insurance companies, both big and small, took a major financial hit from the attacks, as evidenced by their third-quarter reports.
The companies who suffered the most in terms of human losses, Marsh & McLennan and Aon Corp., were also hit hard financially during the third quarter. Marsh & McLennan’s profits dropped 40 percent from the same period in 2000, while Aon’s net income fell 48 percent.
Among U.S. insurers, St. Paul saw a more than $500 million operating loss for the third quarter, Chubb witnessed a $239 million net loss, and CNA Financial Corp. suffered a $155 million net loss.
As a result of its losses in the last few months, CNA Financial Corp. announced it is restructuring, due in large part to the onslaught of insurance claims attributed to the World Trade Center attacks.
The move, which will eliminate 1,850 jobs, or about 10 percent of its workforce, will include restructuring the property-casualty and life insurance operations, discontinuing the variable life and annuity business, consolidating real estate locations and making related job cuts across the country.
CNA attributed much of its $155 million third-quarter loss to a $304 million loss for reinsurance and related premiums in connection with the events of Sept. 11.
A major player in the world market, Lloyd’s of London was also impacted greatly. Last month, Lloyd’s raised its estimate of net losses from the WTC attacks by 47 percent to $2.8 billion. On Sept. 26, the insurance market’s estimate of its WTC losses was $1.9 billion.
Reinsurers to foot most of the bill
With claims coming in on a daily basis, just who is left to pay the bills?
According to the Insurance Information Institute, primary insurers will pay around 36 percent of Sept. 11 losses on a net basis, with most of the remainder being paid by reinsurers. Reinsurers, meanwhile, have been actively seeking to have terrorism exclusions in place for most of the 70 percent of treaties renewing Jan. 1, 2002.
Munich Re, the world’s largest reinsurance company, reported in November that it lost more than $1 billion in the third quarter because of claims from the Sept. 11 terror attacks.
The company, however, expects to be profitable for the year despite the claims, which are the largest it has received in well over a century in business.
The $1.06 billion loss in the third-quarter, which ends Sept. 30, was about what analysts expected. Many were watching to see whether Munich Re would raise the damage figure from the Sept. 11 attacks as late claims came in. But the company held steady with its prior figure of $1.84 billion for its share of the damage claims.
MunichRe, which holds its reserves in the form of stocks and bonds, was also hit by drops in financial markets as a result of the attacks and the sluggish world economy.
Are rates too high?
While the claims are sorted out, some are asserting that insurers are raising prices unfairly as a result of Sept. 11.—that insurers have been doubling rates or raising them even more on some commercial, industrial and airline policies.
Consumer advocates also claim, the increases have come in coverage areas other than terrorism.
The Consumer Federation of America has urged state insurance regulators to strengthen oversight of insurance rates and coverage. The consumer group recommended that state commissioners “immediately set up a rate and policy system that will prevent price gouging and keep terrorism coverage fully available.” The CFA also called on Congress to prevent insurers from collecting rates that are “unjustifiable.”
Companies that write policies protecting property were hit hard by the assaults against the World Trade Center towers and the Pentagon, having to pay claims estimated at $40 billion to $70 billion. Insurers insist that certain rate hikes are necessary to ensure sufficient capacity to cover potential future events.
However, despite the rush of claims and falling numbers for the third quarter, most observers are confident that the industry as a whole remains healthy.
New Companies Formed to Meet Expected Demand Surge
By Charles E. Boyle
As the insurance industry recovers from the Sept. 11 attacks, companies are seeking to position themselves to meet an expected surge in demand and profit from soaring premiums. New capital is required—some replaces a portion of the losses, but even more has gone into the formation of new companies, principally in Bermuda. A review of the new initiatives announced since September includes the following:
RenaissanceRe Holdings Ltd. increased the capital and surplus of Glencoe Insurance Ltd., its primary commercial property insurance unit, by $100 million.
MMC Capital, Marsh & McLennan’s private equity subsidiary, established a new specialty insurance and reinsurance company in Bermuda, AXIS Specialty Ltd. MMC’s Trident II L.P. fund joined investors JP Morgan Partners, Thomas H. Lee Partners, The Blackstone Group and Credit Suisse First Boston to put up an initial capitalization of $1.6 billion.
American International Group’s new syndicate at Lloyd’s, N° 1414, managed by Ascot Underwriting, began operations on Nov. 1 with $144 million in capacity.
RenaissanceRe established a joint venture with State Farm Mutual to form Bermuda-based Da Vinci Reinsurance Ltd., with an initial capitalization of $500 million.
ACE Limited is raising around $1 billion in additional capital by selling 28.6 million shares at $35 per share, plus 4.29 million shares to cover over-allotments.
