Slip-sliding ahead?

• Author: Kaelble, Steve
• Position: Indiana insurance executives on the state of their industry - Includes related article

Slip-Sliding Ahead?

Indiana insurance executives, like log rollers, don't know which way the log will turn as their industry faces a multitude of questions. But they're afraid that ill-conceived solutions to misperceived problems will push some insurers underwater.

Solvency, the most fundamental issue facing insurers, goes right to the heart of the promise of insurance companies: being there when customers need assistance. "There have been some recent cases - Executive Life in California and Mutual Benefit in New Jersey - that are examples of large insurance companies that have had financial difficulties," notes David Reddick, a deputy commissioner of the Indiana Department of Insurance. "The number of calls that we have had about the solvency of a particular insurance company has gone up considerably in the last six months."

Those who pose the question will find out that, with only a couple of exceptions, Indiana-based insurance companies are in pretty good financial shape. Insolvency, consumers will find, is not a big problem in Indiana. How big a problem it is across the nation as a whole is a matter that continues to be debated.

"I think in general there is absolutely a crisis," says John E. Seward Jr., chairman and CEO of Munster-based Universal Fire & Casualty Insurance Co. Seward expects to see more big U.S. insurance companies fail before the crisis is over. "I don't think there is any one item you can put your finger on; I think its a number of things. In property-casualty it's a rate problem. In life-health it's pretty obvious that some of them have got some bad investments."

But H. Peter Hudson, president of Monroe Guaranty Insurance Co. of Carmel and a former Indiana insurance commissioner, says the issue isn't a new one and isn't necessarily any more of a crisis than it normally is. "The solvency issue has been with us for years. The greatest concern now seemingly stems from the recent collapse of some life insurers, particularly inasmuch as they were involved in junk bonds or heavily in real estate with the decline in real estate. Investments always have been a concern from the solvency perspective. Those issues - except for this specific type of investment mechanism, the junk bond - are not necessarily unique."

Dale F. Stephenson, president of the Indianapolis-based National Conference of Insurance Guaranty Funds, says part of the problem is the crisis mentality itself. Fear of problems, he says, can make those problems worse. Case in point is the Mutual Benefit Life story in New Jersey. Policyholders heard the news that the company had some bad investments, and created essentially a "run on the bank." In the course of a few weeks, Stephenson says, policyholders sought about a billion dollars, and the company asked to be taken over by the state to stop the outflow. "A massive run, basically nobody's going to be able to handle in the short term because those assets are simply not in immediate liquid form. If policyholders come forth within three weeks asking for a billion dollars, that puts a severe strain on anybody's liquidity."

Whether they define the current situation as a crisis, a scattered thundershower or...