In the wake of the near-collapse of AIG, many companies are taking a much closer look at the health of their own insurers.
By Paula L.Green
Dealing with a Downgrade
After rating agencies downgraded XL Capital’s outlook in December, the Bermuda-based insurer launched a campaign to satisfy corporates’ desire for more in-depth analysis of its financial condition. The global insurer turned out fact sheets and conducted presentations for risk officers and senior financial managers about XL insurance and its claims-paying ability. “These were presented at face-to-face meetings with our major clients and brokers,” says Eileen McCusker, chief operating officer for XL Insurance in the United Kingdom and Ireland.
Interest in insurance has spiraled upward to the boardroom and so-called C-suite-the cluster of chief executive officers, chief financial officers, chief operating officers and even chief information officers. “Companies want to know if their insurance companies are in the business of other financial products, where there is less regulation and less understanding,” adds Mekrut. These board members and top executives are asking their risk managers more questions. “They’re asking how much are we insured for and what happens if an insurer goes under,” says Ewing. “They want to know what are the back-up plans.” These back-up plans can include creating strong relations with a handful of carriers that can step in if another carrier becomes insolvent, assuming more of the risk with larger deductibles, setting up insurance alternatives (such as risk retention groups or captives) or tapping into new products developed after the financial crisis.
Whitmore of Marsh believes that one consequence of the global financial crunch will be an increase in the attention tax authorities around the world pay to insurers. Insurance companies typically pay a government entity a tax that is levied on the premiums written for risks located within that country. In Belgium, for example, eager tax authorities have called in several corporate clients to talk about their insurance programs, he notes. “Regulators are looking more closely at what companies are doing and the regulations on the books,” he points out.
Yet regulations and assessments can also help ease corporate concerns. The system of state regulatory authorities and accompanying guarantee funds, which are usually funded through an assessment on written insurance premiums and not dependent on shrinking state government budgets, have helped many US-based insurers feel a bit safer. “It provides some sleep insurance,” says Adams of SunCal.
Kathy Donovan, an attorney working in the Waltham, Massachusetts, office of Wolters Kluwer Financial Services, says the value of a state regulatory system with dozens of insurance regulators monitoring an industry cannot be discounted. These quasi-independent state guarantee funds are managed by a state’s insurance department or a government authority, not the private sector. “It provides a system of checks and balances. If one state doesn’t see something, then another could,” says Donovan, who is senior compliance counsel for the firm’s insurance compliance solutions group. “The states step in very quickly if there is a potential problem. They’ve consistently worked time and time again,” she says.
While the debate over the merits of federal versus state regulation ebbs and flows in the United States, the Obama administration has not made any specific proposal to set up a federal insurance authority. Across the Atlantic, the pan-European Solvency II is a new regulation regime scheduled for implementation in 2012. Led by the European Commission, it is meant to better regulate and integrate the insurance market as it protects policyholders and forces insurers to boost their capital requirements.
Rolf Tolle, franchise performance director at Lloyd’s specialist insurance market in London, warns against regulatory overreaction to what was essentially a banking-driven crisis. “The general insurance industry has been resilient throughout, and the regulatory framework for insurance has shown itself to have worked,” he says. “While improvements can always be made, the industry needs to be vigilant against any unnecessary regulatory response. We need more international regulatory cooperation, not less, and Solvency II could be the basis in which to achieve that,” he adds.
And, of course, everyone is closely watching how events at American International Group, whose property-casualty division is an integral part of the global insurance market, will unfold. The financially sound insurance operations are to be spun off by year’s end and are already operating under the name of AIU Holdings, a name that has long been used by AIG outside of the United States. The insurer’s financial troubles are shaping the actions of both insurance buyers and its competitors. “The market wants to show some loyalty and wants AIG to survive because it’s such a competitive part of the marketplace,” says Berger of Allianz. “But some clients are reviewing who their insurer should be in the future.”
Meanwhile, insurers who lead global insurance programs will very carefully assess the financial security of their program co-insurers, says Berger. This is particularly relevant for so-called long-tail risks, liabilities characterized by extended claims periods. It is these long-tail lines-such as product liability and environmental liability, in which claims may not surface for decades-that are generating the most concern about an insurer’s financial security.
Ewing agrees that risk managers are revving up their due diligence activities and strengthening their back-up plans. “Any good risk manager shouldn’t put all their eggs in one basket. There should be a diversification and separation of risk,” he says. “Now is the time to dust off the bible and turn to the chapter and verse that might be appropriate.”