Claimants against insolvent insurer Legion will be able to recover directly from captive reinsurers for which Legion served as a fronting company. Koken v. Legion Ins. Co. et al, NO. 218 MAP 2003 (July 19, 2005)
The decision came over a dissent by Madame Justice Newman, in which the Justice said: "Because Section 534 of the Insurance Department Act explicitly prohibits an insured from obtaining direct access to reinsurance funds absent express language in the provisions of the reinsurance contract, I believe that we must reverse the Orders of the Commonwealth Court to the extent that they permit such erroneous direct access.
See also the decision below: Koken v. Legion Ins. Co., 831 A.2d 1196 (Pa. Commw. 2003)
(Commissioner’s decision to liquidate insolvent insurers and trigger guaranty funds contested by principal shareholder. Insolvents acted either as “fronting companies” on numerous corporate insurance programs reinsured by captives or wrote large deductible policies on corporate risks and were reimbursed by affiliate that wrote a Deductible Reimbursement Policy. Corporate insureds that had such contracts with Legion were granted direct access to the reinsurance proceeds, and did not have to accept a delayed and reduced dividend from the insolvent estate of Legion.)
This year, they quietly began publishing an online newsletter with news of legal decisions and procedural developments in the liquidation of insurance companies that affect the various state insurance guaranty funds. State insurance guaranty funds are provided for by statute and are obliged to pay many of the ordinary insurance claims made against property-casualty insurance companies that have been placed in liquidation due to insolvency.
The current issue includes an update on Reciprocal of America, PHICO, Frontier, The Home, CRE/EMIC, and the latest financial reports from Legion Insurance Company. It includes a short report by Kevin Harris of transactions at the recent meeting of the National Conference of Insurance Legislators (NCOIL).
A listing of back issues (unfortunately without TOC or squibs of their contents) could be easier to find.
Property Casualty Insurers Association of America (PCI), a large association of property-casualty insurance companies, has proposed to Congress an alternative to the scheme set forth in the Terrorism Risk Insurance Act (TRIA) which is expiring. In its press release, PCI says:
"PCI’s market-based approach focuses on bringing additional capacity to the terrorism insurance marketplace by employing private market tools coupled with the certainty that can only be provided by high level federal government financial backing. The solution would spur insurers to enter the market, enable insurers to share or “buy down” their risk, and allow for the development of a catastrophe bonds market and similar facilities that would encourage greater private capital participation in the market."
A three-page outline of their proposal can be found in a " Key elements" PDF
The U.S. Treasury has also argued for significant changes in TRIA. See Unintended Consequences: Treasury Assesses TRIA: Revisions, Limits Needed
In "Who Bears the Risks of Terror," New York Times July 10, 2005, Edmund L. Andrews' provides a concise and readable "fly-over" of the principal issues in the debate over the future of TRIA. He notes a developing red state / blue state divide and the positions of Rep. Delay and Sen. Frist that the role of federal help "had run its course."Unintended Consequences: NYTimes on distributing risks of terror
Science writer Michael Balter reviewed the PBS special television program based upon Jared Diamond's "Guns, Germs and Steel" (Unintended Consequences, June 22, 2005). His review, "Is This How the West Won?" appears in the July 8 issue of Science.
Underpricing and under-reserving by well-meaning new players in the medical malpractice insurance marketplace often ends in financial disaster for the company, its policyholders and claimants. It is politically popular for regulators to play to those wanting to keep premiums down and to encourage self-insurers, physician-owned mutuals, reciprocals and risk retention groups. To often, those groups face an inherent conflict of interest between their mandate to "make affordable coverage available" and their obligation to obtain enough premium to cover all claims and contingencies.
That conflict becomes most acute during "crises" in which commercial insurers withdraw from markets that have become losing propositions for any financially responsible provider. It is economically vital that those that regulate insurance providers and the insurance coverages of health care providers also enforce the less popular legal requirements forbidding premiums that are "inadequate," to avoid melt-downs like MIIX Insurance, presently operating in "solvent runoff". N.J.'s Med-Mal Writer MIIX Continues in Runoff Without Guaranty Fund (Insurance Journal, July 21, 2005). The regulatory euphemism "solvent" runoff is ironic, considering that less than a year ago, MIIX had a negative surplus of some $300 million.
