NAII Gets Down to Serious Business at 56th Annual Meeting

Just two months after the Sept. 11 terrorist attacks on the U.S., those acts and the potential for others have become a part of the collective American consciousness. And the insurance industry ranks among those most deeply impacted by the tragedies.

This fact was abundantly clear at the 56th Annual Meeting of the National Association of Independent Insurers (NAII), held Nov. 4-7 in New Orleans. In fact, this year’s meeting was probably one of the NAII’s largest on record. Apart from the usual number of members who attended, an especially high number of reinsurers flocked to the meeting. These, along with the brokers, intermediaries and underwriters in attendance, numbered at least a couple of thousand, making areas of the Sheraton New Orleans a veritable sea of people during most of those four days.

According to Jack Ramirez, president and CEO of the NAII, this year’s meeting was especially significant for several reasons. First, it provided an essential opportunity for reinsurers and primary insurers to transact business. “With all the uncertainty over the reinsurance market, this was a great opportunity for them to get together face to face,” Ramirez said. And while that happens at every NAII annual meeting, the need to connect was even more urgent this year. Apart from the fact that several other large insurance meetings have been cancelled in recent weeks, there has been a great deal of activity in Congress with regard to the Sept. 11 events.

“The other thing is we put on…excellent people to discuss these issues,” Ramirez said. And though not planned that way, the terrorism issue became the central theme of the meeting.

Among the highlights of these presentations were addresses by journalist George Will, a columnist for The Washington Post; Tony Snow, a political analyst and public affairs program host for FOX News; and political consultant and former Clinton campaign manager, James Carville.

Another highly anticipated address was given by Alice Schroeder, a principal with Morgan Stanley Dean Witter and Company, who covered topics including the insurance industry’s performance since the World Trade Center attacks; facts and trends in the future of the industry; and the industry-related terrorism bills currently working their way through Washington.

“For most of you, since this has happened, it’s been like having six jobs at one time,” Schroeder told attendees. “Everyone I’ve talked to in the industry said they’ve been working around the clock, trying to deal with a whole multitude of new responsibilities.”

Schroeder noted the great number of insurance professionals lost in the attack—losses which are not very well understood outside the industry. She added that even as the industry tries to rebuild from the losses directly associated with the events of Sept. 11, it has the enormous responsibility of helping all attack victims pick up, repair and recover.

The industry also has a much more difficult task—to put a financial price on terrorism and to tell people to expect to pay more for insurance. “At the same time, the economy is struggling, and people don’t feel they can afford to do that,” Schroeder said. Furthermore, the industry must accomplish these difficult tasks at a time when it is struggling to reassess its own future.

Schroeder said one healthy outcome for the industry in the long run could be the trigger of some necessary restructuring. However, she also predicted many more WTC losses are yet to be reported. Only $22 billion have been reported to date, and, ultimately, there may be $50 billion or more. Schroeder opined that some expectations that 2002 will be a good year for earnings may not transpire for all companies or to the full extent that some believe.

Schroeder also noted, “For insurers, public confidence in your liquidity is what determines your solvency. Companies that have strong balance sheets, therefore, are in the best position in this environment. Reinsurance-dependent strategies are vulnerable now that the cost of reinsurance is likely to go up significantly, and its availability is less. The downside to depending on reinsurance has always been that part of your capital and how it’s used is not under your control. Reinsurance is now asserting their control over that capital.

“[Also] insurers are likely to go through rapid strategic changes as a result of the attacks,” Schroeder continued. “We’re already seeing sales of subsidiaries, consolidation… And especially people jumping ships to go to different jobs.”

Schroeder emphasized that the government should not be blamed for its inability to protect the public from terrorism. “Terrorism can be managed, but today the weapons terrorists can use involve things like biochemistry and, therefore, can have a very large impact on our society,” she said. “The consultants have stressed to us that, in fact, we are entering a new Cold War era, and it may last 30 or 40 years.”

