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To the Point New assaults vs. long-standing loyalties Coastal market woes may create unfortunate legislative fixes By Emanuel Levy Hurricane Katrina et al. continue to blanket the insurance business with woes and if it isn’t the battle over wind or water, it’s the effort by members of the U.S. Senate to end the 62-year reign of the McCarran-Ferguson Act, shifting antitrust regulation to the Department of Justice and the Federal Trade Commission (FTC). And it may go further than that. At this writing (the end of February), the effort led by Sen. Patrick Leahy (D-Vt.), chairman of the Judiciary Committee, has not gotten much, if any, media attention—but it may. That’s because the motivation for the bill to put the industry under federal antitrust regulation, is the assertion by Sen. Arlen Specter (R-Pa.), co-sponsor and ranking member of the committee, that “Too many consumers are paying too much for insurance due to the collusive atmosphere that exists in the insurance industry.” The bill is The Insurance Industry Competition Act (S. 618). Specter went on to charge that the misbehavior became evident along the Gulf Coast, “where insurers have shared hurricane loss projections.” He said that may result in “double-digit premium increases for Gulf Coast home owners.” And Sen. Trent Lott (R-Miss.), another sponsor, said that he looked at the history and found no explanation for “why antitrust and price fixing in this industry are not covered by the federal government.” The senator’s research leaves something to be desired, and he was not around for the debates about McCarran-Ferguson in 1945 to know the sound reasons for its enactment. And he is well off base in characterizing the insurance rating mechanism as “price fixing.” Nevertheless, the Senate bill is a continuation of the long-standing effort of some members of Congress to put the federal government into the regulatory picture, even though McCarran-Ferguson is not a blank check for avoidance of antitrust strictures or restraint of trade. The Judiciary Committee should be well aware of how far McCarran-Ferguson goes in safeguarding public interest. The facts are easily obtainable. The impetus for this new legislative thrust, among others, may be that Lott suffered a devastating loss of his own property from Hurricane Katrina and is, or was, involved as a plaintiff in a suit against State Farm. State Farm, which accounted for almost one-third of the homeowners business in Mississippi in 2005, moved thousands of adjusters into the area immediately following Katrina and Rita to handle more than 84,000 claims (there were an estimated 480,000 claims in the state), and it did so promptly. But, like every other insurer, its policy contained a flood exclusion, and that was challenged almost immediately by Mississippi Attorney General Jim Hood. That challenge went into the courts, as did a class action with more than 600 plaintiffs, under the guidance of the trial attorney, Richard F. Scruggs, who is Lott’s brother-in-law. State Farm caved in. You have to know when to fold and State Farm wisely did so. State Farm also announced that it would cease writing new homeowners and commercial property coverage in Mississippi. There is some question about the future committment of the company to either Louisiana or Mississippi as a homeowners insurer. Other insurers may feel the same way in view of the future hurricane threat, even though 2006 was a good year. That may induce the assertion that insurers engage in conspiracies. But adapting from the Harry Truman observation, if you don’t want to lose your shirt, get out of the wind. These observations in no way mean to imply that the insurance industry is not without serious dilemmas all over the country with respect to disasters. Nor does it mean that there is not an urgent need to redefine the homeowners and flood insurance language to clarify, as much as possible, the extent of coverage, as well as the specific elements contained in existing forms covering disaster and their relationship to reimbursement. While it is probably impossible to create an unassailable contract, the experience with Katrina makes it clear that the present forms are subject to disputes that end up with lack of coverage for insureds and unanticipated liabilities for insurers—all leading to justifiable unhappiness and disdain for the entire system. That takes in producers, companies and government. Failure to bring about change will mean a resistance to the purchase or availability of coverage, (already a problem), resort to litigation and demands by regulators and legislators for more onerous controls over the business. There is certainly enough talent around to reach a consensus on risk and coverage without mandating specific verbiage. Strong opposition to the Senate bill has been expressed by industry organizations, including the National Association of Professional Insurance Agents (PIA National). PIA National Executive Vice President/CEO Len Brevik called it “...the opening move in a long chess game for control of insurance regulation.” And PIA National Senior Vice President Patricia A. Borowski described the Senate proposal as “a