State Risk and Insurance Management Association Presents Here

State Risk and Insurance Management Association Presents Here Today, Gone Tomorrow! Insurance Carriers in Crisis In conjunction with Wells Fargo Insurance Services National Market Security

Panel Participants • J. Stewart Sawyer – Executive Director of National Market Security – Wells Fargo Insurance Services

Evaluation of the financial viability of Risk Bearers • • • Types of Risk Bearers How to evaluate the viability of Risk Bearers The role of rating agencies The effects of catastrophic events Will the risk bearer be there 10 or 20 years from now? ?

Types of Risk Bearers • Insurers – – – • • Stock, Mutual, Reciprocal Domestic, Foreign, Alien Admitted Non-admitted Surplus Lines Reinsurers Risk Retention Groups (RRG’s) Pools, Trusts, MEWA’s Be sure you are looking at the exact named risk bearer!!!!

Evaluation of Risk Bearers • Insurers, Reinsurers, RRG’s – Rating agencies (AM Best, Moody's, Fitch, S&P, The Street) – Annual Statements (quarterly supplements) – Best’s Key Rating Guide (states licensed) – Management experience – Time in business (5 years minimum) – Surplus is the key – Loss Control capability

Evaluation of Risk Bearers • Pools, Trusts, MEWA’s (Self-Insurance) – Financial documents (annual report) – Shareholders equity (assets minus liabilities), Retained earnings are like surplus – GAAP Vs SAP accounting (look at notes to the financials) – Number and size of members – Joint & several liability – Assessable Vs non-assessable – Exit strategy (when you first go in to the pool) – Management (administrative, loss control capability, claims) – Investment policy for your money

Rating Agencies • • • AM Best Standard & Poors (S&P) Moody's Fitch Rating Service The Street (formerly Weiss) Demo. Tech

Rating Agencies • Impartial third set of eyes • Failures to be impartial (1980’s, Current) • Paid by the risk bearer for rating (conflict of interest? ? ? • Ratings drive stock price • Downgrade in this environment is a death sentence • Are they reliable? ? • Data from NAIC central office

Catastrophes Wind (hurricane, typhoon, tornado, tropical storm) Water (flood, tidal surge, backup) Earth movement (quake, slide, avalanche) Economic, environmental Terrorism Reinsurance and price are key Size (surplus) is critical to a solvent Vs insolvent risk bearer – Can be fatal to the thinly capitalized entity • Closely watched by the rating agencies • •

Staying Power Ability to be there in the long term to pay claims Length and breadth of management Knowledge of coverages written Especially watch long tailed covers (Med Mal, GL, EPL, WC, Pollution) • Pools need to beware of size differences and homogeneity of members • Reputation • Surplus, surplus • •

Staying Power • What can you do? ? Know your coverages Do the things that Loss Control indicates Make Safety job one Keep your policies – Forever!!! Use a return to work policy for WC even if you have to create jobs – Work with your insurer or TPA to resolve claims – Treat your employees like family – Be active in your association (pool, etc) – – –

Is the Insurance Industry Viable? • P/C companies (including AIG) are faring well through the crisis – Surplus going in was at an historic high mark – Combined ratios were below 100 – Pricing was reasonable, albeit declining – Were not heavily invested in sub-prime mortgages – Reserves were very strong – Reinsurance was available for reasonable pricing, although property was cat dependent

Property/Casualty • Current situation – Pricing in commercial lines is still declining, but is stabilizing – Reinsurance is getting to be more pricey – Combined ratios are now hovering at 100 + – Reserve releases from prior years will help earnings in calendar year results – Generally business as usual, although expect tightening as we move into 2010

Life/Health • The Life and Health companies were not as well positioned – Substantial investments in sub-prime mortgages – Reserves were not as strong going in – Economy has had a greater negative effect on surplus – Fairly slow to rid themselves of toxic assets – Difficult market to raise funds, although some funds have been raised.

Life/Health – The Health insurers were hardest hit because they traditionally operated with very low surplus margins – Many of the Health pools (MEWAS) became impaired as the economy worsened – A number of the HMO and physician and hospital sponsored group health plans became insolvent and more are becoming impaired today – These latter were more likely to not be run as insurers, but rather as traditional medical businesses for profit, not surplus building

Life/Health • Prognosis for the future – Life carriers will generally come out of the economic downturn, but there will be insolvencies – Health carriers need to be carefully evaluated and the strongest sought for coverage – Surplus is key

Other Considerations • Fraud – Be sure that you know who you are buying risk transfer from. Fraud is very easy to perpetrate in insurance and a number of the old fraud crowd are coming out in this environment. – Be very wary of the “too good a deal” – Don’t do business without credible references – Check out the background of any one that you don’t know from past experience.

Other Considerations • Catastrophes must still be considered – Normal Cats: Hurricanes, tornados, earthquake – Don’t forget: Flood, tsunamis, effects of terrorism – Go beyond your properties to those of your critical vendors • Regional Considerations – Quake in CA and New Madrid – Tornados in the Mid-West and South-East – Hurricanes in the Gulf and Eastern seaboard

Other Considerations • Florida is an area to be very cautious of – The Florida wind coverage is very tenuous in regard to the ability to pay – State Funds are not well capitalized – Many small insurers do not have the surplus to stave off even a smaller hurricane – Situation is a house of cards waiting to be blown away

Some Words to the Wise • Surplus is the Key, regardless of the risk transfer choices that you make (including your own captives) • Watch the reinsurance markets for clues as to what will happen to property rates, especially in catastrophe prone areas • If the price is too low, be very, very careful that the coverage will be there in the long run and that the coverage is actually as comprehensive as you think – cost is the least expensive of the alternatives to no coverage • Captives and pools may well be worth a wait until the economy improves a bit and investments are better • Now is the time for flight to high rated companies

Some Words to the Wise • Evaluate your group benefits insurers very carefully, they are the weakest link in the current insurance environment • Specialty Lines (EPL, D&O, Professional, etc) and long tail lines (GL, WC, Products) now require extra diligence in selecting risk bearers • Err on the side of conservatism – be smart