205 Insurance Firms on State ‘Watch List’

The state Insurance Department has placed 205 of about 1,350 insurance companies doing business in California on a “financial watch list” because of doubts that they will be able to pay all legitimate claims, Insurance Commissioner Roxani Gillespie said Wednesday.

“This is a much higher number than we have ever looked at before,” said Gillespie, leadoff witness in the first of a series of legislative hearings into insurance issues that are being chaired this week and the next two by Assembly Speaker Willie Brown (D-San Francisco).

Under questioning, Gillespie said that she believed the 205 companies on the list account for 10% or less of the state’s annual insurance sales. None of the companies were identified. Two years ago, a comparable list named 165 companies.

Gillespie noted that “because of impaired financial condition,” the Insurance Department barred 18 companies in 1984 from doing business in the state, 34 in 1985 and 11 so far this year, and has “had to take over completely four insurance companies in 1984, 13 in 1985 and eight to date in 1986.”

Insolvency ‘Unprecedented’

“This insolvency activity is unprecedented in our state,” the insurance commissioner said, referring to the industry’s problems of the last three years.

Gillespie noted, however, that such statistics contrast with what the department sees as a better overall financial situation in California for the industry as a whole.

“In 1984 and 1985, companies licensed to do business in California reported net income after taxes of $1.35 billion and $2.08 billion, respectively,” she said. “This represents return on average equity of 2% and 3%, well below previous rates of return for the industry, which averaged 10.9% from 1975 to 1984. (But) as of mid-year 1986, the return for the industry has risen to about 12% (on an annual basis).”

Gillespie indicated that she attributes the perceived financial trouble of most of the 205 companies on the watch list to a failure to charge enough in premiums to cover losses.

But this position was challenged at the hearing by Assemblywoman Maxine Waters (D-Los Angeles), who suggested that many of the companies involved are mismanaged or have made poor investments of their reserve funds. Waters asked Gillespie to estimate how many of the 205 companies fall into such categories. Gillespie said she could not do so without further checking.

Also implicitly challenging Gillespie in subsequent testimony was Michael Strumwasser, special counsel to state Atty. Gen. John K. Van de Kamp, whose office has launched its own study of the insurance system.

Strumwasser said he thought that in setting premiums, insurers paid more attention to how much they were likely to earn by investing the money they took in than to how much they expected to pay off in claims.

The hearings, which will continue next week in Los Angeles and the following week in San Francisco, were not an hour old before they fell into often confusing exchanges between the legislators and the leading Sacramento lobbyist for the insurance industry, Clay Jackson.

Considered ‘Poppycock’

Jackson, speaking in often highly technical terms or alternately in obscure language, challenged the “poppycock” that he said characterizes many charges against the industry. The insurance system, he said, “is not in a crisis.” Only 7% to 9% of the total insurance sold in the state is the subject of controversy, he declared.

Several legislators, including Waters, Assembly Majority Leader Mike Roos (D-Los Angeles) and Brown, tried without success to elicit clear responses on specific questions from Jackson and another industry representative, Mavis Walters, senior vice president for the Insurance Services Office, an industrywide actuarial reference group.

After 1 1/2 hours of talk and questions that scarcely moved the subject forward, a reporter observed to Jackson that he seemed to have stymied the legislators’ inquiries.

“I don’t believe they have begun to understand that yet,” the lobbyist replied.

Six Hours of Talk

Altogether, there was more than six hours of discussion at the hearing Wednesday as to the financial condition of the insurance industry, but there were few uncontested conclusions.

Brown said he decided to chair the hearings himself because the head of the Assembly’s Insurance Committee, Alister McAlister (D-Fremont), is retiring and Brown wanted to get a head start on exploring insurance issues before appointing a new chairman in December.

The Assembly Speaker said he believes the California public is more concerned about insurance at present than any other single issue.