The story of MIIX Insurance could be added to a list of case studies in dysfunctional insurance management and regulation, joining the list with Reciprocal of America and many others.
Other online resources providing a timeline of the decline and fall of MIIX Insurance:
MIIX Group Reports Fourth Quarter Results, Announces Quarterly Dividend and Sets Record Date for 2001 Annual Meeting Investor's News at MIIX.com Website (2/22/01), in which management stated:
"Our written premium declined over $30 million in 2000 and we expect further reduction in 2001 as a result of our ongoing re-underwriting and re-pricing efforts. During 2000, we aggressively sought to eliminate unprofitable business and we will continue to focus on retaining and intelligently growing our business prudently and where opportunities exist. We believe that this bottom line focus will result in greater long term profitability, particularly in the current very hostile market climate."
"Our book value at December 31, 2000 exceeded $21 per share and we believe that the current trading range represents a significant opportunity for long term investors. We believe that reserve adequacy, debt leverage and management are key considerations when looking at MIIX as an investment. Our reserves continue to be carried at Company best estimate levels and at year end our gross loss reserves approximated $1.142 billion, of which incurred but not reported (IBNR) reserves represented $690 million, or 60.3% of the total, up from 58.1% at September 30, 2000 and 57.6% at June 30, 2000. Debt leverage at the Holding Company level approximated 2% and is not expected to increase in the near future. Lastly, the new MIIX management team has demonstrated its commitment to take the appropriate, often difficult actions to ensure the Company's long-term success."
MIIX Group Reports Third Quarter Results (reporting book value of over $23.00 per share) Investor's News at MIIX.com Website (11/1/01).
MIIX Announces Decision of Chief Financial Officer to Leave in March 2002 Investor's New, MIIX.com Website (12/21/01).
MIIX Group Reports Fourth Quarter Results Investors News, MIIX.com Website (Reporting reserve increases, $12/share net operating loss and book value below $10 per share) (2/28/02)
MIIX Group Reports Fourth Quarter Results Investor's News, MIIX.com Website (2/26/03). This year-end report blamed the sudden downturn on the necessity of increasing reserves for past policy years:
"For the twelve months ended December 31, 2002, the Company incurred a net operating loss of $107.5 million, or $8.03 per share, compared with a net operating loss of $149.6 million, or $11.06 per share, during the twelve months ended December 31, 2001."
"The Company's losses in 2002 are reflective of the turbulent legal and medical economic environments in the states where the Company wrote the majority of its business," stated Chairman and CEO Patricia A. Costante. "Results reflect fourth quarter gross reserve adjustments of $85.1 million, which are directly attributable to the continuing upward trend of loss severities to unprecedented levels. The reserve adjustments associated with the New Jersey physician market primarily relate to accident years prior to 1999 when the Company undertook an effort to restructure its New Jersey program. The continuing rise in loss severities in the fourth quarter to historically high levels follows loss and ALAE reserve adjustments made by the Company in the first quarter of $35.6 million and in the third quarter of $30.7 million."
The MIIX Group Announces Court Places Insurance Subsidiary in Rehabilitation. Investor's News at MIIX.com Website (9/30/04)
The MIIX Group announces bankruptcy filing. Investor's News at MIIX.com Website (12/20/04)
There's a graduate level case study in here somewhere.
Risk Prof Martin Grace suggested on Monday that TRIA support is a blue state issue, particularly for urban centers like New York City, explaining the outcries of NY senators in reaction to the Treasury Department recommendations against renewing TRIA in its present form. He suggests an objective analysis of the economics, including the external costs and benefits of subsidizing construction projects in NYC. RiskProf : TRIA--A Blue State Problem?
