What too few detractors of the insurance industry look to is how effectively it protects the country both from anticipated losses and from the hazards of disaster.
To the point
2005—Here's looking at you
In the wake of the Spitzer investigation and
Republican wins, what lies ahead?
by Emanual Levy
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What too few detractors of the insurance industry look to is how effectively it protects the country both from anticipated losses and from the hazards of disaster. |
It’s always a challenge to look into the future, but while the urge to uncover what lies ahead is an inherent human trait, it’s also a most chastening enterprise. Obviously, past events establish the foundation for future events, yet there is little assurance that some wholly unexpected twist will not occur. The fact that the calendar advances to a new year is merely a measure of passing time. The dynamics of change and challenge are with us day by day.
A dramatic example is the upheaval that was thrust on major insurance brokers and insurers by New York Attorney General Eliot Spitzer, when late in October 2004 he announced the launch of an investigation into alleged bid rigging. The inquiry immediately spilled over into other aspects of the business, including the payment of contingent commissions. Spitzer’s office issued subpoenas to a wide range of brokerages on all levels, and he and his staff released news statements that implied there was widespread collusive activity with quid pro quos that resulted in favoritism in the placement of risks at excessive premiums to the detriment of corporate buyers. Subpoenas are only demands for documents and records, but to the uninitiated public they leave the impression that illegal activities have been uncovered.
Compounding the problem, the industry and its segments either refuse comment, delay or respond halfheartedly, or immediately agree to stop practices that have been around for years, suggesting that the allegations are valid. What is certain to be a center of debate, even more than in the past, is congressional consideration of federal assumption of more regulatory involvement. Immediately after Spitzer demeaned state regulation, U.S. Rep. Peter Fitzgerald (R-Ill.) convened a House subcommittee oversight hearing on the brokerages’ activities, which he suggested might indicate conflict of interest in the face of the possible inadequacy of current regulation. Look for that to continue into 2005 even though nothing substantive will come of it.
Because Spitzer has a very favorable track record in prosecuting fraud or overreaching in the securities business and other fields, his attack on insurance brokers and companies, with implications of fraud, won him front-page attention, especially because there were a few high-ranking resignations, some firings and reports of guilty pleas on both the brokerage and company levels. As might be expected, a few other state attorneys general launched their own probes, a few insurance regulators flexed their muscles and repercussions were felt in the UK.
Spitzer’s leap forward
What started as a charge that bid rigging was widespread and pervasive among the major brokerage firms, a charge that has “feet” but apparently little substance, presented the New York Attorney General with the opportunity to go national with his opinion that regulation of the insurance industry would be better if it were transferred to a federal authority. This constituted a great leap by a high-ranking state official, who was insinuating himself into an argument outside his jurisdiction and in effect disparaging the effectiveness of the New York State Insurance Department, another agency of the state government. The AG, who capped his intrusion with the announcement that he will run for New York governor, was jumping from his function as monitor of business fraud and excesses to the controversial national issue of regulation of insurance, evidently without conferring with the superintendent of insurance. While there was some response from the National Association of Insurance Commissioners (NAIC), it was not fervent. Nevertheless, major brokerage firms, as an immediate reaction to the attack on contingent commissions, fees or returns paid by insurance companies above and beyond what they receive from their clients, announced they will abandon the practice. This is not the case for brokers and agents who are paid by companies in the form of stated commissions per class of business. Their associations strongly defended the practice of contingent commissions or profit sharing, asserting that extra professional services warrant such payments.
The battle over regulation will continue during 2005, but in this writer’s opinion there will not be any resolution of the controversy. The call for optional federal chartering of insurers is presumed dead for 2005, at least according to the American Insurance Association (AIA), a prime backer of the federal charter concept.
This look ahead is being written late in November with the presidential contest over, bringing the second term of the Bush administration and firm Republican control of the Senate. Without imputing any partisan pose, I suggest the altered balance of power may be of great significance to the insurance business, because it may have a profound effect on controversial legislative issues, including tort reform and the regulatory structure. Some segments of the business believe that the outcome of the election will be more favorable to the legislative aims of the insurance industry.
