House Report Sees Peril in Insurance Industry : Regulators: Parallels to the S&L; crisis are cited. Study finds ‘scandalous mismanagement’ could set off widespread failures.

The insurance industry is threatened by “scandalous mismanagement and rascality” that could trigger widespread failures similar to the massive crisis in the savings and loan industry, according to a House subcommittee report issued Friday.

“The parallels between the present situation in the insurance industry and the early stages of the savings and loan debacle are both obvious and deeply disturbing,” said Rep. John D. Dingell (D-Mich.), chairman of the House Energy and Commerce Committee’s oversight subcommittee.

The report said more than 150 property and casualty insurance firms have become insolvent since 1969, with nearly half the failures taking place in the last five years.

Four of the biggest failures, including the collapse of two Los Angeles firms, Mission Insurance and Transit Casualty, ultimately will cost the public more than $5 billion, the subcommittee study said.

Companies falling into trouble often expanded too rapidly, failed to hold sufficient financial reserves and suffered from reckless management, said the report, titled “Failed Promises--Insurance Company Insolvencies.”

The insurance business “is uniquely suited to abuse by mismanagement and fraud,” according to the study. “The prepayment of large, often vast, sums of money with few restrictions lends itself naturally to monumental wasting of assets through greed, incompetence and dereliction of duty.”

Insurance industry executives said their business is generally in good shape and accused the subcommittee of exaggerating the problems.

“We are greatly troubled by the analogy drawn to the S&L; industry,” said Marc Rosenberg, a spokesman for the Insurance Information Institute.

“There were four major insolvencies they looked at, and in those four they found characteristics of improper, if not criminal, behavior,” Rosenberg said. “If you walk into a morgue and four bodies are being autopsied, you find a cause of death for those four. You do not find any information about whether the rest of the population has cause to worry. The subcommittee report moves from the specific to the general too quickly.”

The American Council of Life Insurance “considers insolvency developments important enough to have formed a task force to identify the problems more fully,” said Benno Isaacs, an ACLI spokesman. “But we do not foresee a serious threat to our members.”

Isaacs noted that a Congressional Research Service report last summer declared the industry in good shape. “The insurance industry has had an excellent record in that insolvencies have been rare, and in cases that have occurred, regulators and guarantee funds have usually prevented loss to the policyholders,” the research service said. “It must be emphasized that there are no signs of imminent crisis for this industry.”

However, the subcommittee report focused on the significant potential for financial abuses.

The “record of inquiry on both the insurance and thrift industries shows that a relatively few crooks, scoundrels and incompetents are capable of bankrupting huge companies, and possibly an entire industry,” the subcommittee report said.

Dingell called for intensified activity by state insurance commissioners to keep the industry financially sound. “The regulatory system must anticipate and deal effectively with the activities of the pirates and dolts who inevitably will plague an attractive industry, such as insurance, where customers hand over large sums of cash in return for a promise of future benefits,” Dingell said.

The subcommittee’s ranking Republican, Rep. Thomas J. Bliley Jr. of Virginia, said that “particularly in the aftermath of the savings and loan catastrophe, Congress must make certain that all insurers are financially able to pay claims. While most insurers are sound, flaws in existing regulation need to be promptly addressed to prevent insurance insolvencies from spreading.”

The report included an extensive review of the problems at Mission Insurance, which was placed into conservatorship by the California Department of Insurance in 1985, and liquidated in 1987.

Mission aggressively sold vast numbers of property insurance policies and then reinsured this business with other companies. “Most of those were unlicensed carriers that could not write policies themselves, so Mission was the ‘front’ to write business that was immediately transferred to the books of unregulated companies,” the subcommittee said.

When claims were filed, the re-insurance companies couldn’t make payments to Mission, which in turn, couldn’t pay the policyholders. The system failed. “Like an empty fire extinguisher, it looked fine until it was needed,” the report said.