powerful prescription for unintended consequence” that “does nothing to advance insurance regulatory modernization.” Borowski added that such a law “would stifle open competition by insurers, both large and small.” That observation refutes the February 15 charge of Leahy that attributed “egregious forms of anticompetitive conduct” to insurance companies in their “price fixing, agreements not to pay, and market allocations.” The senator is about as accurate on these contentions as he is in his commendation of Lott’s “tireless efforts to ensure that resources are in place to rebuild.” New Orleans, please note. With reference to noncompeti-tiveness, Leahy is also off base. Insurance is a competitive industry |in the sale to a disparate and unenthusiastic marketplace, as well as in fashioning the policy coverages that demonstrate the superiority of one company over another. But the actors in the business are also fully aware of its realities. A recent lengthy report and study by the Insurance Information Institute included a cogent summation of the nature of the business. The document says that property/casualty insurance will always be an impossible business because it requires the use of past information to determine today’s prices for a product sold tomorrow and claims that may arise in the future—all of which is expected to come out right. One might add to that observation that the entire scheme depends on the vagaries of life and nature, the truthfulness of the marketplace and the proclivities of the trial bar—examples may be asbestos, 9/11 and global warming. In all of business and commerce, however, there is not another product and service like insurance. But the I.I.I. document also offers the conclusion that the long-term success of the P-C industry requires some shift in underwriting culture, asserting that underwriting/pricing currently is “archaic.” Nevertheless, there are very positive aspects among the dire. The I.I.I. document points to imaginative and constructive innovations being adopted by individual insurers to improve the automobile liability bottom line, that are also upgrades for policyholders. Yet it cites a downside and attempts to measure the blame for the fact that in the homeowners market, in and around 2003, there was a large void in the insurance-to-value (ITV)—$8 billion was left on the table. The question raised was whose responsibility is it to keep values up to date? One poll on the subject had 2% of the respondents blaming producers, but three out of four said it was the policyholders’ responsi-bility. It was found by one survey that nearly 40% of the people queried had not updated their homeowners policy in three years. There are many other indications of inadequate ITV and/or failure to purchase needed coverages for other exposures, such as one cited by the Independent Insurance Agents & Brokers of America (IIABA) in a press release circulated in December 2006. According to a study by its Trusted Choice promotional arm, most of the 28.5 million Americans who plan to host parties do not have umbrella insurance policies to protect them in the event of a liability claim. That leaves room for a lot of competition. Another excellent aspect of the business, and one that has endured on a wide scale, is the cooperation among producer organizations and insurance companies to improve understanding and productivity. It is the kind of educational approach that is unique to insurance. One such was held in mid-February by the PIA (New Jersey). The association said “when agents and companies partner, it’s a win-win situation.” This is only one such kind of educational exchange. They occur regularly across the country and include CEOs of companies as participants in panels and lectures that establish better understanding of the dynamics of the industry and create “value for consumers.” Does it work? PIA’s Borowski says, “Overall, and setting aside the increasing challenges in coastal areas, business partnerships between agents and carriers are working well in the recent years. More agents have come to anticipate changes with their carriers, rather than being surprised. “Currently, the market has generally been good to everyone (with the exception of coastal availability following hurricanes),” Borowski continues. “A better market gives carriers the disciplinary incentive to make sure that their partnerships with their agents are working well, because there’s competition and agents have more options available to them. “PIA National’s observation is that today there is a larger number of agencies that are more satisfied with a larger number of carriers than we have seen in a long time. But by no means is everything good,” says Borowski. “Agents do have some building concerns, such as the few carriers who have entered into settlement agreements that ban contingent commissions and some carriers deciding to expand their direct sales activities. “Last, the circumstances for coastal areas is quite the opposite and becoming desperate and carriers must engage more fully in fostering solutions.” In this writer’s opinion, that’s a concise but sound overview of where we are. * The author |
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