Tort reform chances
Because President Bush during his campaign stressed the administration’s unyielding support for tort reform, with emphasis on capping non-economic damages, it is expected that this will be a top priority when Congress returns for its next session. This will not necessarily be an easy target because of Democratic opposition, but it has a better chance than before because of the stronger Republican majority. There may also be new efforts to rein in class action suits through legislation to bar forum shopping by lawyers who identify cooperative courts and judges where non-meritorious cases get favorable hearings. Another possible consideration is a ceiling on fees of plaintiffs’ attorneys who currently take too much of the judgment proceeds, particularly in punitive damage recoveries.
What are the chances of getting this legislation enacted? From this observer’s view, only the cap on non-economic damages has much of a chance. The current popular number is $250,000, but it is not clear whether such a law will take precedence over state laws with different limits or rules. Congress is also expected to look at asbestos and come up with some means of getting litigation under control, such as barring recoveries by individuals who may have been exposed to the materials but suffered no medical or health damages. Such an initiative does not appear to have much chance of making it into law this coming year. Legislation to address medical malpractice litigation on a federal level seems unlikely, but state efforts may be more productive.
Another vital need is extension of the Terrorism Risk Insurance Act (TRIA). AIA said it expects the extension to pass in a timely manner, but would opt for revamping the act for long-term effect and some simplification in its application. The National Association of Mutual Insurance Companies (NAMIC) told this writer that it is encouraged by the broad bipartisan support for the TRIA extension bill, which will keep the law in force for another two years. NAMIC also referred to the “impressive list” of members of the House and Senate who have cosponsored the bill (S.2764). In other areas, NAMIC pointed to actions in the states that enhance industry options that undercut the call for federal interference. These include laws that make rate regulation less restrictive through modernization. NAMIC also cited the continuing trend toward protecting credit scoring in the rate-making process. Expect highly intensified legislative activity in the states.
Preserving state regulation
Despite Spitzer’s and Rep. Fitzgerald’s stance on federal regulation, the states are acting with a sense of keen understanding that regulatory efforts must be responsive not only to streamlining, but also to more sensitive controls and oversight. The NAIC and the National Council of Insurance Legislators (NCOIL) are setting their sights on needed revisions, including modernization of the Market Conduct Model. It is clear that they want to move ahead to keep the federal government from raining on the state regulatory parade.
What too few industry detractors appreciate is how effectively the industry protects the country both from anticipated losses and from the hazards of disaster. The Insurance Information Institute (I.I.I.), in providing some data for this projection into the future, cited a phrase from Shakespeare’s The Tempest that “what’s past is prologue.” The research and news agency emphasizes how traditionally what appears to be a profitable outlook is dashed in the wake of hurricane catastrophes. The I.I.I. cites as an example the $20 billion in insured losses from a quartet of fall 2004 hurricanes, which blew away the hope for an industry-wide underwriting profit last year. I.I.I. also cited the Spitzer foray as another unanticipated event for the beleaguered industry. There must be more consistent activity by the industry to reach the public consciousness, emphasizing the message that without insurance, virtually everything would come to a halt. That doesn’t mean that the industry should not clean up its act where necessary, but it does mean that it is essential to counteract the bad press by touting the values of insurance to the public.
States I.I.I.: “In 2005, the industry will need to maintain the underwriting discipline of the recent past to achieve a combined ratio of 95% in order to achieve the sought-after return on equity of the Fortune 500. Assuming a normal catastrophe season, that could happen. On the public policy side, there will be significant activity on state and federal levels to address a variety of issues.” With respect to TRIA, I.I.I. notes that fiscal elements existing when it was first enacted do not exist today, but “concerns about fiscal responsibility in the midst of a historic federal deficit add a new degree of uncertainty to this debate.
“Come to think of it,” I.I.I. concludes, “Shakespeare’s experience-based model of forecasting doesn’t hold up as well as a relativist one.” Quoting Einstein, “The difference between the past, present and future is only a stubborn, persistent illusion.” n
The author
Emanuel Levy, editor of Insurance Advocate from 1958 to 2004, joined the weekly insurance news magazine in 1946 after serving with the United States Army. He has appeared as a speaker at meetings and seminars across the country sponsored by producer and other industry associations, and is the recipient of many awards and citations. He served on the faculty of the College of Insurance for the annual orientation course for incoming insurance regulators and staff members, lecturing on the debate over state and federal regulation of the insurance business. He wrote insurance articles for the Economist Magazine, and for many years was insurance section editor of the World Book Encyclopedia’s annual historical review book.