The Role of Governments in the Insurance Industry Royal Institute for International Affairs London, U.K. 2 December 2002 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected]www.iii.org If you would like a copy of this presentation, please give me your business card with e-mail address Download at http://www.iii.org
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The Role of Governments in the Insurance Industry
Royal Institute for International Affairs
London, U.K.2 December 2002
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
If you would like a copy of this presentation, please give me your business card with e-mail address
Download at http://www.iii.org
Presentation Outline
Changing Role of Government in Insurance
• Historical/Traditional Role of Government
• Is Role of Government Expanding/Contracting?
• Role & Rule of Government Beyond Direct Regulation
• Is ‘Insurance Regulation’ Obsolete or Marginalized?
• Summary & Conclusions
• Q & A
HISTORICAL ROLE OF GOVERNMENT IN
INSURANCE
Fundamentals of Insurance Regulation
Expanded View ofInsurance Regulation
Solvency
Rate/Form
ConsumerProtection
Traditional
PublicPolicy
PoliticalAgenda
Political
Pools
GuaranteeFunds
(Re)insurer ofLast Resort
Ancillary
Mitigation/Safety
Taxes/Fees &Assessments
Stimulative
Fiscal
IncomeRedistribution
Source: Insurance Information Institute
Rationale for Insurance Regulation
Why Should Insurance be Regulated?
• Contrary to public belief, there is no “right” to insurance
Therefore need justification for existence of regulation
• Frequently cited reasons are market imperfections (e.g.,
Government outlays for social security as a % of GDP will
increase by 52% by 2035
US Old-Age, Survivors & Disability Insurance Expenditures as % GDP
(“Social Security” Program)
Bush plan to “privatize” social security on indefinite hold. Time is “not ripe.”
The Texas Takeover & Maryland Maneuver
Dramatic Examples of Expansion of State Control• Texas: Dysfunctional homeowners insurance market
3.5 million HO policyholdersHistorically most expensive state to insure home (severe
windstorm, hail, tornado threat; high freq. of water claims)95% homes insured via “county mutuals”: not rate regulated ‘Toxic’ mold problems crisis of availability/affordabilityBecame major issue in campaign for governorProposals to ban county mutual/implement rate regulation
• MarylandState forced struggling insurer to provide terror coverage on
state property
Contractionary Influence of Government on Insurance
Govt. Contraction/Liberalization/Harmonization
• EU Directives
• Japanese “Big Bang” (1996)
• Harmonization efforts in US after Gramm-Leach-Bliley
• Opening of Chinese market (esp. post-WTO)
• Support of ART (generally), esp. captives
Strong interest in some states in domestic captives (e.g., Vermont)
ROLE/RULE OF GOVERNMENT BEYOND DIRECT REGULATION
Monetary/Fiscal PolicyRegulation of Securities IndustryJudicial SystemTaxationTrade PolicyNational Security & Defense
• Insurers exposed to a wide variety of risks: Investment risk (as institutional investors)
Insurance risk (surety, D&O, E&O, etc.)
Litigation risk (as both plaintiff & defendant)
Accounting Risk
Regulatory risk
• Outcome of corporate governance issue hinges most critically on
regulatory reform and enforcement in the securities industry: Insurers have little, if any, say in this debate
Enron-Related Losses for Insurers
Source: Loss estimates from Morgan Stanley as Feb. 8, 2002; Insurance Information Institute.
Surety26%
Multiple7%
D&O1%
Fin. Guarantee
2%Investment
64%
Total Exposure (Life & Non-Life): $3.796 BillionEnron is the biggest bankruptcy in US history ($31B+)
Equity/debt widely-held as S&P 500 company
Biggest impact in institutional investors/creditors
11 Congressional investigations
56 suits against officers & directors
Will spark similar suits
Average U.S. Jury Awards1994 vs. 2000
419759
187 333
1,140 1,185
1,744
1,168
1,727
269698
3,482 3,566
6,817
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
Overall BusinessNegligence
VehicularLiability*
PremisesLiability
MedicalMalpractice
WrongfulDeath
ProductsLiability
($00
0)
1994 2000
Source: Jury Verdict Research; Insurance Information Institute.