State Farm agreed to open an additional credit facility of about $144 million for Lloyd’s insurer Amlin Plc.
Arch Capital Group Ltd. established Arch Reinsurance, backed by $1 billion in capital, $250 million from Arch and the rest from private equity firms.
PartnerRe, issued $200 million worth of trust preferred shares and $175 million worth of mandatory convertible preferred shares, which are expected to be converted to common shares by December 2004.
XL Capital Ltd. offered up to 7 million ordinary shares, plus additional shares, to cover underwriters’ over-allotment, in a move to strengthen its capital base. The company reported an $840 million net third-quarter loss. XL’s shares have been trading in the $85-$90 range, making the offering worth over $600 million before expenses and commissions. XL also confirmed plans to increase its ownership in Le Mans Re.
Everest Re Group Ltd. filed a shelf registration statement with the SEC to offer newly issued common shares to the public up to an aggregate of $575 million.
White Mountains Insurance Group is raising $1 billion to fund a new Bermuda-based insurer. It will invest $200 million in the venture and expects to raise the remaining capital from investors.
Aon Corp. and Zurich Financial Services are forming Bermuda-based Endurance Specialty Insurance Ltd., with an initial capitalization of $1.2 billion. Aon also filed a shelf registration statement in early December to enable it to increase capitalization of its underwriting units by $750 million.
Kohlberg, Kravis, Roberts & Co. committed an additional $100 million in capital to the Alea Group [formerly Rhine Re].
AIG and Chubb Corp. teamed up with GS Capital Partners L.P., an investment fund managed by Goldman Sachs & Co., to establish Allied World Assurance Holdings Ltd. with initial equity capital of $1.5 billion. The Bermuda-based operating company, AWAC, got under way in November, when it agreed to an exclusive agency agreement with IPCRe to begin writing property catastrophe treaty reinsurance.
Lloyd’s Goshawk Insurance plans to raise an additional $145 million through a new share offering. However, ironically, it won’t bolster its Lloyd’s capital—the funds will be used to establish a new reinsurance company in Bermuda.
These capital initiatives added up to almost $10 billion as of the beginning of December. But the window of opportunity is closing, if companies want to be in operation in time for the January renewals.
The rush to enter a market which may end up paying out as much as $50 billion as a result of the attacks of Sept. 11 repeats on a larger scale the formation of new companies that followed Hurricane Andrew in 1992.
While their increased capital participation is a sign of confidence in the future, it also validates the observation of long-time industry consultant Paul Walther, head of Reinsurance Directions, that the larger companies stand to gain an even greater share of the market.
“There is probably an element of capital replacement in the new money being generated, but I see most of it as opportunistic capital, as was the case when the Bermuda market boomed after Andrew,” Walther said. He doesn’t think that the influx of new capital will eventually create a problem of excess capacity, as he expects a lot of other players will leave the market.
However, in Insurance Observer, David Schiff warned that when too much capital flows into the industry seeking high returns, it paradoxically lowers returns because too many companies compete for business. And over capacity was a major problem that depressed premiums and caused underwriting losses from 1994 through late last year.
After House Passes Terrorism Risk Protection Act, Attention Turns to Senate
By Catherine Tapia
Following the U.S. House of Representatives passage of its Terrorism Risk Protection Act (HR 3210) by a vote of 227-193 on Nov. 29—a move viewed by many in the insurance industry as, at least, a significant step in the right direction—all focus zeroed in on the U.S. Senate in anticipation of that legislative body reaching a compromise and producing its own bill.
According to the Independent Insurance Agents of America (IIAA), HB 3210 provides that in the event a future terrorist attack causes an insurance company to incur a loss equal to 10 percent of its capital surplus or a loss exceeding $100 million, the federal government would provide the company with a loan. Such loans, which would be repaid by insurers, would be equal to 90 percent of total exposure.
However at press time, no one seemed to know when, in what form or even if the Senate would come up with a bill of its own before session’s end. As of the first week of December, rumour had it the Senate would vote on the issue during the week of Dec. 10, and a conference committee would reconcile by Dec. 18
A point of particular concern has been the 70 percent of reinsurance contracts that will come due Jan. 1, 2001. If the Senate were unable to come up with a bill of its own by session’s end, industry analysts predicted an economic crisis could ensue, with terrorism coverage becoming largely unavailable. But most of those same analysts remained optimistic that the Senate would come up with its own bill, albeit one that would have significant differences in comparison with HB 3210.
“[Senate Majority Leader] Daschle has taken more of a leadership role,” said According to Julie Rochman, senior vice president of public affairs for the American Insurance Association (AIA), adding that Daschle had been bringing his staff together with key Democratic members to come up with a common proposal.
