Features: Insurance Insecurity

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

Corporate risk officers are asking more questions, checking more documents, diversifying their book of insurers and even retaining more risk to avoid the specter of placing their liabilities with an insurer that goes belly up in today’s precarious economic climate. And while the commercial insurance operations of no major property/casualty insurer has gone under or dipped into the financial rescue program run by the US government, risk managers are scrutinizing the finances of insurance carriers around the globe.


“Risk managers are absolutely worried,” says Wayne Salen, director of risk management at Labor Finders International in Palm Beach, Florida. With more than three decades of experience in risk management, Salen says the financial woes at AIG’s financial products unit have created uncertainty for risk managers even though its commercial insurance unit remains solvent. “There’s a concern that there could be another festering sore out there that could impact a component [of an insurer] we haven’t looked at. AIG’s insurance unit is still solid, but that doesn’t mean the holding company couldn’t drag everything down,” he says. For that reason, Salen examines the financials of the operating units of any carrier he uses or considers using and does not rely solely on the ratings issued by rating agencies for a carrier’s holding company.

Lance Ewing, vice president, risk management, at Harrah’s Entertainment in Las Vegas, Nevada, says risk officers should look beyond the financial ratings assigned to an insurer and pore over its entire book of business. That means looking at the industries an insurer is underwriting, its geographic areas of coverage and the market share it holds in a particular line of business. “You have to be asking the right questions,” adds Ewing. “And these are all salient questions.”

Gordon Adams, senior vice president and director, risk management, at privately held housing construction company SunCal Companies, says that one way he finds protection is by buying coverage from an insurer that is larger in size than SunCal. In addition to monitoring the reports put out by the major rating agencies, he and other risk officers are intensifying their review of news stories and the numerous reports issued by regulators, independent analysts and the major brokers.

Insurance broker Marsh, for example, has a market information group that closely follows the financial condition of insurers. It issues continual updates, including email alerts, on developments affecting carriers, and its staff talks regularly with clients by telephone. Group members were part of so-called town hall meetings held around the world with corporate clients and insurers after the financial crisis deepened last fall. “They’ve gone from being back-room folks to front and center stage…rock stars right now,” says Howard Whitmore, a managing director and global leader of the multinational practice at Marsh in New York City.

In response, insurers have intensified their own communications activities and are even sending their top financial officers out on the road to soothe their clients’ anxieties. FM Global, for example, has upped the number of presentations it makes to risk officers. “Normally we make five to 10 presentations over a 12-month period. Now we’re doing double that in half the time,” says William Mekrut, vice president and treasurer at the Johnston, Rhode Island, global property insurer, which does business in about 130 countries. He says risk managers want to know about the insurer’s investments, the adequacy of its reserves, the strength of its cash position and ability to raise cash, the strength of its reinsurance program, and its debt on the books. “They want to know about not just the abundance of debt, but the terms and conditions of paying it down. Will that impinge on our ability to raise cash?” he adds.

Andreas Berger, who is global head of market management and communication at Allianz Global Corporate & Specialty in Munich, says corporate customers in all industries are concerned about an insurer’s ability to pay out claims on a short-term and long-term basis. “Companies are taking a more detailed look…at balance sheets, solvency ratios and counter-party credit risk,” says Berger.


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.”