One of the considerations to keep in mind is the reaction of those that fund construction in NYC. According to the Congressional Budget Office, Federal Terrorism Reinsurance: An Update (January 2005) [hereinafter “CBO Terrorism Study”], following 9/11, banks did not tighten commercial lending requirements, even though the market for terror coverage dried up. Builders and developers were able to distribute risk through the use of REITs and mortgage-backed securities, plus requiring more developer equity in properties. All without terror insurance. Banks still loaned money on construction, according to the CBO study, which found no significant impact on construction hiring or construction loans. True, properties and securities that did not take such financial diversification measures suffered credit rating downgrades because of the lack of terror coverage.
If that is the case, the source of New York's concerns may be from small and medium sized businesses and construction interests who may not have access to the more sophisticated financial tools like mortgage-backed securities and REIT investment.
Should we continue the present approach, in which federal reinsurance is free? Expecting private reinsurance (from which the capacity for terror catastrophe coverage must come) to compete with a free federal product seems just silly to me. As long as the feds give away reinsurance, small and medium sized businesses will be dependent on the kindness of strangers in Washington. And those strangers will be dependent on their votes and campaign contributions.
"Who Bears the Risks of Terror" leads the Sunday Businss section of the Times today. Edmund L. Andrews' piece provides a concise and readable "fly-over" of the principal issues in the debate over the future of TRIA. He notes a developing red state / blue state divide and the positions of Rep. Delay and Sen. Frist that the role of federal help "had run its course."
Andrews compares impact of 9/11 on the insurance industry ($31 billion) with that of 1992 Hurricane Andrew ($20 billion). He also cites insurance industry funded reports by R. Glenn Hubbard (Columbia Univ.) and Kent Smetters (Wharton School). He also points to the debate over the impact on private markets of the presently "free" federal coverage, and also notes the possible negative impact on private security "hardening" that such subsidized protection may have.
An excellent article for the busy novice to this complex economic controversy.
Who Bears the Risks of Terror? - New York Times (Sunday Business page one, July 10, 2005).
For another perspective on terror risk distribution, see also this view:
"The administration seems comfortable with transferring risk away from taxpayers and into the private sector. Private insurers, in turn, will ask their actuaries to calculate the potential exposures (no easy task) and will then try to pass the added costs along to their customers. But which customers will be willing to pay? For insureds living in high risk areas, business owners are very likely to opt for terrorism coverage. But what about the machine shop in Leominster MA? Or the Midas Muffler franchise in LaGrange GA? The fact is, the vast majority of businesses are likely to decline coverage, because we all seem to think that most of the risk resides in the big coastal cities. That leaves the burden for coverage on a relatively small number of businesss: their costs will go through the roof, while the costs for everyone else will stay pretty much the same."
Found at: Workers Comp Insider - TRIA: Terror and Risk Transfer (July 7, 2005)
The Supreme Court's decision in Grokster left Sony in intact, but found it did not shield those who promote and encourage use of a product to infringe intellectual property. Euclid Managers Blog points out that "the case raised new concerns and considerations for some technology companies, particularly those whose product or service can be used for making unauthorized copies."
They go on to relate this to insurance costs for technology companies, saying:
"Companies may face a more fact-intensive examination of intent and objectives. That kind of lawsuit can make discovery more expensive, it can lead to more cases being filed for the purpose of going through the discovery process to see what’s there, and such a suit can be more difficult to defend. And summary adjudications may be more difficult to achieve in such cases.
Tech companies should be aware that someday a court may perform a balancing test of the product’s legitimate and illegitimate uses, and the standards that will be applied in that test are not entirely clear.
Predictability has gone down for developers, and their insurers, meaning that risk has gone up."
Source: Euclid Managers Blog - Home - Grokster, the Supreme Court and the Impact on Risk (June 30, 2005).
Insurance blogmeisters George Wallace and Bob Sargent have an ongoing discussion over the ethics and legality of duties and responsibilities of agents and brokers. This arises in the current controversy over undisclosed contingent commissions and other revelations in the insurance intermediary business. George himself acknowledges that the discussion has reached a level of dryness and complexity that one might think could frustrate the average state legislator. (See: Declarations and Exclusions: In Answer to Bob Sargent's Question . . .)
