Corrosive Practices Greater Threat ThanCats

By Lisa S. Howard

International Editor

Dublin

The insurance industry is less under threat from the nextfinancial crisis or manmade or natural disaster than it is from“corrosive” business practices, according to Brian Duperreault,chief executive officer of ACE Limited in Bermuda.

“Companies within the insurance industry dont normally go bustbecause of a catastrophe,” Mr. Duperreault said. “They go bust froma corrosive approach to the business, a lack of understanding aboutunderwriting discipline, a continuous buildup of poor business overa long period of time, which completely erodes the surplus.”

He admitted there is not a lot of excess surplus in the industry“that could be applied to something disastrous,” so there isnt alot of room for error.

However, he emphasized, there are protections forcatastrophes.

Consequently, he said, another disaster is not as likely todrive out more companies than is the recognition of the poorunderwriting, poor risk selection and poor pricing that occurred inthe late 1990s. “That may be the next shock [facing the industry],”he added during a question and answer session after a speech hegave at the recent European Insurance Forum.

During the Q&A, Mr. Duperreault was asked to what extentrecent reserve strengthening has been driven by requirements of theSarbanes-Oxley Act of 2002, which addressed accounting andfinancial practices.

While the requirements certainly focus the attention ofinsurance executives, Mr. Duperreault thought the reserve increaseswere forced upon the industry because of bad practices over a longperiod of time. The reserve increases “were coming in any case,” hesaid.

Sarbanes-Oxley has simply heightened and accentuated the need to“look at whats going on,” he said.

The new corporate governance requirements mandated bySarbanes-Oxley are a little like being a teacher, he asserted. Astudent, may get an “A” on a course, but when you become a teacher,you have to learn many times more about the subject in order to beable to teach it, he said.

He then equated the experience of teaching to the requirementsof chief executive officers and chief financial officers underSarbanes-Oxley. “When you are forced to sign that statement”verifying the accuracy of financial statements, “things you mighthave understood in part, you need to understand in whole,” hesaid.

Mr. Duperreault commented that reserving practices of the futurewill be influenced by new Securities and Exchange Commission rulesthat require detailed explanations of reserve movements, whetherpositive or negative.

“I think this requirement to explain is going to probably keepthe exaggerations of the movements in reserves down a bit,” hecontended.

As the insurance industry is in the business of trying topredict the future, which is an imperfect science, there willalways have to be reserve adjustments, positive or negative, hesaid.

“Thats just the nature of the business. We price expected risk,or perceived risk, and we find out what the actual risk was and wehave to adjust,” he said.

Reproduced from National Underwriter Edition, April 7, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.