During the weeks of late November and early December, there had been as many as four or five various proposals floating around the Senate. Senators Dodd and Gramm, had been working on the issue for some time, and other Senators like Hollings and McCain had also gotten energized in the process. Different committees battled over which would have the bill first, but as a result, none had dropped the tort reform provisions found in HB 3210, which, Rochman noted, “are much more controversial on the Senate side…Daschle has said he will not bring a bill to the floor that has those kinds of tort reform provisions in it.”
“We supported passage of [HB 3210] in the committee and the House,” said IIAA CEO Robert A. Rusbuldt. “However, there is no doubt that this very different from a traditional reinsurance mechanism… Insurance companies have not traditionally priced their products based on potential loans they may have to repay…We’re not sure what kind of impact [HB 3210] is going to have on rates, but there is no doubt it will clearly help make terrorism insurance more available.”
Rusbuldt emphasized the political importance for the Senate to produce a bill. He also added, “In the Senate, the bottom line really is over the liability issue…Everybody would like to have tort reform, but we don’t want the bill to fall apart over that issue. So the President clearly is going to have to weigh in on this…[And] any one Senator can filibuster…you need 60 votes to break that, not just a simple majority of 51…Somehow Daschle has to navigate all of the twists and turns because it’s so important to the economy.”
According to Carl Parks, senior vice president of government relations for the National Association of Independent Insurers (NAII), everyone from the President to the Republican and Democratic leadership in the House and Senate had all indicated that this is “must do” legislation. He also made note of the challenge faced by Daschle to get a bill out of the Senate and ready to go to the President in the couple of weeks that remained during December in which to do so.
The NAII issued a letter to all members on the Hill supporting passage of HR 3210. “We were very pleased that Oxley and the leadership responded to our concerns,” Parks said. Among the most important of those concerns were that the NAII “rather than being based on the model that came out of the administration…the methodology that [the House used] could have produced a pretty radical cross subsidization. Also, Parks noted “where there’s an industry-wide aggregate retention, we wanted to make sure that…the individual companies would have their own retention level inside of the overall industry aggregate to make certain that an individual company, a smaller company, didn’t go insolvent before the overall industry aggregate was reached.”
Rochman affirmed that the AIA still had several remaining issues with regard to HB 3210, but had always supported the process of moving forward with something, figuring that the flaws in any legislation could be fixed along the way. She added that, as there is no federal regulator for insurance, the process provided a tremendous opportunity for insurers to educate people about such things as how commercial insurance and workers’ comp work, and what business interruption coverage and reinsurance are all about.
“The interesting question is what the final bill that is sent to the President will look like,” Rusbuldt said. “The Senate has been talking about a very different, more traditional reinsurance mechanism, where the House is more of a loan program. We’re going to have to marry those two proposals together.”
Larry Silverstein Squares Off Against Swiss Re in Epic Battle
By Charles E. Boyle
Claims adjusters and policyholders may wrangle over the amount of compensation due following an automobile accident, or a fire, and eventually reach a compromise. But when you’re arguing over a difference of three and a half billion dollars, neither party is inclined to give up.
That’s the current situation between Larry Silverstein, head of Silverstein Properties, the company which acquired the master lease on the World Trade Center last July, and Swiss Re, the insurer which heads a group of 22 companies that signed binding commitments to insure it. While the “binders” are enforceable insurance contracts under New York law, the absence of a formalized policy has led, perhaps inevitably, to disputes over terms—particularly with regard as to what constitutes an “occurrence.”
Swiss Re opened the battle on Oct. 22, when it filed a lawsuit in the U.S. Federal District Court for The Southern District of New York in Manhattan seeking a declaratory judgment “that the September 11 collapse of the World Trade Center is one insured loss.” Although it framed the request as necessary in order to determine to whom insurance payments should be made, the company’s intent was clear: one occurrence means one loss— and, therefore, liability to pay for only one building, as there was no coverage against a simultaneous loss, a possibility which had been deemed unthinkable.
The binder placed a maximum limit on liability of $3.56 billion. Swiss Re avows that this is the most the insurers will be required to pay. Its own portion of the loss is 22 percent, around $780 million.
Silverstein responded by reaffirming his position that two loss events occurred and accused Swiss Re of trying to avoid its obligations, which brought a swift denial. He filed a formal response to the legal action two weeks later, asserting that since two airplanes smashed into two buildings, at two different times, two losses had occurred. Therefore, his company, its associate Westfield America, and the WTC’s owners, the Port Authority of New York and New Jersey, had the right to make two claims and be paid for two loss events. He also filed for an injunction to prevent ACE and XL from opening an arbitration proceeding in London to determine the extent of their WTC-related losses.