Schroeder also said the industry, as it lobbies in Washington for assistance, has to walk a very fine line in its behavior. “There is an issue here—that on the one hand the industry is saying it didn’t really suffer any damage, and, on the other hand, is asking for help. I don’t think the industry has completely finished the job in explaining why terrorism is different and needs protection when major events occur. I’ve been really proud of how the industry has been conducting itself in the aftermath of Sept. 11. I would just hate to see something evolve out of this where it actually discredited the industry and undermined the confidence of the public.”

During his own formal address, Ramirez focused briefly on the issue of modernization of the insurance regulatory system, which, with changes in priorities occurring since Sept. 11, has begun to be viewed in a new way.

Ramirez raised the question of how the debate over federal terrorism reinsurance legislation will affect the outcome of the larger debate on regulatory modernization and possible federal regulation. As of Nov. 12, there were two Senate proposals and one House bill regarding federal terrorism reinsurance legislation.

“It could make federal regulation more likely,” he said. “It raises the profile of insurance issues in Congress once again. If there were a large event, and any of these bills kicked in, you would have to basically gear the federal process to try to make this thing work. That would—whether you want it to or not, whether or not the Treasury Department tries to keep it a minimum—provide more federal involvement.”

The flip side is that the terrorism issue has changed the priorities of Congress, which will work on it this year and will probably have to work on it for at least the next couple of years. “The optional federal charter and the other alternatives are going to be pushed down the priority list,” Ramirez said. “They won’t have time or perhaps the inclination to get to them.”

Ramirez added that perhaps most importantly, through the whole process, the administration has indicated it supports state regulation and doesn’t want a federal regulatory infrastructure built for the terrorism bill.

“The industry has performed well,” Ramirez said. “There are no complaints about how state regulation has handled matters up to this point…We see that these forces…might diminish the probability of federal intervention for several years…We’re working very hard with the NAIC and individual commissioners…to try to do everything we can to improve state regulation.”

Ramirez also discussed the public policy debate that has been ongoing for the last month regarding implementation of a federal terrorism reinsurance program. He noted the political developments of the weeks preceding the meeting, including action on Capitol Hill; the role of the NAII in the negotiations; the type of legislative solution that might be enacted before Congress adjourns; and the possible impact of these developments on future debates on insurance regulation.

He also outlined a set of principles adopted by the NAII Executive Committee to guide its public policy efforts with regard to the legislative solution to the terrorism reinsurance issue. Those principals call for a program that is simple and temporary, with the least federal regulatory structure and a definitive sunset; has credible retention levels, based on an individual company standard; is fair with respect to the retention, with no cross-subsidies; and is broad, including other uninsurable events.

Ramirez said the NAII had concerns with certain elements of the House bill, which still has the issue of being a loan repayment program rather than one where the government basically assumes some of the risk.

“[Terrorism] is not an insurable event because it can’t be predicted, and it can’t be priced,” he said. “It can’t be predicted in terms of severity, or when, where or how often it might happen. There’s no historical pattern that would tell how you price this going forward. That is why a government program of this kind is needed—similar to flood insurance.”

Ramirez added that the recent Senate Commerce Committee proposal “has a pool that would basically be used to repay to a loan from the government. It’s similar in that sense to the House bill, and we don’t like that provision. Using the pool is even worse because you have to pay in advance. Secondly, we have this cross-subsidy concern with respect to contributions to the pool by the various insurance companies.”

An important “changing of the guard” also occurred at the Annual Meeting; that is, NAII Chairman Steve Milne, president and CEO of Erie Insurance Group in Pennsylvania, finished his one-year term. Tony Nicely, chairman, president and CEO of GEICO, was elected to succeed Milne and immediately assumed his duties in that regard.

“Whatever the future holds…the NAII will continue to represent our companies and our industry with uncompromising fervor,” Milne said in his farewell address. “I have every confidence that at this time next year…this organization will still be standing strong.”