TIME - Man of the Year/CompactPublishing-TimeMagazine-TimeManOfTheYear-Win31MSDOS.iso/moy/101292/1012200.000

Text File | 1993-04-08 | 10.0 KB | 197 lines

                                                                                BUSINESS, Page 74

Through the Roof


A string of disasters is wreaking havoc on property-casualty
insurers, but policyholders are the ones likely to pick up the
tab
By THOMAS MCCARROLL


    In the days immediately following Hurricane Andrew's
deadly visit to South Florida, Allstate Insurance hastily
dispatched more than 2,000 extra claim adjusters to the
devastated area to assist the 200 stationed there. Many of the
reserves arrived in convoys of motor homes. Others flew in from
as far away as Alaska and California. Since the storm had
knocked out telephone lines, Allstate rushed to set up its own
communications system, consisting of 80 shortwave radio units,
850 pagers, 173 cellular phones and a toll-free number. Allstate
expects to pay out $1.2 billion to cover more than 121,000
damage claims as a result of Andrew.

    All told, U.S. property and casualty insurers have been
hit with more than $8 billion in Andrew-related claims, makthe
hurricane the most costly single calamity to strike the industry
since the San Francisco earthquake and fire in 1906 (cost: $6
billion, after inflation). With claims continuing to pour in,
Andrew threatens to take a painful toll on the already battered
property-casualty insurance industry and its 100 million
policyholders. The final bill, analysts predict, is likely to
top $10 billion. While most well-capitalized insurers are
expected to weather the storm, less anchored firms are in danger
of being blown away, leaving consumers stuck with the tab. Says
Sean Mooney, senior researcher at the Insurance Information
Institute: "It will take years before the industry digs itself
out from the wreckage left by Andrew. Some [companies] will
be buried by it."

    Hurricane Andrew is the latest in a string of mishaps to
plague the insurance industry this year. In April an overflowing
Chicago River flooded the city's downtown district, costing
insurers $300 million in claims. A month later, Los Angeles was
rocked by the worst civilian riot in the U.S. since the Civil
War. The insurance toll: $1 billion. Then came a series of
major hailstorms in Texas, Florida and Kansas. They cost
insurers a combined $700 million. And two weeks after Andrew,
another lethal hurricane, Iniki, smashed into Hawaii, causing
$1.4 billion in damages. In all, property and casualty insurers
have paid out a record $13 billion in claims so far this year,
far surpassing the previous high of $7.6 billion in 1989, the
year of Hurricane Hugo and the Bay Area earthquake. Just as in
that year, when those catastrophes were followed by substantial
increases in insurance premiums, insurers are already lobbying
for rate relief.

    The spate of disasters comes as the industry as a whole is
struggling to cope with a series of cataclysmic burdens. Life
insurers, for instance, have their hands full with the AIDS
epidemic, which is costing the industry more than $1 billion a
year. Mounting product-liability claims, including asbestos and
pollution damages, are running at $10 billion annually. Insurers
are also still recovering from a decade's worth of bad
investments in savings and loans, junk bonds and real estate.
Says Roger Joslin, chairman of State Farm Fire & Casualty: "This
traumatic period is unprecedented in the history of the
insurance industry."

    Perhaps the most traumatized have been property-casualty
insurers, which account for 33% of the industry's revenues of
$700 billion. Even before Hurricane Andrew, trouble was brewing.
It took Andrew, however, to expose the industry's shortcomings
and unmask the weaker players. Such major insurers as State Farm
(surplus capital: $18 billion) and Allstate ($8 billion) will
have enough financial staying power, but some less capitalized
firms are getting wiped out. Last week the Florida department
of insurance seized two insolvent insurers, Florida Fire &
Casualty in Fort Lauderdale and Great Republic in Miami, and
placed about a dozen others on its "watch list." MCA Insurance,
a division of Tulsa-based Thrifty Rent-a-Car, was placed under
supervision by Oklahoma regulators after it was overwhelmed by
$30 million in Andrew-related claims. States typically bail out
failed firms through guaranty funds financed by assessing a fee
on other insurers.

    Despite being well cushioned, large insurers are also
coming under scrutiny. Moody's Investors Service, a top Wall
Street investment-rating agency, last week lowered the credit
rating of Sears, Roebuck because of losses at its Allstate
Insurance unit. The action took place just before Sears
announced its decision to sell off 20% of the big insurance
company in a spin-off of the retailer's financial units.
Prudential Insurance, which injected $900 million in capital
into its property-casualty division after it was hit with $1.2
billion in Andrew-related claims, was placed on review by both
Moody's and Standard & Poor's. E. Michael Caulfield, president
of Prudential Property & Casualty, argues that the moves are
unwarranted considering the industry's large capital base. "Wall
Street is overreacting because the numbers are so big and
scary."