Whatever the court decides, the loser will probably appeal, and it could be a long time before the issue is settled. Other questions that get raised are when the $3.5 billion owed should be paid, and who earns the interest on that money.
Swiss Re has maintained almost from the day of the disaster that it is fully committed to paying its share of the claims. Jacques Dubois, president and CEO of Swiss America Holding and a member of the parent company’s executive Board, said special resources had been committed “to help clients manage these unprecedented claims,” and initial payments had begun to be distributed.
To pay interest on some $760 million General Motors Acceptance Corp. had loaned Silverstein to purchase the lease, $14.3 million was paid into an account set up by GMAC. Insurers have also begun paying the lost rental on the property, some $25 million a month. Over the five years it is estimated it will take to rebuild the WTC, that amount will come to around $1.5 billion.
Intimating that Swiss Re’s attitude was all show and no go, Silverstein opened another front in the confrontation, filing a “Preliminary proof of losses” with the company and demanding payment of the” actual cash value” of the complex.
Dubois led Swiss Re’s counterattack. In a written statement, he asserted, “By electing to recover an ‘actual cash value’ payment, Mr. Silverstein has apparently abandoned his plan to rebuild the World Trade Center.” Dubois added that if such were the case, the Port Authority would receive $1.5 billion, Silverstein and Westfield around $1.3 billion, and various lenders, principally GMAC and UBS Warburg, about $700 million.
Barry Ostrager, a lawyer for Swiss Re, told Reuters News Agency that the situation was “just like with your car.” If the company pays cash value for it, it doesn’t have to then pay to replace it. However, this analogy seems a little thin, as there are very few $3.5 billion cars.
Silverstein shot back that Swiss Re’s claim was “total and complete fiction” and emphatically denied he wasn’t going to rebuild. He maintained that how the claims are settled is separate from the issue of whether he and the Port Authority intend to rebuild the complex.
Some commentators indicated that Silverstein’s demand for the cash value was a move to obtain immediate funds, which might be worth more at present, than a series of payments spaced out during the years it would take to rebuild the WTC. He’s probably also aware that office space in downtown Manhattan is not exactly in demand since Sept. 11. One recent report found 13.2 million square feet of vacant office space in the area, a 49 percent increase in vacancies since the time prior to the attacks.
That’s where things stood at the end of November, but either side could open a third or even a fourth front before the battle is over. And even Solomon might have a hard time trying to settle their differences.
Will Montemayor’s Solution Deliver Stability to the Homeowner’s Market?
By Stephanie K. Jones
There’s a bit of popular wisdom about policy-making that goes something like this: if you make a decision that pleases no one, then it’s probably a good decision. The question is, does that adage attach to Texas Insurance Commissioner Jose Montemayor’s plan for addressing the “Texas mold crisis?” After all, no one seems to like it.
Aiming to head off a disaster in the Texas homeowners insurance market, Montemayor issued his restructuring of the state’s residential policies on Nov. 28. delivered at the waning of a year that has seen insurers pulling away from the homeowners market in droves due to sky-rocketing numbers of mold and water-related claims.
The order retains coverage for mold stemming from water damage protected by residential property policies. However, it eliminates cover for expensive and sometimes unreliable procedures, like testing, treating, containing, and disposing of mold beyond those necessary to repair or replace property damaged by water. Mold removal resulting from sudden or accidental water damage is covered but coverage could be denied if a policyholder repeatedly ignores indications of an obvious water problem. In addition, “stacking” of claims within the same policy year—a process through which some policyholders have collected more than 100 percent of their policy limits by filing several separate mold-related claims—is prohibited.
Insurers are required to offer additional coverage in increments of 25 percent, 50 percent, and 100 percent of policy limits.
A difficult problem
Insurers, insurance lobbying organizations and consumer groups wasted no time responding to Montemayor’s decision. While most commended the commissioner for tackling this admittedly difficult problem, reactions ranged from polite skepticism to outright disdain.
According to Jerry Johns, president of Southwestern Insurance Information Service, “the decision…will do nothing to solve the lingering problem of how insurers will address water-related mold claims in the future.” Johns added that “the decision could raise homeowners rates as much as 60-80 percent or more for those who choose to purchase mold coverage.”
In a statement, Rick Gentry, executive director of the Insurance Council of Texas, commented that the full impact of Montemayor’s mold decision remains unclear. “What is clear, unfortunately, is that the department’s decision is too little, too late,” he said. Rob Schneider, a senior staff attorney for Consumers Union’s Southwest Regional Office, said: “Taking away coverage you have now and charging more if you want to buy it back essentially terminates the coverage.” The Consumers Union is “concerned that homeowners may have to fight insurance adjusters to get legitimate water claims completely addressed,” Schneider said. “We hope Commissioner Montemayor’s decision doesn’t result in making water claims under the homeowners policy much more complicated.”
