A View From The Press Box

While there were no low blows or knockdowns in “The Battle Of The Bobs,” the two seasoned combatants—who regularly clash indirectly in the media and in Congressional testimony whenever the industry is embroiled in a political crisis—took their best shots in a one-on-one debate moderated by this reporter.

WIND VS. WATER

Mr. Hunter delivered the first blow by declaring that “Gulf Coast residents are outraged by insurer performance after Hurricane Katrina” in settling claims that involved both wind and water damage. He scoffed at industry assertions that since almost all Katrina claims are closed, insurers did a good job in sorting out covered wind losses from flood damage insured only for those who also bought federal policies.

“The industry says it settled 97 percent of claims, but even if that’s accurate, that doesn’t measure satisfaction,” he said, adding during his later rebuttal that “closed claims doesn’t mean happy people.”

“There are a lot of miserable people down in Louisiana and Mississippi,” he said. “There were a lot of claims of wind battering a house for hours prior to any flood coming on that were never even adjusted and were denied from afar. That is no way to treat policyholders.”

Mr. Hartwig, however, counterpunched that “insurers are rightfully and justifiably proud” of their performance following Katrina, noting that the industry paid out some $41.1 billion on 1.75 million claims.

“The real tragedy,” he said, “is simply too few people who needed federal flood insurance bought it.”

He said that only a tiny percentage of claims have been subject to litigation, while noting that “insurers did prevail on virtually every major court decision on the wind-versus-water issue, with rulings that storm surge and levee breaches are in fact forms of flooding.” He added that insurer flood exclusions were ultimately found to be unambiguous and binding.

Mr. Hunter, however, took insurers to task over the anti-concurrent-causation clause in many homeowners policies, which rules out wind-related coverage if uninsured flooding also caused damage, calling the ACC clause “intellectually dishonest.”

“I can’t believe the insurance industry would put in such a devious and underhanded provision,” he said.

In rebuttal, Mr. Hartwig said there were “tens of thousands of cases where homes were flooded, but insurers paid the proportion of losses associated with wind and made every good-faith effort to distinguish wind-versus-water damage. There is no evidence insurers dumped wind claims on the National Flood Insurance Program.”

PROFITABILITY

The next round focused on whether the insurance industry is too profitable, as critics contend, or not profitable enough, as many within the industry and Wall Street community assert.

Mr. Hartwig said the “notoriously cyclical” property-casualty sector “still underperformed the Fortune 500 group for the 19th consecutive year” when it comes to return on equity.

“Critics focus naively on the dollar amount in aggregate profits for the entire industry,” he said. “That’s inappropriate. You need to look at individual profits for specific types of insurance in particular markets over time.”

He said results for Florida homeowners insurers, for example, have been “downright miserable,” with carriers on the whole losing $10.7 billion since 1992.

Mr. Hunter, however, argued that many individual carriers have in fact returned far better returns than the Fortune 500, adding that it is misleading to include mutual insurers in an industrywide comparison to a broader group of publicly traded noninsurance firms.

“Isn’t it time to do the calculation correctly?” he said, adding that under any scenario, insurance should deliver a lower return since they face a “below-average risk,” citing the industry’s profitability even during major catastrophe years.

Mr. Hartwig countered that “it is appropriate to include mutuals’ profitability because they make up half the industry’s business. They are gargantuan players.”

Mr. Hunter retorted that “catastrophe insurers are overcapitalized, which has depressed their returns,” citing recent share buybacks as proof.

He added that “consumers want insurers to be profitable but also want them to be efficient, but now they are returning only 50 cents on the dollar in claims,” which he said results in “excessive” returns.

TERRORISM

With the House, Senate and Bush administration at odds over how long the federal government should continue to provide a federal reinsurance backstop and what exposures it should cover, Mr. Hunter said the Terrorism Risk Insurance Act—due to expire Dec. 31—“stands a real chance of not being extended.”

Mr. Hunter sounded as if he would not be sorry if TRIA, at least in its present form, is not renewed. “TRIA isn’t below-cost, it’s no cost—nada—for the industry,” he said. “Zero premium is an interesting concept.…Where do I tell consumers to apply for free auto insurance like insurers get free terrorism reinsurance?”

He added that “insurance companies decry subsidies when consumers supposedly get them,” citing insurer allegations that coverage for coastal properties is underpriced due to market restrictions imposed by state lawmakers. “But when it comes to subsidies for them, they gleefully lobby for and accept them.”

He said at least $4 billion collected for terrorism-related exposures by private carriers “should be in the U.S. Treasury to cover losses” in case of another major terrorism event.

But Mr. Hartwig argued “there is no subsidy because the federal government has paid nothing. Plus there is an industry retention in place so high today [for private insurers] that in 99 percent of scenarios, [TRIA] doesn’t even wind up costing the federal government anything.”

Mr. Hunter countered that “it is astonishing to hear that since there is no claim, there is no subsidy. I’ve never had a homeowners claim in 40 years. I want my money back.”

Mr. Hartwig said that “in more than six years after 9/11, the fact of the matter is terrorism is still uninsurable. We don’t know how frequent it is and what it will cost, so you don’t know what to charge.”

He added that “the private market has made it abundantly clear” it wants no part of terrorism exposures, particularly on the reinsurance side.

“You have to think of terrorism risk as an act of warfare, and war has never been insurable in the United States,” he said.

But Mr. Hunter asserted that private insurers “can cover conventional terrorism,” noting that models are in use to assess such risks. “Katrina losses were twice 9/11’s, and the industry handled that and still reported a record profit,” he said.

However, one of the few points of agreement during the debate was that private carriers cannot insure against massive nuclear, chemical, biological or radiological exposures, as TRIA extension legislation in the House would have them do.

As for those who say the federal government should have no role in terrorism reinsurance, “I have a four-letter word for you—Iran,” said Mr. Hartwig. “Say there is no TRIA and, as many people fear, the U.S. attacks Iran. The likelihood of a terrorist attack in this country would go through the roof, yet millions of businesses and workers would be left unprotected [without TRIA].”

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Mr. Hartwig and Mr. Hunter had plenty more to say about Katrina claims, terrorism coverage and insurer profits than we have space for here.

They also clashed over the merits of using credit scores as an underwriting and pricing tool for insurance, as well as whether insurers would be better regulated by the federal government rather than individual states.

To hear the full debate, register for NU’s Virtual Conference by clicking here.

Registration is free, and is available until Feb. 16, 2008.

Beyond the “Battle of the Bobs,” NU’s first fully online conference featured sessions on enterprise risk management, fraud control and predictive analytics.

In addition, NU’s commercial insurance agency of the year and workers’ comp risk management award winners shared the secrets of their success. You may go to online to hear any one of the sessions.

A virtual exhibit hall is also available.