    Few analysts expect that insurance failures will occur on
the scale of the savings-and-loan crisis. Insurance firms tend
to stand on a more solid financial footing than banks and
thrifts. State regulators generally require insurance firms to
keep on hand $1 of capital for every $3 of outstanding
obligations, compared with a ratio of 1 to 12 for banks.

    Even so, analysts are concerned that the industry's
exposure to Hurricane Andrew will grow as households and
businesses gather more information about their losses. Many
insurers have already had to increase their damage estimates.
State Farm, the largest insurer in the area, with 23% of the
South Florida market, raised its loss estimates to $1.5 billion
from $750 million. ITT said last week that it would take a net
charge of $582 million against third-quarter earnings to cover
losses in its Hartford insurance unit. Hartford's claims from
hurricanes Andrew and Iniki total $95 million.

    Ironically, after the claims are paid, Andrew and the
year's other disasters could eventually spell relief for the
remaining healthy insurers. Before the storms hit, the industry
had been embroiled in a long and painful price war. Since 1987,
property-casualty premiums paid by households and businesses
have dropped an average of 40%. The intense discounting, and the
sluggish profits that went with it, has touched off an
industrywide shake-out. State Farm, the nation's largest
property-casualty insurer, has racked up underwriting losses of
$7.2 billion in the past four years, due largely to price
competition and rising claims. In response to softening
profitability, Aetna Life & Casualty will pare 4,800 jobs from
its payroll by 1994, including 2,600 this year. Some insurers
are even abandoning the market. Transamerica put its
property-casualty division up for sale two months ago. So far,
no takers.

    Fortunately for the industry, costly catastrophes tend to
extinguish price wars by squeezing discounters out of the market
and by presenting survivors with a can't-miss opportunity to
raise rates. In the aftermath of Hugo, South Carolina premiums
increased an average of 3.5%. Most analysts expect rates in
South Florida to rise at least 10% in 1993, meaning the average
annual premium for homeowners will reach $440. Average
auto-insurance rates could hit $1,050 next year, up $50 from
1992. However, a senior-level insurance executive contends that
insurers would be justified in doubling or tripling prices in
all coastal areas that are potential hurricane tar gets, given
the industry's exposure to claims in those regions.

    Before raising rates, though, insurers must persuade state
regulators of their need to do so, and that won't be easy in
Florida and Louisiana. Two days after Andrew struck, the
National Insurance Consumer Organization disclosed an
embarrassing internal memo from Jeffrey Greenberg, executive
vice president of American International Group. In the Aug. 26
memo, Greenberg described the storm as "an opportunity to get
price increases now." He urged AIG executives to prepare clients
for a rate boost. "Please get it moving today," he wrote. The
memo touched off a maelstrom of outrage. Insurance commissioners
in Louisiana and Florida immediately slapped a 60-day freeze on
AIG's rates. Florida insurance commissioner Thomas Gallagher,
who launched a probe into AIG's rate-setting practice, also sent
letters to the chief executives of the state's 780 licensed
insurance companies warning them that regulators "will reject
any effort to take advantage of consumers."

    Consumer groups oppose any attempt by insurers to spread
the costs over the whole U.S. marketplace. Says J. Robert
Hunter, head of NICO: "The industry wants all of America to pick
up the tab." Insurers deny the charge. Says Edward Young, a
group vice president at Allstate: "Rates in Georgia aren't going
up because Florida had a hurricane." Another question is
whether regulators will allow insurers to charge more in order
to replenish their surplus capital. Property-casualty insurers
in the U.S. have a total of $160 billion in surplus capital.
Analysts estimate that the firms will need to set aside an
additional $40 billion in capital to replenish reserves after
this year's stretch of disasters. While most firms will be able
to fortify reserves without endangering their net worth, many
fringe firms could face insolvency. In those cases, state
regulators may be called in to fill the void through guaranty
funds.

    The industry will be helped by the continued
consolidation. With fewer players, especially discounters, price
wars are likely to come to an end. The loser, though, could end
up being consumers, who will face higher prices and fewer
bargains -- especially in hurricane country.