Cost of U.S. Tort System($ Billions)
Source: Tillinghast-Towers Perrin; Insurance Information Institute estimates for 2001/2002 assume tort costs equal to 2% of GDP. 2005 forecasts from Tillinghast.
$129 $130$141 $144 $148
$159 $156 $156$167 $169 $179
$198 $204
$298
$0
$50
$100
$150
$200
$250
$300
$350
90 91 92 93 94 95 96 97 98 99 00 01* 02E* 05F
Tort costs consumed 2.0% of GDP annually on average since 1990, expected to rise to 2.4% of GDP by 2005!
Tort costs equaled $636 per person in 2000!
Expected to rise to $1,000 by 2005
Who Will Pay for the US Asbestos Mess?
Source: Tillinghast-Towers Perrin; Insurance Information Institute
US Insurers30%Asbestos
Defendants39%
Foreign Insurers
31%
Estimated Total US Settlements & Expenses = $200 billion
$78 billion $60 billion
$62 billion
Non-Malignant Asbestos Claimants File Most Claims, Get Most $$$
DISTRIBUTION OF CLAIMS
1991-2000
ALLOCATION OF COMPENSATION
1991-2000Lung & Other
Cancers7%
Non-malignant
90%
Meso-thelioma
3%
Source: RAND, Tillinghast-Towers Perrin
Lung & Other
Cancers18%
Non-malignant
65%
Meso-thelioma
17%
National Security & Defense Issues More Important in Post 9/11 Era
War on Terrorism
Terrorists & Terrorism
Expansion of War Is Iraq Next?
Insurers forced to cover losses over which they have no control, little knowledge and
that properly rest with public sector
No regulatory “compass” for this issue.
THE ROLE OF GOVERNMENTS IN IN INSURANCE IN THE
21ST CENTURYIs Traditional’ Regulation is Archaic?
Focus on Convergence of Sectors
Conclusions
Is Insurance Regulation Becoming Marginalized
Are Insurance Regulators Overshadowed?
• Efforts to modernize insurance regulation progressing more slowly than world in which insurance operates
• Approaching time when non-insurance regulators have more influence over insurance industry than non-insurance regulators
• Impact of non-insurance policy (war on terror, Iraq) & non-insurance regulatory decisions (e.g., SEC) on industry becoming more pronounced (corp. governance)
• Monetary/fiscal policy decisions are more critical than ever to insurers (esp. life) in convergent world
Core Principals ofInsurance Regulation (IAIS)
• System of insurer licensing
• Standards for corporate governance
• Standards for capital adequacy/solvency
• Rules governing assumption of risk by insurers
• Authority to monitor/conduct on-site inspections
• “Principles” applicable to intl./cross border nature of global insurers
• Power to take remedial action at problem insurers
Source: Holfeld, Knut, “Comments of Global Regulation,” Geneva Paper on Risk and Insurance,January 2002.
Focus on Regulatory Convergence is Insufficient
Are Insurance Regulators Overshadowed?
• Much of the focus on modernization of insurance regulation in recent years has focused on convergence
• While convergence proceeds (domestically and internationally) there is no push for a global “super regulatory authority”Practical/political impossibility even within US/EU for now
• Regulatory modernization is a necessary but not sufficient condition for regulatory relevance
ConclusionsMaintaining Relevance in the 21st Century
• Cross-sectoral efforts are underway (acknowledges realities of convergence), and work with groups like Basel Committee, IMF and World Bank are important, but…
• Sphere of insurer regulatory influence is under siege by outside forces—often beyond regulator control
• Regulators must achieve a delicate balance of achieving effective regulation without stifling innovation in insurance
• Many government policymakers/lawmakers and non-insurance regulators know very little about the insurance industry—must be educated.
Insurance Information Institute On-Line
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