Perhaps this debate (and others like it) best demonstrates that this issue is too complex for the average lay person who is buying personal or commercial insurance to follow, even if they wanted to. The issue becomes much like insurance rates and forms. Decades ago, insurance regulators decided that rates and forms were too complex and variable for consumers to be expected to follow, and imposed regulations requiring that they be filed. Some states require them to be approved by a regulator before use, or subject to review after use. Some may also require affirmative non-waivable disclosures to insurance purchasers before or at the time of sale.
Has the time come to make similar provisions for the compensation terms of insurance agents and brokers? Or would such regulation stifle the creativity in the field that may be necessary to make a market? Perhaps in consumer lines a different argument could be made than in standard commercial or in specialty lines (such as those Bob Sargent focuses on)?
The NYC public transport network has failed to implement anti-terror security recommendations from a 2002 threat assessment, according to the New York Times. Until July 7, there might be a few clueless hermits who might argue that a bomb attack on underground transit facilities might be "unforeseeable." They would have to ignore a 1994 Manhattan subway firebomb, a 1995 sarin gas attack in Tokyo, and a 1997 attempt to bomb the NYC subway. After the London bombings on July 7, even the clueless should wake up and smell the C-4.
According to "M.T.A. Slow to Spend Money on Transit Security," (New York Times, July 8, 2005. page one), the failure of the MTA to even spend the $600 million recommended almost 3 years ago is due to a combination of technical problems, management glitches and inter-departmental issues. Much the same as the issues that left the occupants, police and firefighters in the World Trade Towers vulnerable before and after the initial crashes on 9/11.
The article quotes Senator Charles E. Schumer about progress on spending the money already available, Sen. Schumer said, "They've done a poor job spending their capital money. I understand they have long and elaborate procedures, but when it comes to homeland security we ought to speed things up a little bit."
In introducing the recent report on TRIA to Rep. Oxley, the Secretary of the Treasury expressed concern that without changes, another terror incident could provide a windfall to tort lawyers. Unintended Consequences: Treasury Assesses TRIA: Revisions, Limits Needed (July 2, 2005)
Martin Grace poses some questions over at PointOfLaw Forum: Terror Risk and the Trial Bar. Among them is: "So the question arises, if terrorists use an airplane in an unforeseeable way to kill people, should the airlines or the property owners be liable if they did not act unreasonably before the fact?" See also: RiskProf : Terror Risk and Tort Reform (July 1, 2005).
He's gliding past the hard question to get to an easier one to answer. For those who have to actually underwrite coverage, the harder question has to deal with the possibility that plaintiffs could convince juries that the risk of such an attack was foreseeable in 2001 and other attacks are now foreseeable. The use of a jumbo jet or a weapon of mass destruction as a terror weapon is hardly "unforeseeable."
It was 1991 when Tom Clancy wrote "The Sum of All Fears," hypothesizing a terrorist explosion of a nuclear device in a van parked at the SuperBowl. It was 1996 when he wrote "Executive Orders," hypothesizing the near-obliteration of the U.S. government when a rogue pilot flies a 747 into the U.S. Capitol during a joint session of Congress, after which a fundamentalist middle eastern nation launches a coordinated bioterror attack on the United States using the Ebola virus.
Apart from best-selling fiction, Richard A. Clarke's "Against All Enemies: Inside America's War on Terror" provides a first-person account of over two decades working on national security. In his excellent book, he makes clear that an attack like that of 9/11 was foreseeable. In "102 Minutes: The Untold Story of the Fight to Survive Inside the Twin Towers," Jim Dwyer and Kevin Flynn compile a compelling story from survivor accounts and records of calls and emails from those who died in the towers. "102 Minutes" documents ways in which shortcomings in management, staffing, communication and provisioning by state, federal and private sources led directly to the loss of life and property after the initial air strikes. Combined, these accounts, together with the official "9/11 Commission Report," provide support for a possible allegation of negligence in protecting against a known threat.
Could a jury find that the responses of private and government entities to such threats fell short of due care? I'm not confident that the answer must be "no," and until it is, the Secretary's concerns must be taken into account by those pricing insurance and reinsurance that includes such hazards. And, consequently, by those crafting legislation to make the market for such insurance feasible.
