- The Washington Times - Sunday, December 1, 2002

President Bush's signature on the terrorism insurance bill last week is ending one of the worst parts of "the perfect storm" for the insurance industry.
In the past two years, the insurance industry has been nearly ripped apart by a cataclysm of a poor stock market, runaway juries and terrorists.
Hard realities of business drove small insurers into bankruptcy and made even the largest companies dig into their cash reserves.
The terrorism insurance bill shields the insurance industry from catastrophic losses caused by terrorist attacks. One provision requires that taxpayers cover up to 90 percent of insured losses from major attacks, with the insurance industry paying up to the first $15 billion.
That provision is likely to rescue the industry from what many analysts call the worst time in insurance history.
The year 2001 started off poorly for insurance companies: Juries awarded huge payouts for asbestos claims, medical malpractice insurance rates drove doctors out of business, and homeowners saw their insurance rates climb from floods, storms and mold.
And the trial lawyers, as one industry analyst put it, "continued to run amok."
Then terrorists slammed airliners into the World Trade Center.
It was the worst insurance catastrophe in history. But then, corporate scandals pulled the stock market lower and took insurance companies' investments with them. The U.S. insurance industry has lost $20 billion in the last year.
"Last year's perfect storm produced a tsunami of misfortune for insurers," Robert Hartwig, chief economist for the Insurance Information Institute, said in a financial report. "Recession, underpricing, catastrophic losses, medical cost inflation, Enron, abuse of the legal system and, of course, the September 11 terrorist attack."
The past year, said John Morrison, the National Association of Insurance Commissioners legal issues task force chairman, was "the worst year ever."
Initially, specific groups were hit hardest by the industry's woes, such as high-risk doctors, homeowners in moist environments where toxic mold grows freely, ranchers overrun by Western fires, airlines and property owners near key government buildings.
But now, with a $120 billion shortfall of cash reserves and a souring stock market eating away at the rest, companies have raised rates on nearly every type of insurance.
Even the cost of health insurance for a dentist's teeth cleaning or replacing an automobile windshield are rising.
"Across the board, the risk for insurance companies is different today," said Debbie McKerrow, spokeswoman for the Maryland State Insurance Administration.

The industry reacts
Insurance industry analysts try to sound optimistic in reports to investors. Moderate economic growth and no major catastrophes so far in 2002, which would result in large insurance claims, are raising hopes for a brighter future.
But they also say any improvements must come quickly.
"Investment income and capital gains typically offset losses from claims, but market declines eliminated that cushion in 2001," Weiss Ratings, a financial-services ratings company, reported to customers.
The Insurance Information Institute is warning about continuing uncertainties in the stock market.
Among them, "The Enron debacle degenerated into a full-fledged crisis in corporate governance," the Insurance Information Institute said.
Enron's announcement a year ago that it manipulated its books started a wave of disclosures about major U.S. companies engaging in fanciful accounting, causing investors to lose confidence in Corporate America. The loss of trust drove down the stock market and eliminated investment money insurance companies depend on to survive bad times.

Risks come to Washington
The nation's capital has been hit particularly hard by the insurance crisis.
In addition to claims caused by the nation's second most congested traffic and a relatively high crime rate, some of the world's most tempting targets for terrorists lie within walking distance of each other.
One of the first indications of the District's insurance trend arrived in the mail of offices near the White House earlier this year.
As their annual policies came due, renewal notices quoted rates substantially higher than their last payments. Property insurance was canceled for some. "Non-renewed for catastrophic loss," one of the notices said. Among them was a church seven blocks from the White House.
Agents explained that one dirty bomb or chemical attack could devastate a wide swath of downtown Washington.
"Those can go anywhere," said Larry Mirel, commissioner of the District's Department of Insurance and Securities Regulation. "People don't really know where it's going to be."
The department and the D.C. Chamber of Commerce recently completed surveys that showed insurance rates increasing across the Washington area.
Most notable was workers' compensation insurance, which is required by law.
In a terrorist attack, any employee injured on the job by a bomb blast, toxic chemicals or a deadly virus would have a workers' compensation claim.
The result is higher rates.
Metro's insurance premiums have tripled in the last year. The New York Metropolitan Transportation Authority tells similar stories.
Both transit agencies have been identified by the FBI as prime targets for terrorists. A well-placed bomb or biological agent on a Metro train could kill many people while disrupting lives and wreaking havoc on an entire city.

Spreading wildfire
Although Washington has been hit hard, the insurance problem is being felt throughout the nation.
"The destruction of the World Trade Center has changed attitudes to risk worldwide," the Insurance Information Institute said in a recent industry report. "It also affected more kinds of insurance than any other disaster and made both insurers and their policyholders reconsider their risk exposures."
In Texas, a state senator is warning the insurance industry of government intervention unless it lowers homeowner insurance rates.
"Is there any reason for 200 percent rate increases?" state Sen. John Carona, Dallas Republican, asked during a July hearing on insurance rates. "Surely [insurance companies] recognize that if this situation continues, they are going to get slaughtered in the next legislative session."
In June 2001, a Texas jury awarded $32 million to a family who said its insurance company failed to cover a water leak, which led to toxic black mold spreading throughout the house and ruining the family's health. The lawsuit sparked a surge in similar claims across the nation.
Insurers say the mold claims are an example of runaway litigation and show why they must raise rates.
The insurer, Farmers Insurance Group, said recently that it would not renew policies for 700,000 Texas homeowners. State Farm Insurance has stopped writing homeowners insurance in the state.
Allstate Corp. has capped mold coverage at $5,000 in 31 states and the District of Columbia but has not been approved to provide the insurance in Virginia and Maryland.

