Katrina, Asbestos, Soft Market Test Mettle of Today’s Bright CEOs

Industry pundits have praised today’s insurance chief executive officers as better informed and more disciplined than their peers of the past. The next few months may put that notion to the test as these leaders are forced to respond to Hurricane Katrina claims, tougher financial reporting requirements and soft market pressures.

Will they be able to maintain good returns despite the temptations of a soft market and the demands of Katrina?

The company chief executives at the annual meeting of the Independent Insurance Agents and Brokers of America in New York appeared hopeful if not certain that financial discipline would rule.

Yet they suggested that if financial strength is indeed maintained, it will be as much because CEOs fear going to jail than because of any superior intelligence.

Despite the tendency of carriers to “destroy value,” Allmerica’s Frederick J. Eppinger is a “big optimist” who thinks there are a number of forces working to keep insurers focused on their financial strength. Today’s leaders think more about the returns they are earning, the president and CEO at Allmerica Financial Corporation said. They also have more and better data at their fingertips and can gauge their business “by line, by region, by agent” and in a variety of other ways. “We know more,” Eppinger said.

Storms such as Katrina, legacy issues such as asbestos and the watchful eye of rating agencies also keep insurers trained on their finances, the leaders noted. But in the end, it may be the government that has the most effect, namely the Sarbanes Oxley Act with its strict reporting requirements and sanctions.

“SOX has put a renewed discipline around earnings,” commented Eppinger.

“Sanity will rule” in the era of SOX for one big reason: “If you do it wrong, you go to jail,” Charles M. Kavitsky, Fireman’s Fund president and CEO, added.

Westfield Group’s Robert J. Joyce agreed that insurers are “better prepared and better armed” to produce desired returns. “But the pressure is still there,” he cautioned.

Others agreed the pressure to lower prices to gain share would be felt. Kavitsky noted that one year ago after the four hurricanes hit Florida, “one would have thought that it would slow the soft market but it didn’t. It depends on the market; it’s not consistent.”

Axel P. Lehman, CEO of Zurich North America Commercial, acknowledged that reality but mixed in some hope. “911 did not change the insurance landscape but maybe this (Katrina) will,” he told agents.

As their claims adjusters and agents scurried to handle the record number of claims along the storm-ravaged Gulf coast, the CEOs expressed the hope that the public and private sectors will come together to find solutions on how to protect people living in high risk areas.

Safeco’s McGavick said that even though his company does not write a lot of business on the Gulf Coast, Katrina’s impact is “so large everyone is caught up in it” and that how the private sector responds should be a concern in Washington.

“It’s a fact that people like to live in geographically interesting places. But guess what? That’s where things happen; that’s why they’re geographically interesting,” quipped McGavick, who is expected to run for the U.S. Senate from the state of Washington.

“The country needs to have a discussion about how we are going to handle these events. It’s not just an insurance issue,” agreed MetLife Auto & Home’s Mullaney.

McGavick said government can’t shoulder the entire burden of large catastrophes, making it all the more important that the policymakers in high risk states be more hospitable to the insurance industry. “We should want the private sector to be the lead responders,” said McGavick.

Comparing Katrina to other catastrophes, Eppinger cited how Katrina differs from other recent storms in its impact. “The magnitude of the uninsured is different with Katrina,” Eppinger said. “One thing I hope comes out of this is that we can collaborate better on how to solve the issue of protecting people who live along the coasts.”

The CEOs questioned the nation’s readiness to respond to another terrorism attack and Kavitsky expressed concern over the failure of Congress to thus far renew the Terrorism Risk Insurance Act. “You would think that there would have been a reaction after the bombing in London,” he commented. Given the lack of response, he said his company and others have to plan as if there will be no federal backstop.

Metlife Auto & Home’s president, William J. Mullaney, urged the industry to focus on its own response to Katrina and disasters. “This is the Super Bowl for us, an opportunity to show what a terrific business this is. We should all be proud,” he said.

Robert Rusbuldt, IIABA’s chief executive and panel moderator, changed the subject by raising the matter of compensation disclosure by agents in reaction to the investigations by New York Attorney General Eliot Spitzer. Rusbuldt reported on a proliferation of company disclosure mandates lacking uniformity. He said agents are worried they might face 12 different companies with 12 different disclosure mandates.

Mayor Giuliani

By the next day, the convention had returned to the subjects of leadership and catastrophes when Rudy Giuliani, former mayor of New York City, addressed the crowd. “You need a great team to be an effective leader,” he stressed as one of his six principles of leadership.”

During a question and answer segment, Giuliani appeared to endorse some form of government role in terrorism insurance.

“There is a role for federal government. We are one nation…and something that happens in one section of the country can affect others,” responded the former elected official who now runs a risk and crisis management consulting firm and is considered a potential presidential candidate. He said the federal government has a role to play in both training first responders to a crisis and in backing up insurance.