Montemayor, however, defended his actions. “This decision is a common-sense, middle ground approach,” he explained. “It gives Texas homeowners basic protection plus the ability to purchase additional coverage if they so choose. This decision protects consumer choice and insurance availability, and addresses insurance cost drivers to help keep policies affordable.”
Better, more efficient products
For insurers, the issue boils down to whether companies are allowed to structure their forms in the marketplace as they deem necessary. While Montemayor said he will consider individual companies’ filings for alternative levels of mold coverage, the insurance industry expressed its disappointment that TDI has failed to fully exercise its powers under a 1997 state law that allows companies to file and the commissioner to consider the companies’ own policy forms and endorsements.
Gentry said the law gives the department the power to “approve forms in a manner used in most other states. This is perhaps the most frustrating aspect of this entire mold crisis. SB 1499 gave the Department the authority to do this four years ago. Insurers should be able to offer their policyholders better, more efficient products that would eliminate the ambiguity and unnecessary coverages present in Texas’ HO-B, especially with regard to mold.”
The three largest homeowners writers in Texas—Farmers Insurance Group, State Farm and Allstate were involved in negotiations with TDI and Gov. Rick Perry’s staff to come up with a solution that would entice the companies to begin accepting new homeowners customers again. The companies are standing by their previously announced no-new-business strategies. Additionally Farmers has said it will follow through with its November decision to stop renewing comprehensive HO-B policies.
Smaller carriers are expected to closely watch the actions of the state’s biggest insurers. Following the announcements earlier this year by Farmers, State Farm and Allstate to close their doors to new applicants, Many HO-B writers followed suit and other companies placed restrictions on new business, according to an analysis by the Independent Insurance Agents of Texas (IIAT). However, Farmers remains the only carrier to announce that it is declining to renew existing policyholders.
State Privacy Regulations Produce Consistency—But Some Surprises
By Joseph Mangan
When Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act (GLB) in November 1999, many observers expected a wave of mergers and consolidations among financial services institutions.
However, there was very little activity along those lines in 2001. The spotlight focused instead on statutes and regulations intended to implement GLB’s privacy protection provisions. State legislatures and insurance departments were slow to act. When the July 1 deadline for implementing privacy protections passed, several states still had taken no action. As the year drew to a close, privacy regulations were still pending in three states.
Fierce debate also swirled around privacy regulations that the states and the U.S. Department of Health and Human Services (HHS) adopted. Insurers complained that the model privacy regulation adopted by the National Association of Insurance Commissioners (NAIC) put them at a competitive disadvantage relative to other financial institutions. The model regulation, they asserted, went beyond GLB by including third party claimants and workers compensation policyholders in the definition of “customer.”
Insurance trade associations tried to paint these provisions as excessive, citing language in both GLB and the NAIC model, which state explicitly that privacy protection extends only to non-public personal financial information provided for personal or household purposes.
History provides a partial explanation for the slow response by the states to the privacy provisions of GLB. Insurance regulators and state legislators look on Congress as the new kid on the block when it comes to protecting consumer privacy, and they point to the 1982 NAIC Model Privacy Act to buttress their position.
By November, the NAIC reported 47 states and the District of Columbia had privacy laws or regulations in place. That tally included 13 states that have the 1982 NAIC Privacy Model Act on their books, plus 34 others and the District of Columbia that have adopted privacy regulations based on the 2000 NAIC Privacy Model Regulation.
Trade groups representing insurers, agents and brokers generally favored the regulated NAIC regulation to the extent that it implemented the privacy provisions of GLB. They took exception, however, to provisions that brought third party liability claimants and workers’ comp within the scope of privacy protection, and launched a campaign to remove those provisions—an effort that produced mixed results. Fifteen states adopted regulations or statutes removing the health information provisions in whole or in part.
“We’re happy to see that every state did something to advise their insurers how to comply with GLB,” commented Kathleen Jensen, insurance services counsel for the National Association of Independent Insurers (NAII). She did express disappointment, however, that three states, Alaska, California and Maryland, have adopted enabling legislation but have not yet promulgated the regulations necessary to comply with GLB.
Another problem insurers face is the prospect of state laws and regulations that impose an affirmative consent (opt-in) standard for sharing non-public personal financial information, instead of the opt-out standard set by GLB. In November, the Vermont insurance department adopted a regulation establishing an opt-in standard, and similar proposals remain on the table in Alaska and California.
