Terrorism, Mold and Convergence Among Topics Discussed at Insurance Company CEO Roundtable

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NEW YORK, Jan. 16, 2003 - While the U.S. economy is better protected because of the Terrorism Risk Insurance Act, the fundamental difficulty insurers have in effectively predicting future attacks against high profile targets and civilians in the workplace remains. That lack of predictability leaves open the question of whether the private insurance market will be able to reassume the risk when the federal participation ends in three years.

Chief executive officers of nine of the industry's leading insurance companies shared their thoughts regarding terrorism and other key issues affecting the industry in 2003 at the seventh annual Property/Casualty Insurance Joint Industry Forum, held here this week. Moderating the discussion was Edward M. Liddy, chairman, president and chief executive officer of The Allstate Corporation and Allstate Insurance Company.

"The legislation removes the insolvency risk for companies," said Joseph P. Brandon, chairman and chief executive officer of General Re Corporation, referring to the terrorism insurance measure enacted late last year. "The industry is still early in the development stage of its ability to price this risk." The panel expressed concern that expectations are too high on what the legislation will accomplish, including an over emphasis on lowering the price of the coverage for terrorism. The legislation allows for a sharing of losses between the federal government and private industry for future terrorist attacks for a three-year period. The Insurance Information Institute (I.I.I.) estimates that the insured loss from September 11th will be $40.2 billion. A comparable loss from a future terrorist attack would still leave the insurance industry responsible for between $11 billion and $20 billion.

"The cost of this coverage could remain high for some time," said Ramani Ayer, chairman and chief executive officer of The Hartford. "We can't ignore the reality that another attack is likely. Even with the legislation, insurers are retaining a substantial risk which will make this an ongoing underwriting challenge," he said. The cost will vary from business to business, depending on such factors as proximity to metropolitan areas, high profile properties and especially the workers compensation exposure that comes with the large concentration of people in one place," he added.

"If you look at the risk, there is a false sense of predictability," said Edward B. Rust, Jr., chairman and chief executive officer of State Farm.

"We have to remember what we understood on September 12, 2001," emphasized Edmund F. Kelly, chairman, Liberty Mutual. "This was an act of war and it is fundamentally not affordable. It is easy to put together a potential $200 billion scenario? This is something we will have to confront in three years."

The panel said the war on terrorism and the threat of conflict with Iraq and North Korea may also affect the industry's ability to improve its investment returns should the market rebound in 2003.

"War is a real unknown," said Walter Kielholz, vice chairman of Swiss Re. "It will create a great deal of uncertainty in insurer portfolios," he said. Given current interest rates, there may nowhere to hide."

"I expect the market to come back slightly," added Rust. However, because of the new reality that we face, a rebound could be short-lived."

While the panel acknowledged progress in repairing the financial bottom line of most companies, they continue to see a wide range of significant risks facing the industry.

When the topic of mold was introduced into the discussion, the panel was divided as to whether the issue has peaked.

"We may be past the peak on the personal lines, but we could now face more claims in commercial lines," said Brandon.

"Texas blew the roof off of the mold issues," added Rust. "There are signs that it is becoming more manageable, however at a higher cost to the consumer."

"If it is not mold, trial lawyers will find new areas to litigate," said Jeffrey H. Post, president and chief executive officer of Fireman's Fund Insurance Company. "We have to recognize that tort costs are to an extent the nature of our business."

The panel acknowledged that the industry will face increasing pressure from regulators on the rising cost of insurance. But, they emphasized, despite recent increases in insurance premiums, the industry still has work to do to repair its bottom line.

"The industry's balance sheet is not as healthy as it should be," said Post. "During the soft market of the '90s, we did a lot of damage to ourselves."

The panel emphasized the need for the industry to strengthen its underwriting. "During the '90s, the basic skills of underwriting and claims management atrophied," said Brandon. "Insurance is unique in that when we sell our product, we don't know what the ultimate cost of goods sold will be."

Regarding the future structure of the insurance industry and the current uncertainties in the financial services world, executives were cautious about dramatic moves regarding further consolidation and convergence.

"Convergence will come when our returns are better than everyone elses," said Brian Duperreault, chairman and chief executive officer of ACE Limited.

"For the foreseeable future, acquisitions will occur on Main Street, not Wall Street," added Ayer.

"This is a time for good management and financial discipline," predicted James J. Schiro, chief executive officer of Zurich Financial Services. There could be some convergence, but we won't get there without improving our rate of return."

The Property/Casualty Insurance Joint Industry Forum was created to provide leaders from the widest spectrum of the industry with an opportunity to meet with each other in discussion of topics of general interest.

Forum participants included nearly 250 representatives from property and casualty insurance and reinsurance companies and organizations.

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