Connecticut AG Blumenthal recently slammed medical malpractice insurers for raising rates faster than current payouts are rising. According to Specialty Insurance Blog: Insurers are to Blame, he's citing a recent advocacy piece written by Jay Angoff, former Missouri insurance commissioner, a lawyer who represents trial lawyers and consumer advocacy groups. See: Illinois Civil Justice League: Will the REAL 'conflict of interest' be raised?
See: Attorney General Calls For Immediate Review Of Medical Malpractice Insurance Rates; Cites Troubling Consumer Report (Press Release from Conn. Attorney General July 7, 2005).
Advocacy pieces often overlook the sorts of long-range statistics that show that the insurance cycle lags the med mal expense cycle for many complex reasons. Advocates will frequently select a relatively small time frame to compare data, without referencing long periods in which insurance prices and profitability fell year after year until large insurers collapsed leaving hundreds of millions in claims unpaid.
Following such market collapses, reinsurers and surviving companies must rebuild reserves in order to gain enough strength to survive the next round of price wars, often initiated by government-subsidized insurance pools, JUAs and patient compensation funds. The key roles of below-cost providers (often physician owned) in aggravating the insurance cycle is well documented. Some of the objective, scientific studies are referenced in a recent working paper available on this website at: Unintended Consequences: Causes of the Medical Malpractice Crisis? (March 17, 2005.
Insurers have long made a convenient whipping boy for advocates seeking to avoid dealing with the complex issues of markets in long-tail lines in which governments periodically introduce below-cost competition. Its complicated by the special legal and accounting rules allowed (required) for insurers. Prof. Martin (author of the RiskProf blog comments on these regularly, such as in his guest post in: Evan Schaeffer's Legal Underground: Continuing the Med-Mal Debate: Insurance as a Whipping Boy? (Jan. 12, 2005)
Let us hope that Attorney General Blumenthal maintains his objectivity and reads more than one side of a complicated story in which the last four years' experience is only a small part of a much larger economic story.
The Organisation for Economic Co-operation and Development has released an extensive report on the availability of insurance coverage against terrorism. According to its abstract, the report finds that private sector insurance capacity is still limited and what is offered is not widely taken up by insurnce buyers. It cites estimates of $50 billion to $250 billion as potential maximum losses from a "mega terror" attack like that of September 11. It suggests possible changes in tax and accounting laws may be helpful, as well as public-private partnerships.
The report is offered for sale as a printed document or e-book, but journalists are invited to request copies.
From the letter of transmittal to Rep. Oxley:
"The attached report, based in part on surveys of the insurers and policyholders that were developed after extensive consultations with the National Association of Insurance Commissioners, policyholders, the insurance industry, and other experts in the insurance field, evaluates the effectiveness of TRIA in the context of the purpose of the legislation. The report finds that TRIA has achieved its goals of supporting the industry during a transitional period and stabilizing the private insurance market."
* * *
"It is our view that continuation of the program in its current form is likely to hinder the further development of the insurance market by crowding out innovation and capacity building. Consistent with its original purpose as a temporary program scheduled to end on December 31, 2005, and the need to encourage further development of the private market, the Administration opposes extension of TRIA in its current form."
"Any extension of the program should recognize several key principles, including the temporary nature of the program, the rapid expansion of private market development (particularly for insurers and reinsurers to grow capacity), and the need to significantly reduce taxpayer exposure. The Administration would accept an extension only if it includes a significant increase to $500 million of the event size that triggers coverage, increases the dollar deductibles and percentage co-payments, and eliminates from the program certain lines of insurance, such as Commercial Auto, General Liability, and other smaller lines, that are far less subject to aggregation risks and should be left to the private market."
"It is also important to keep in mind that the program would cover damages awarded in litigation against policyholders following a terrorist attack. Current litigation rules would allow unscrupulous trial lawyers to profit from a terrorist attack and would expose the American taxpayer to excessive and inappropriate costs. The Administration supports reasonable reforms to ensure that injured plaintiffs can recover against negligent defendants, but that no person is able to exploit the litigation system."