“The Vermont legislature did not pass enabling legislation, yet the Department of Insurance went ahead and promulgated a regulation regarding privacy that actually is not consistent with GLB in that it provides for an opt-in for non-public personal financial information as opposed to an opt-out that is consistent with GLB,” Jensen explained. “That places insurance companies at a competitive disadvantage with other financial institutions in Vermont.”
When a new administration took office in January, insurers sought to reopen debate on the regulations HHS adopted in the closing days of the Clinton Administration to implement privacy provisions of the Health Insurance Portability and Accountability Act (HIPAA). The industry expressed concern that the minimum necessary rule and the provision for an agreement not to disclose would encourage fraud in third party liability, personal injury protection and workers’ comp claims by allowing claimants to conceal prior injuries. In April, President Bush dashed their hopes by instructing Secretary of Housing and Human Services Tommy Thompson to allow the regulation to take effect without modification.
The burden of the HIPAA regulations on the industry eased when HHS issued guidelines. These created an exception to the minimum necessary rule for property and casualty insurers when they obtain an authorization or when disclosure is required by state law—but concerns remain.
“The guidance that HHS put out in July was very welcome in terms of the minimum necessary rule in lines other than workers compensation,” said Nancy Schroeder, NAII assistant vice president, workers comp. “At this point, it’s ironic that the biggest problems with the regulation will really be for workers compensation writers because some of the issues were resolved for everybody else in the property/casualty industry. The one issue that the non-workers compensation writers still face is, of course, the agreement not to disclose. And there’s a lot of concern that might lead to fraud.”
Allison: The Most Destructive Tropical Storm in U.S. History
By Stewart Eisenhart
Tropical Storm Allison never achieved the distinction of becoming a full-blown hurricane. But the damage it exacted in Texas was the worst the state had seen in several years.
For the second year in a row, in fact, no hurricane touched down on U.S. soil—a cold comfort, however, as Allison proved to be the most destructive tropical storm in the nation’s history, according to the Houston Chronicle and the Associated Press. On June 5, the storm developed in the Gulf of Mexico, and headed into Texas. Although forecasters saw it coming, they failed to see it staying, and those who lived through it thought it might never go away.
Allison lasted less than 24 hours as a tropical storm, but its remains continued for days to pour torrential rains upon six states, from Texas to New Jersey, ultimately causing 41 deaths. Texas lost 31 people, Florida lost eight, and Louisiana and Mississippi each lost one.
Damages from the storm totaled nearly $5 billion in Houston alone. The Insurance Services Office reports that 219,500 claims have been filed for vehicle, residential, and commercial property damages in Texas, Pennsylvania, Louisiana, New Jersey, Florida, and Mississippi.
Insured property damage was $1.2 billion; $1 billion of that occurred in Texas, which was inundated with as much as 32 inches of rain, primarily in the Houston area. Pennsylvania sustained $120 million in insured losses, mostly in the Philadelphia area. Damages totaled $65 million in Louisiana, $10 million in New Jersey, and $5 million apiece in Florida and Mississippi.
Texas Governor Rick Perry declared 28 counties state disaster areas; President Bush soon deemed them federal disaster areas. In addition, 33 of Louisiana’s 64 parishes were declared disaster areas.
Within a month of the storm and ensuing floods, 85,000 Texans had registered for federal disaster assistance; by August, the Federal Emergency Management Agency (FEMA) had distributed $471 million to victims. More than 3,500 residential dwellings had been destroyed, and nearly 45,000 more had been damaged. According to the Texas Department of Insurance, many storm-damaged homes would not be covered by homeowners policies, which exclude damage due to rising water. Those without suitable coverage sought either federal flood insurance assistance or low-interest loans from federal disaster relief agencies.
Houston was by far the hardest hit by Allison. Among the areas damaged when bayous overflowed and flooded downtown were the University of Houston campus, the lower level of whose law library was flooded by eight feet of water, and the Texas Medical Center, where nearly 15 inches of rain fell on June 5-6, more than half of which fell in a two-hour period. Patients and hospital staff had to be transported to other medical facilities, some as far away as San Antonio and Austin. Biological samples, experiment records, laboratory equipment, and doctoral theses were lost.
The city’s theater district also sustained heavy damages after nearby Buffalo Bayou flooded. The five major arts groups active in the district—Jones Hall, the Houston Ballet, the Houston Symphony, the Grand Opera, and the Society for the Performing Arts—lost more than $12 million in costumes, sets, musical instruments, computers, and other valuables. Jones Hall and the Wortham Theater Center, owned by the city, incurred more than $27 million in property damage, including flooding of the large underground parking garages under their complexes. The privately owned Alley Theater lost another $7 million.
It took 50 days to pump all the flood waters out of the underground garages beneath the district; they didn’t fully reopen until early November.
