WASHINGTON - Concern is mounting among public
officials and analysts that a financial crisis is brewing in the
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
Premiums provide one source of the industry's income, but an
even larger share comes from investment earnings, and there are
problems there, too. …