Insurance company profits are rebounding after five years of unprecedented losses, but the industry’s future will remain clouded unless states act to limit the size of court-awarded damage claims, two top insurance executives warned industry regulators on Wednesday.
Court reforms so far offer “a dime’s worth of reform” while seeking “a dollar’s worth of rate reduction,” charged John J. Byrne, chairman and chief executive of Fireman’s Fund Corp., which is based in California, where voters last June enacted a limited reform initiative in Proposition 51. Fireman’s Fund and other insurance companies strongly supported the initiative.
That measure reduced the liability of municipal agencies for such non-economic damages as “pain and suffering.” Since passage, opponents of the measure--mainly trial attorneys--have been calling on insurers to respond with broadly lower rates.
However, Byrne agreed with William O. Bailey, president of Aetna Life & Casualty in Connecticut, that a modest measure of court reform has taken place this year in about two-thirds of the states.
Bailey told the National Assn. of Insurance Commissioners, which met here, that “I see 1986 as a watershed year . . . the beginning of what must be a long-term effort to restore fairness, efficiency and predictability to our civil justice system.”
In states where new laws cap how much can be collected in liability awards and limit an insurer’s responsibility to the extent of its client’s actual degree of fault, companies are re-entering the marketplace as their financial situation permits, both insurers maintained. Nonetheless, some risks remain essentially uninsurable because they are impossible to calculate, given the unpredictability of future court findings under the present system of civil justice, Bailey said.
The court system creates “wild cards,” he said, by extending liability beyond the terms of insurance contracts and by requiring insurers to pay damages beyond their fair share.
The state regulators listened to Bailey and Byrne along with other panelists representing reinsurers, brokers and major insurance customers as part of their effort to avoid a repetition of the rampant rate cutting in commercial liability insurance that took place in the early 1980s and the inevitable sharp rate increases needed to restore the market later.
No one seems to oppose efforts to moderate the sharp extremes in this kind of rate-pricing cycle--which insurers maintain reflect strong competition--but no one seems to know how it might be done, either. Nonetheless, state insurance commissioners have been roundly criticized for not having tamed the last boom-and-bust cycle.
At Wednesday’s closing session, the emphasis was on the future of the liability insurance business. And the regulators got bad news from Byrne of Fireman’s Fund, who called the outlook “rotten"--even if further modest premium increases, which he said are needed in such fields as workers’ compensation and commercial liability insurance, can be imposed.
Insurers base their decisions on whether to assume a given risk on such variables as the price of the premium, their investment income, their losses and the legal and regulatory climate within which they operate, Bailey observed.
“It was the interaction of these variables that got us where we are today, and it is the interaction of these variables that, to a great extent, will determine the future insurance marketplace,” he said. The rate cutting of the early 1980s, as insurers vied for premium dollars to invest at double-digit interest rates, brought with it riskier clients.
Aetna was among the minority of companies that refused to follow the herd--and as a result lost about 15% of its business, Bailey said.
The recovery remains modest, even tenuous, both Bailey and Byrne said, despite hefty increases in operating income reported for the first half of this year. (While the improvement reflects sharply higher premiums and improved income from investing them, insurance operations continue largely and significantly in the red--especially in the liability field.)
The piecemeal reforms enacted in about two-thirds of the states this year represent a significant achievement, given the political power of trial attorneys among legislators, Byrne and Bailey acknowledged.
But as far as addressing insurers’ risks in such nebulous areas as professional liability and environmental-impairment coverage, only “a little bit of that is being corrected around the edges,” Byrne said. “It’s better than nothing.”