Alley Theater managing director Paul Tetreault said its insurance policy covers $10 million, which should cover the storm damages. However, both the Houston Ballet Foundation and the Society for the Performing Arts were turned down for federal aid after it was determined that they did not provide educational or essential government services.
Despite these unprecedented setbacks, however, the theater district launched its fall season on schedule. Theater District Association executive director Barry Mandel explained, “There’s still incredible energy down here…In every sense of the word, this is a full season.”
That sentiment was echoed by the Houston Metropolitan Transit Authority, which had been planning to build a 7.5-mile light rail line at street level through two flood-prone areas, as well as by state plans to widen the Southwest Freeway to include a half-mile stretch below ground level with sheer vertical walls.
As Metro spokeswoman Julie Gilbert explained, “It would not make sense economically” to redesign these projects after Allison. “The cost is prohibitive.” Texas Department of Transportation engineer Gary Trietsch added, “To assert that event gives us marching orders to place gates and warning devices to close the roadway is wrong.”
Insuring Free Trade, Safety and NAFTA: Allowing Mexican Trucks in the U.S.
By Stewart Eisenhart
Like most domestic issues facing the nation, the impasse last summer over how to allow Mexican trucks into the U.S., obligated under the North American Free Trade Agreement, without compromising highway safety has gotten short shrift since Sept. 11. But when a NAFTA arbitration panel announced Feb. 6 that the U.S. was in violation of the treaty by not allowing Mexican trucks free access to its roads and highways, wrangling between the Bush administration, Congress, labor unions, the Mexican government and other parties over how to comply with NAFTA regulations was intense, and lasted through the summer.
The administration pressed for prompt opening of borders to facilitate free trade, but Congress raised thorny questions about safety and adequate insurance. To defuse the latter issue, the Tri-national Insurance Working Group accelerated the work to establish cross-border insurance policies between the U.S., Canada, and Mexico. Not long after the NAFTA arbitration panel’s ruling, the group proffered a proposal to implement cross-border insurance in phases in a way that would not require stopping every truck crossing the border.
The first phase of the proposal would utilize brokering arrangements similar to those already set up between U.S. and Mexican insurers; coverage could be obtained for entire fleets of trucks for up to one year. The second phase would entail fronting arrangements, in which American carriers would reinsure Mexican insurers while their trucking customers are in the U.S., and Mexican carriers would reinsure American insurers as their customer fleets travel in Mexico. According to David Golden, director of commercial lines for the National Association of Independent Insurers (NAII) and a member of the working group, this would require some liberalization of current reinsurance regulations.
The final phase would involve power of attorney and undertaking to provide for coverage in other countries, plus a form of mutual recognition like that set up between the U.S. and Canada. Golden pointed out, however, that current laws forbidding foreign insurance in Mexico would need to be changed for this phase to take effect.
The issue of safety, however, was not so readily resolved. Last summer, despite attempts by Senator John McCain (R-Ariz.) to filibuster, the Senate adopted a bill containing what the administration considered prohibitive restrictions on allowing Mexican trucks into the country after the House approved an outright ban of them. The legislation was stalled after Bush threatened a veto.
Mexican president Vicente Fox warned of retaliation by restricting American agricultural imports into his country. U.S. labor unions and other supporters of the restrictions, on the other hand, asserted that Mexican trucks are less likely to pass basic safety inspections and that Mexican truckers, overworked and underpaid, would prove hazardous on American roads.
The impasse was subsequently eclipsed by the Sept. 11 tragedy, but a breakthrough was finally reached in late November, when negotiations between the administration and Congress yielded agreement on a plan to allow Mexican trucks into the U.S.
Attached to a Department of Transportation (DOT) finance bill, the new proposal would require inspection of Mexican trucks prior to entry into the U.S. Furthermore, trucks would be allowed to enter only through checkpoints where inspectors are on duty.
All Mexican truckers hauling hazardous materials would also be required to submit their driver licenses for electronic verification; half of all Mexican truckers carrying non-hazardous materials into the U.S. would also have to submit their licenses for electronic verification.
The Bush administration voiced approval of the agreement, saying it would assure truck safety while fulfilling trade obligations under NAFTA. Specifics of the proposal include:
• Opening of borders beginning in May 2002, provided a DOT inspector general certifies that all safety requirements are being met.
• Confirmation that safety requirements continue to be met through follow-up DOT inspections.
• Installation of weigh-in motion devices for trucks at the five busiest border entry points, and of an additional five devices at other entry points within one year.
• Granting of conditional operating authority to Mexican carriers, so long as they submit to safety audits.
• Inspection of Commercial Vehicle Safety Alliance vehicles and stickers can take place either at a carrier’s place of business or at the border.
