Recovery From Adverse Conditions on Minds of IIS Seminar Attendees

The International Insurance Society’s 39th Annual Seminar, held in July at New York’s Waldorf Astoria Hotel—differs from other big insurance gatherings. It brings together CEO’s, top managers, academics and executives from the big four accounting firms, to discuss the current industry conditions, problems and possible solutions, with an with emphasis on the macro aspects rather than the micro.

This year’s event featured the inauguration of the Insurance Hall of Fame in New York, a black tie dinner and a gala farewell dinner at the U.N. It was perhaps a bit less international than it could have been, however. A large majority of delegates came from the U.S., and, while executives from most of the world’s biggest companies attended, a lot of CEO’s from some of Europe’s largest companies stayed home.

Gordon Stewart, IIS Board president and head of the conference organizing committee, set the tone, reminding the 650 plus attendees of the “critical role” the industry plays in assuming society’s risks, a poignant observation in the city that suffered the Sept. 11 attacks. Over the next three days the conference covered a range of industry concerns—topping the list, according to a delegate survey, was “Recovery from adverse political, economic and market conditions.”

The roster of speakers was a virtual “who’s who” of industry leaders. The first day, after a keynote speech by NYC Mayor Michael Bloomberg, Douglas Leatherdale, former CEO of the St. Paul Companies and current IIS chairman, introduced AIG’s Maurice “Hank” Greenberg, Ewald Kist, CEO of the Netherlands ING Group, and Kunio Ishihara, the president of Tokio Marine and Fire (part of the Millea Group).

“Divergence is not good,” said Kist, referring to the current differences, political and otherwise, between the U.S. and Europe. In response to a question he noted that the two are converging economically and therefore need to “accept and agree with one another.” To do that a broader dialogue is urgently needed.

Insurers are specifically worried about differing accounting standards (U.S. GAAP vs. IAS rules), corporate governance rules and changing demographics (aging populations, etc.). After discussing the current state of the Japanese market, Ishihara stressed the need for transparency and the necessity of creating business models that address capital problems by concentrating on “asset liability management” that are not “fragile to business risks.”

Greenberg emphasized the changes wrought by the Sept. 11 attacks, which he feels have reduced risk management flexibility and made it more passive. “Our job is to manage change,” he said, adding that in the last three years there have been quite a few. He also pursued some of his favorite bugaboos—the U.S. tort system and the need to reform class action lawsuits, the recent calls for outside corporate directors (unjustified), regulations to implement “fair value accounting,” which he said “has no place in the insurance business,” and the apparent failure of any meaningful legislation to control runaway asbestos claims.

In the question and answer session that followed all three men expanded on their original remarks and emphasized the industry’s need to adapt to the changed circumstances, primarily by emphasizing underwriting discipline, and recognizing that it’s no longer possible to rely on investment returns to make up for underwriting losses.

As CEO’s of three of the largest global insurers, Kist, Ishihara and Greenberg emphasized their commitment to assuring the future leadership of the industry. Kist stressed that future executives will need a broad education with multiple job experience, a good knowledge of information technology and personal integrity. He also said the industry should increase its efforts to recruit more women. Ishihara, one of the first men from the technology sector to command a major insurer, agreed with Kist, and indicated that managers should have the ability to “read the future.”

Greenberg, who could give even experienced politicians a lesson in sound bites, called for more emphasis on leadership quality, knowledge, energy and commitment, and likened the search for that kind of talent as “no less than looking for a white blackbird.”

In a session concentrating on the issue of corporate governance in the wake of the Enron, World Com, Tyco and other scandals, Lord Colin Sharman, chairman of the U.K.’s Aegis Corp. and Zurich Financial Services CEO James J. Schiro addressed problems that included how to keep management honest, how to help company leaders deliver on their promises and how to adequately reward them for doing so, without stifling the “entrepreneurial flair” that introduces needed innovations. “You need to create an environment that encourages it,” Sharman said, “but at the same time you have to control it.”

They indicated that the new rules don’t offer much of a solution, and emphasized the need to create the culture, the principles and the values within the company, i.e. “principles, not rules.” They also expressed concerns, as did other speakers, including Greenberg, about the added burdens of compliance imposed by the new strictures and the increased costs of implementing them. Schiro noted the increasing pressures in many companies to separate the functions of CEO and chairman of the Board—leaving the former to concentrate on running the business, while the latter deals with compliance issues, shareholder concerns and long term planning.

At a press conference following the session XL CEO Brian O’Hara noted that “during the ’90s bubble underwriting discipline practically went away,” now the industry is facing “D&O and E&O claims in the billions,” plus new corporate governance rules and the runaway U.S. tort system, all of which are having “a big negative impact on the industry.” The other panelists, ING’s Kist, Sun Life of Canada chairman Donald Stewart and Klaus Dorfi, chairman and CEO of Atlantic Mutual, agreed. Kist pointedly stated that a major factor in ING’s decision to exit the P/C business in the U.S. and to concentrate on the life and asset management sectors had been the concern over tort liabilities. The panelists also largely agreed that the “Sarbox reforms” (the new rules mandated by the Sarbanes-Oxley Bill) would probably cause companies to be more cautious, but would not solve the governance problems. Ultimately the only way to address the problem is to instill managers with a real sense of the responsibility they bear.