The list goes on
Judgments against doctors, particularly obstetricians, have made practicing medicine difficult.
Nationwide, malpractice insurance rates for obstetricians have increased 160 percent in the past decade. Average lawsuit settlements have more than doubled to $400,000 per case.
In the small town of Cleveland, Miss., malpractice insurance for two obstetricians jumped from $30,000 a year to $150,000 a year. In Las Vegas, an obstetrician decided to move his practice to coastal Maine because malpractice insurance rates were much lower.
Patients also feel the pinch of insurance. Monthly premiums for employer-sponsored health insurance rose 12.7 percent in the past year, according to a recent survey by the Kaiser Family Foundation.
Health insurance cost increases and recession are combining to force employers to reduce benefits and make employees pick up more of the tab, a trend expected to continue next year.
Property insurance for public buildings is shooting up from terrorism risks. Taxpayers can expect to pick up the bill.
In Charlotte, N.C., the cost of insuring the Charlotte Coliseum rose 115 percent in the past year, from about $370,000 to nearly $800,000.
In Iowa, the Des Moines airport expects to pay nearly three times more for insurance in the coming year, compared with rates before September 11, 2001.
In Maryland, the treasurer's office received notice in October 2001 that the state's $500 million insurance coverage would not be renewed for Baltimore-Washington International Airport, the State House in Annapolis, Camden Yards and other state properties. Since then, the state has used legal action to force the insurer, Royal & Sun Alliance USA Inc., to provide coverage.
A contributing issue in property insurance increases both public and private is asbestos claims.
So far, asbestos removal and claims have eaten up $54 billion of the nation's business income, according to a Rand Corp. report delivered to the Senate Judiciary Committee in September. More than 500,000 claims have been filed, with that number expected to at least double.

Crisis of confidence
Part of the problem lies with the insurance industry's method of protecting itself. Any one insurance company insures its policies with companies known as reinsurers. The reinsurers then insure their policies with other reinsurers.
The idea is to spread the risk of a big loss through so many insurance companies that the primary insurer emerges relatively unscathed. The estimated $40 billion in losses from the World Trade Center, for example, are being spread throughout about 100 insurance companies worldwide.
Insurance companies swore they would not get caught off guard again, which meant terrorism and war insurance prices shot through the roof.
In one example, the commercial real estate industry put $15 billion in projects on hold because of a lack of affordable terrorism insurance. Most lenders will not finance projects unless they have insurance.

Pinning the blame
The insurance industry says escalating rates are not its fault.
"An insurance company's ability to underwrite insurance policies is tied to its capital and the riskiness of what it insures," the Insurance Information Institute said. "With less capital now available prices for many types of insurance are rising."
In other words, everyone is suffering equally.
The nation's property and casualty insurers reported a $9 billion loss in 2001, compared with a $27 billion profit in 2000, according to Weiss Ratings.
By year-end, claims surged to a record $381 billion, an increase of $175 billion, or 86 percent, over the $205 billion in claims reported in 2000. The loss, the first for the industry, was only partly the fault of the September 11 attacks.
Last year, 30 insurance companies became insolvent, according to A.M. Best Co., an insurance rating and information company. Of those, 23 or 77 percent blamed deficient cash reserves.
The rate "represents a significant increase over historical trends, where the insolvency rate from insufficient reserves ranged from 30 percent to 35 percent," A.M. Best said in a report to customers.
The surviving companies have avoided bankruptcy by raising rates, which is spreading the complaints as much as it is the risk.
"Policyholders have already felt the sting of rate increases and should expect more on the horizon," a Weiss Ratings report said.
Skeptics say the insurance industry is trying to profit off the hysteria of the September 11 attacks. Among them is Delegate Eleanor Holmes Norton, the District's non-voting Democratic member of Congress, who called sudden increases in insurance "shameful, unacceptable and unnecessary." She also threatened to sponsor legislation to stop the high rates.
Marsh & McLennan Cos. in October reported a 78 percent increase in the third quarter to $299 million from a year earlier. Allstate Corp. reported a $280 million profit in the third quarter, compared with $226 million a year earlier.
However, those companies are among the world's largest, with a stable base of customers. Some of their smaller competitors, whose fortunes can be wiped out by sudden downward shifts in the insurance industry, are being driven to bankruptcy.

Call to action
Disputes about who should pay damage claims call into question the extent to which government should regulate the insurance industry. Insurers said in congressional hearings leading to the terrorism insurance bill that regulations that force them to absorb terrorism losses would drive them out of business or force them to spread the risk to other forms of insurance.
In other words, the cost of renter's insurance for an apartment could rise if insurers are forced to insure BWI and other high-risk properties.
Their pleas led to the "federal reinsurance backstop" in the terrorism insurance bill to make the government pay for acts of terrorism or war.
Opponents in Congress argued it was not the government's responsibility to fund poorly managed or poorly financed insurance companies.
For most insurance, the federal government lets supply and demand determine prices. But terrorism and war changed the outlook.

Future of fewer choices
When the "perfect storm" subsides, policyholders are likely to have fewer choices among insurers.
"There are more insurance companies than we need to have out there," said Steve Dreyer, managing director of insurance rating for Standard & Poor's credit-rating service.
In other words, mounting losses are driving small insurance companies out of business. Only the largest insurance companies that can rely on big cash reserves are prepared for a long-term business downturn.
Some analysts predict a handful of industry giants will survive. Policyholders would be left with fewer choices and less competition. Some analysts warn of higher rates, but others dispute the warning.
There is a positive side to having the small companies disappear, Mr. Dreyer said.
"This is a very inefficient business," he said. "Consolidation would help to drive efficiency gains."
Other insurance industry analysts say any current problems will be short term.
"It's a very cyclical business," said Joe Annotti, spokesman for the National Association of Independent Insurers. "The economy is sooner or later going to turn and investment income will rise again. Insurers will once again be competing for business."

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