Fears Mount over Brewing Insurance Crisis

By Nash, Nathaniel C. | THE JOURNAL RECORD, April 6, 1989 | Go to article overview

Fears Mount over Brewing Insurance Crisis


Nash, Nathaniel C., THE JOURNAL RECORD


WASHINGTON - Concern is mounting among public officials and analysts that a financial crisis is brewing in the insurance industry.

Losses are growing, though they are still modest compared with the entire industry's assets. But some federal and state government officials are warning that a number of problems could combine to create a significant crisis, including a lack of adequate state regulation, low levels of capital, excessive risk-taking by underwriters, weak managements and evidence of illegality.

The vast majority of the industry's 3,800 members are sound, they note, including almost all of the largest corporations. But more and more seem to be in trouble.

``The industry has some very serious problems,'' said William M. McCormick, chairman of the Fireman's Fund Insurance Co. ``The regulation of the industry is not enough. There is not enough preventive action before an institution gets into trouble.''

The public is primarily affected in two ways when an insurance company becomes insolvent. Policyholders run the risk of not getting their claims paid, and to the extent that the cost of the insolvency is borne by the healthy segment of the industry, insurance costs can rise.

Some analysts and government officials are concerned that the pattern is similar to that of the savings and loan industry in the early 1980s - lax regulation, low capital requirements, overvalued assets and a trend toward lenient accounting methods.

McCormick, for one, did not object to the comparison.

Yet the losses are nowhere near the $100 billion lost in th savings industry to fraud, mismanagement and the economic depression in Texas, and there is no threat of having to tap taxpayer funds to pay for the problem.

McCormick noted that the rising number of insolvencies is a crucial barometer. Indeed, there have been an average of 18 insurance failures in each of the last four years.

During the 1970s, the average was five a year. And the cost of the insolvencies has risen dramatically.

From 1969 through 1983, state guarantee funds, which pay off claims in the event of an insolvency, assessed healthy insurers a total of $454 million to cover claims of insolvent members. But in 1987 alone, the total assessment was nearly $1 billion.

Moreover, since 1985 the industry has experienced its most costly insolvencies, including the 1985 collapse of the Transit Casualty Co. of Los Angeles, which is estimated to have cost more than $1.5 billion, and the 1987 collapse of the Mission Insurance Co. of Los Angeles, at a cost of more than $1 billion.

Contributing to the insolvencies is the riskier economic environment confronting the insurance industry and growing competition, which is creating price wars, leading companies to charge rates that are not sufficient to cove the economic risks involved.

Premiums provide one source of the industry's income, but an even larger share comes from investment earnings, and there are problems there, too. …

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