With a Republican in the White House and Republicans controlling both houses of Congress, prospects looked bright earlier this year for property/casualty insurers to achieve long-sought reforms of the civil-justice system. President Bush had made tort reform a major plank of his legislative agenda, and three bills—on medical-malpractice liability, class actions, and asbestos litigation—had received the approval of the Senate Judiciary Committee. But after a vigorous counterattack by trial-lawyer groups and organized labor, it now appears that only the class-action legislation has a clear chance of passage.
Still, insurance executives like Jeff Post, president and CEO of Fireman’s Fund Insurance Co., are sanguine despite the apparent setbacks. “The issue is now out in the open, and the American public is aware of the injustices of a system that, in the case of asbestos liability, rewards people who manifest no illnesses to the financial detriment of those who are truly sick,” says Post, a former CFO of the Novato, California-based insurer with $12 billion in assets and $4.3 billion in annual gross premiums.
Post believes Congress eventually will pass tort reforms because the economy depends upon insurance to grease the wheels of industry. “Without tort reforms, the insurance industry will cease to exist in this country,” he says. “The industry will simply disappear.”
Already, he says, several old-guard insurance companies are ailing or have failed under the weight of asbestos, environmental, and other liability losses, among them Reliance Insurance and Kemper Insurance. Meanwhile, many other insurers have curtailed their underwriting of liability lines, such as The St. Paul Cos., which stopped underwriting medical-malpractice insurance. “I was a medical-malpractice actuary at St. Paul in the 1980s and ’90s, and this line of business was our financial bread and butter,” says Post.
It’s not far-fetched to imagine insurers of other lines—from directors’ and officers’ (D&O) liability to workers’ compensation—following a similar path. But more problematic are the insurers that have been forced to curtail underwriting. In the 18 months ending in June, in fact, 44 insurance companies had been put under regulatory supervision or placed in liquidation by regulators, according to A.M. Best Co. The Oldwick, New Jerseybased rating agency says insurer-insolvency rates are at their highest level in 10 years—the industry failure rate was 1.03 percent in 2002 compared with 0.23 percent in 1999. Standard & Poor’s confirms the trend, downgrading the ratings of close to 30 insurers this year.
The problem, say rating agencies, is that insurers have not reserved enough cash to pay for past losses—particularly claims from asbestos and environmental litigation. The result, according to A.M. Best estimates, is that the industry is short some $80 billion. And the solution, insurers believe, is to temper rising jury awards in liability cases, arguing that it will stabilize more players and lead to lower premiums for buyers.
“When it comes to liability lines like D&O, product liability, or medical malpractice, our cost is essentially the cost of verdicts and settlements,” explains John J. Degnan, vice chairman of The Chubb Corp., a Warren, New Jersey-based insurer with $9 billion in net premiums written and $9 billion in revenues. “It is the fear and reality of outrageous liability judgments that has contributed to the dramatic escalation in insurance prices. If we can get the system fixed, we can more-predictably and more-appropriately price our products.”