A Profound Challenge of Many Facets

The search for a metaphor has proved fruitless. How would you begin to describe the huge challenge facing the insurance industry after an event for which any description is inadequate?

All the industry has to do, at once and with great dispatch, is:

• Mourn lost colleagues and friends.
• Pay claims.
• Fight the inevitable fraud without smearing the honest.
• Remain solvent.
• Convince rating agencies, regulators and the public of solvency among the vast majority of carriers hit with major losses.
• Placate edgy stockholders.
• Convince Congress and President Bush that a federal reinsurance mechanism is needed for losses stemming from terrorist attacks in the future (which, given the current level of global tension, could be any day).
• Do the previous without giving anyone the idea that the bailout is for this catastrophe.
• Put the brakes on the rumor mill, which was last seen moving at Mach 10 speed.
• Keep the critics at bay in the eventual public relations debate.

In past catastrophes—which bear no resemblance to this one—policyholders, their attorneys and consumer advocates have shown little reluctance to challenge the claims-handling practices of insurers. Nearly eight years after the Northridge Earthquake, carriers are still immersed in litigation, much of it related to claims that had already been settled.

After this catastrophe, will policyholders (which are mostly commercial, unlike in the cases of Northridge, Hurricane Andrew and others) be more or less forgiving of insurer mistakes in light of a tragedy that evoked a military response and universal outpourings of patriotism? What about the public? We know the answer about the plaintiffs attorneys.

As I write this, the insurance industry’s public comments and actions so far have been measured and, on the surface, compassionate. Unfortunately, this is a story no one can control. Speculation, idle or otherwise, becomes part of perception, and then part of reality. Sadly, most of this speculation is coming from media sources.

Within a couple of days of the attacks, there were several reports suggesting that insurers might use “act of war” exclusions in commercial policies to deny coverage. This is another of the many reasons why the attacks are not analogous to Pearl Harbor, which truly was an act of war. A few major insurers were quick to issue statements asserting they would not try to invoke the exclusion.

But the issue wouldn’t go away. When estimates of the insured loss aggregate climbed past $30 billion to as high as $70 billion, the question was raised whether any insurer would risk incurring the wrath of policyholder and attorney alike by relying on the “act of war” exclusion in an attempt to remain solvent. Because virtually all claims would be tendered to publicly traded companies, the question took on a third angle, that of the stockholders.

A true dilemma: lawsuits either way, from holders of policies or stocks.

Standard & Poor’s was the first to bring a number to the solvency debate: once insured losses reached $50 billion, S&P would send up the warning flags—about the whole industry. Given the integrated structure of the insurance policies at issue, one is reminded of dominoes.

Then such a respected source of investor information as Morgan Stanley declared that not only were there “swaths” of insolvencies likely in the reinsurance market, but asserted that Lloyd’s is in “jeopardy.” Lloyd’s responded with denials, but the reinsurance swaths were not available for comment. Morgan Stanley didn’t specify the patches of grass to which it was referring, but a look at the self-stated loss figures provides ample clue.

Rest assured, there will be specifics and, rightly or wrongly, they could become self-fulfilling prophecies. Once a company is said to be in trouble, the downward spiral has begun, regardless of the truth of the alleged troubles.

Lost amid the insurance industry’s multi-legged challenge is the future, which will in no way resemble the past. Suddenly, the term “hard market” has profoundly drastic connotations. And while workers’ compensation will soon find itself in a deeper hole, the possible emaciation of the European and U.S. reinsurance markets will cut deep into the availability of almost every line.

Then perhaps the insurance industry will face the final element of its challenge: rebutting claims of antitrust behavior.

Richard Rambeck, the former editor of InsuranceWeek, has written about insurance issues for nearly a dozen years. He can be reached via e-mail at rambo3@ix.netcom.com.

Topics Carriers Reinsurance Market