NAII’s Golden hailed the agreement as a major breakthrough, stating, “These safety directives, including the numbers of inspectors, weigh-in capabilities and thorough checks of cargo and the drivers hauling that cargo, will provide the steps needed to protect the public.” The Tri-national Insurance Working Group must now make sure that proper insurance mechanisms are in place to provide adequate cross-border coverage.
Golden explained, “In spite of the options available now, the long-term goal remains ‘mutual recognition’ that would allow an insurance policy that is written in any of the three NAFTA countries to be valid in all of them…Seamless insurance coverage between the three countries is a goal that can be reached, but the reality is that it will take a number of years.”
The Great Insurance Scoring Debate
By Sky Barnhart
The use of credit scoring in insurance has gained national attention this year as a point of contention between insurers and consumers.
An insurance score is a number, based on an objective analysis of a person’s past credit history, which predicts the amount and costs of that person’s future insurance claims. Companies generate insurance scores by entering a consumer’s financial history information—such as payment history, collections, balances, bankruptcies and inquiries—into a computer model, which then calculates a score. This score is used to aid insurers in the risk evaluation process.
The practice has been in use for some years now, but the issue was dragged into the spotlight earlier this year with the release of “Breaking the Silence,” a study by Conning & Company that looks at auto insurers’ use of credit scores. The study revealed that out of the 100 largest personal automobile insurers, 92 percent use credit information in underwriting new business.
According to Derrick Shannon, vice president personal lines product management at Ohio Casualty in Fairfield, Ohio, establishing the use of credit scoring is one of the primary initiatives for Ohio Casualty right now. “Actually, I think we’re a little late to get on board,” he said. “We’ve seen a shift in our book of business—for more and more consumers that have lower-than-average credit histories, there is a clear connection between loss ratios incurred [and credit history].”
Shannon said credit history is not a more important factor than a driving record or claims history, but “we do incorporate it as a separate rating variable, and all of those things are still rated in the traditional way.”
On Nov. 30, the American Insurance Association (AIA) publicly stated its belief that credit-based insurance scores are objective underwriting and rating tools which increase competition, and allow insurers to charge customers premiums that reflect their individual risk.
“Insurers have found this tool to be an extremely accurate predictor of future risk exposure, yet they also recognize the need to use that tool responsibly,” David F. Snyder, AIA assistant general counsel, told the Consumer Federation of America’s annual conference. The use of insurance scores, Snyder said, enables insurers to write more insurance for more individuals, which leads to more choices for consumers and in many cases, lower costs.
However, on Dec. 3, Washington State Insurance Commissioner Mike Kreidler called for bold measures to limit the use of credit scoring by the insurance industry, saying the increasingly common practice is likely hurting consumers.
Kreidler, who had input from hundreds of citizens in recent public hearings around the state, said reform was needed to decrease disparities among insurers and to demystify credit scoring for consumers. Kreidler’s office polled other states, and out of the 36 that responded, 13 said they have laws that limit the use of credit history.
Consumer backlash has been forceful. “What I’ve seen more than anything is backlash against the companies that are refusing to issue policies, declining risks and non-renewing risks based on credit history,” Shannon said. “We accept all risks regardless of credit history, though we will still check out their driving records and claims history. We actually provide credits to individuals that have better-than-average credit history. If someone comes in with relatively poor credit, they’re just not going to be eligible for the credit.”
Some consumers point to errors in credit reports that could jeopardize the availability of coverage for some drivers, but insurers say the likelihood of this occurring is small. “I have yet to see any individual credit report that has come across my desk in which there is an error that could make a substantial difference in credit history,” Shannon said.
Reducing the number of inaccuracies in credit reports will benefit both consumers and insurers, Snyder said. To achieve this end, by improving the quality of the information that goes into an insurance score, the education process will intensify in the next year. The AIA and other industry partners have announced they will launch a nationwide educational campaign.
“I think it’s unfortunate that many carriers, in their hurry to jump onto the insurance scoring bandwagon, rather than adopting a risk with better than average history, [are] just declining consumers with poor history,” Shannon said.
Legislation may be the ticket to regulate the credit scoring practice—both to decide what is acceptable use of the data and to mandate disclosure.
Disclosure is a key topic in the credit scoring debate. Kevin Callahan of the Bob Callahan Agency Inc. in Albany, N.Y., said they have used insurance scoring as a tool for about five years, and from an agency standpoint, have developed a way to tell the customer about it in the “least threatening way possible.”
“Many people feel as though they have been discriminated against, and even those who benefit from it seem to resent having insurance companies accessing this type of information,” Callahan said.
But for many insurance companies, credit scoring has been and will continue to be an integral part of the underwriting process.
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