Outlook for the ‘90s : ...

For the insurance industry, the history of the 1980s began--and appeared to end--in a flood of red ink.

A cyclic rise and fall of insurance prices characterizes an industry that counts heavily on investment income for its profitability. Successful investing can offset losses from paying claims, but every few years, this relationship runs wild.

In the early 1980s, the imbalance resulted in record losses. That depleted reserves, which sharply reduced the amount of insurance that each company could keep in force. This in turn triggered a severe cutback in coverage for such high-risk and high-visibility clients as local governments, schools and private day-care centers. Motorists, too, faced sharp increases in premiums or cancellation. In California, Proposition 103 was one result of the ensuing consumer hostility.

As the 1990s open, the industry will continue to face downward pressure on rates as the current “soft” cycle completes a competitive squeeze for new business that began in 1986, according to Alexander & Alexander, a giant international insurance broker. The industry will also face increased consumer and regulatory activism, a legacy of the 1980s. This will include California’s first election of an insurance commissioner, a position that was previously appointed, and Proposition 103’s authors promise an initiative to have the state take over auto insurance.

This domestic action will unfold at a time when foreign insurers are seeking to expand their presence in the big U.S. market. On the eve of 1989, Farmers Group of Los Angeles became a subsidiary of a British conglomerate, BAT Industries, and it could become a French company before the new year is out if BAT itself is taken over and dismembered. Such foreign acquisitions of U.S. insurers will increase as Europe becomes one giant market at the end of 1992 and as major players seek to “bulk up” to conquer larger shares of the market at home and abroad.